ALLIANZ Index Advantage Income ADVSM VARIABLE ANNUITY CONTRACT
An individual flexible purchase payment
index-linked and variable deferred annuity contract (the Contract)
Issued by Allianz Life® Variable Account B (the Separate Account) and
Allianz Life Insurance Company of North America (Allianz Life, we, us, our)
Prospectus Dated: October 18, 2021
Standard Annuity Features
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Available Investment Options
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Additional Features
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• Five fixed annuitization options (Annuity Options)• Free withdrawal
privilege allows you to withdraw up to 10% of the total Annual Contribution Amounts (the amount that is subject to market value adjustment) during the seven-year market value adjustment period•
Minimum distribution program for certain tax-qualified Contracts• Guaranteed death benefit
(Traditional Death Benefit)
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• 31 index-linked investment options (Index Options) based on
different combinations of five credit calculation methods (Crediting Methods), four nationally recognized third-party broad based equity securities indexes and an exchange-traded fund (Index or Indexes), and three time periods for measuring Index performance (Term)
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• Income Benefit:
Provides guaranteed lifetime income (Income Payments) based on a percentage of your investment value that can begin as early as age 50, or as late as age 100.
This benefit is automatically included in the Contract, cannot be removed, and has an additional rider fee.• Maximum Anniversary Value Death Benefit:
Locks in any annual investment gains to potentially provide a death benefit greater than the Traditional Death Benefit. This optional benefit must be selected at issue, cannot be removed, and has an
additional rider fee.
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The risk of loss can become greater in the case of an early withdrawal (a withdrawal taken within seven years after a purchase
payment is applied to an Index Option) due to the market value adjustment. The maximum loss from a market value adjustment on a full withdrawal is 10% of Contract Value, and on a partial withdrawal it is 10% of the amount withdrawn.
Withdrawals will be subject to federal and state taxation, and withdrawals taken before age 59 1⁄2 may also be subject to a 10% additional federal tax. If this is a Non-Qualified Contract, a withdrawal will be taxable to the extent that gain exists
within the Contract. A Non-Qualified Contract is a Contract that is not purchased under a pension or retirement plan that qualifies for special tax treatment under sections of the Internal
Revenue Code (the Code).
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Crediting Methods Currently Available
Only the Index Performance Strategy offers 1-year, 3-year, and 6-year Terms.
All other Crediting Methods only offer 1-year Terms.
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Indexes Currently
Available with
1-year Terms
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Indexes Currently
Available with
3-year and 6-year Terms
(Index Performance Strategy only)
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• Index Protection Strategy with Declared Protection Strategy Credit (the
DPSC is the return you receive if Index performance is zero or positive)
• Index Protection Strategy with Cap
• Index Precision Strategy (only available before Income Payments begin)
• Index Guard Strategy (only available before Income Payments begin)
• Index Performance Strategy (only available before Income Payments begin)
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• S&P 500® Index
• Russell 2000® Index
• Nasdaq-100® Index
• EURO STOXX 50®
• iShares® MSCI Emerging Markets ETF
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• S&P 500® Index
• Russell 2000® Index
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Crediting Methods, Indexes, and the 3-year and 6-year Terms may not be available in all states as detailed in Appendix D.
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Crediting Method Highlights
All Crediting Methods provide a level of protection against negative Credits from negative Index performance, and a limit on positive Credits from positive Index
performance. Credits are the return you receive from the Index Options.
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Negative Index Performance Protection
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Positive Index Performance Participation Limit
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Index Protection
Strategy with DPSC
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• 100%
– You will never receive a negative Credit
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• Declared Protection Strategy Credits (DPSCs)
– DPSCs cannot be less than 0.50%
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Crediting Method Highlights
All Crediting Methods provide a level of protection against negative Credits from negative Index performance, and a limit on positive Credits from positive Index
performance. Credits are the return you receive from the Index Options.
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Negative Index Performance Protection
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Positive Index Performance Participation Limit
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Index Protection
Strategy with Cap
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• 100%
– You will never receive a negative Credit
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• Caps
(the upper limit on positive Index performance)
– Caps cannot be less than 0.50%
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Index Precision
Strategy
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• Buffers (the amount of negative Index performance we absorb over the
duration of a Term before you receive a negative Credit)
– Buffers cannot be less than 5%
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• Precision Rates
(the return you receive if Index performance is zero or positive)
– Precision Rates cannot be less than 3%
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Index Guard
Strategy
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• Floors (the maximum amount
of negative Index performance you absorb)
– Floors cannot be less than -25%
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• Caps
– Caps cannot be less than 3%
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Index Performance Strategy
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• Buffers
– Buffers cannot be less than 5%
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• 1-year Term: Caps
– Caps cannot be less than 3%
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• 3-year and 6-year Terms: Caps and Participation Rates
(a percentage of Index performance)
– Caps for 3-year Terms cannot be less than 5%
– Caps for 6-year Terms cannot be less than 10%
– Both 3-year and 6-year Terms can be “uncapped” (i.e., we do not declare a Cap for that Term)
– Participation Rates cannot be less than 100%
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The Contract’s risks are described in Risk Factors
on page 31 of this prospectus.
Variable Investment Option – AZL®
Government Money Market Fund
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You can allocate the money you put into the
Contract (Purchase Payments) to any or all of the available Index Options. However, you cannot allocate Purchase Payments to the AZL Government Money Market Fund. The sole purpose of the AZL Government
Money Market Fund is to hold Purchase Payments until they are transferred to the Index Options on the Index Effective Date or the next Index Anniversary. You may also transfer Contract Value among the Index Options subject to certain
restrictions described in this prospectus. Your Contract Value is the current value of the Purchase Payments you invest that includes the returns of your selected Index Options and the AZL Government
Money Market Fund. It reflects deductions we make for Contract fees, expenses, and investment advisory fees you authorize your Financial Professional’s firm to receive from the Contract. All withdrawals you take reduce your Contract
Value dollar for dollar, including partial withdrawals that may be subject to a Market Value Adjustment (MVA). An MVA is an increase or decrease to Contract Value based on changes in interest rates if you
take a full or partial withdrawal, begin annuity payments, or we pay a death benefit within the seven-year MVA period.
The Index Options provide Credits calculated by
us based on the performance of one or more Indexes over a Term as measured by the Index Return and the applicable Buffer, Floor, DPSC, Precision Rate, Cap, and/or Participation Rate. The Participation Rate may allow you to receive more than the Index Return if the Index Return is positive. We do not apply the Participation Rate
if the Index Return is zero or negative. Only the Index Performance Strategy 3-year and 6-year Terms include a Participation Rate. The Index Return is the percentage change in Index value from the Term
Start Date to the Term End Date. The Term Start Date is the date on which a Term begins and we set the DPSCs, Precision Rates, Caps, and Participation Rates for an Index Option; this can occur on either
the Index Effective Date or an Index Anniversary. The Term End Date is the date on which a Term ends and we apply Credits; this can only occur on an Index Anniversary. The Index
Effective Date is the first day we allocate assets to an Index Option. An Index Anniversary is a twelve-month anniversary of the Index Effective Date. Because we
calculate Index Returns only on a single date in time, you may experience negative or flat performance even though the Index you selected for a given Crediting Method experienced gains through some, or most, of the Term.
Credits may be positive, negative, or equal to
zero, depending on the applicable Crediting Method and the performance of the applicable Index. The Index Precision Strategy, Index Guard Strategy, and Index Performance Strategy allow negative Performance
Credits. A negative Performance Credit means you can lose principal and previous earnings.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
These losses could be significant. A Performance Credit is the Credit you receive on a Term End Date for any Index Option with the
Index Precision Strategy, Index Guard Strategy, or Index Performance Strategy.
DPSCs, Precision Rates, Caps, and Participation
Rates that we use to determine Credits for a Contract can change on each Term Start Date and may vary substantially based on market conditions. However, in extreme market environments, it is
possible that all DPSCs, Precision Rates, Caps, and Participation Rates will be reduced to their respective minimums of 0.50%, 3%, 5%, 10%, or 100% as stated above. Buffers and Floors that we use to determine Credits for a Contract do
not change once they are established. The Crediting Methods are described in greater detail in the Summary, and in section 5, Valuing Your Contract – Calculating Credits. The Indexes are described in Appendix A.
The Daily
Adjustment is how we calculate Index Option Values on days other than the Term Start Date or Term End Date. The Daily Adjustment approximates the Index Option Value that will be available on the Term End Date. If before the Term End
Date you take a full or partial withdrawal, or when we deduct Contract fees, expenses, or investment advisory fees you authorize your Financial Professional’s firm to receive from the Contract, we calculate the Index Option Value by applying
the Daily Adjustment. All withdrawals you take are subject to the Daily Adjustment, even withdrawals that are not subject to an MVA (MVA-Free Withdrawals). MVA-Free Withdrawals include Income Payments,
withdrawals you take under the free withdrawal privilege, and payments you take under our minimum distribution program. In extreme circumstances the Daily Adjustment could result in a loss beyond the protection
of the Buffer or Floor, but it cannot result in a total loss of -100%. Such losses will be greater if the amount withdrawn is also subject to a negative MVA, or is a deduction of
Contract fees, expenses, or investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract.
The value of Purchase Payments held in the AZL
Government Money Market Fund (Variable Account Value) increase and decrease based on the AZL Government Money Market Fund’s performance. The Separate Account holds the shares of the AZL Government Money
Market Fund subaccount that underlies the Contract. The AZL Government Money Market Fund does not provide any protection against loss of principal.
Index-linked and variable annuity contracts are
complex insurance and investment vehicles. Before you invest, be sure to ask your Financial Professional (the person who advises you regarding the Contract) about the Contract’s features, benefits, risks, fees and expenses, whether the Contract
is appropriate for you based upon your financial situation and objectives, and for a specific recommendation to purchase the Contract. We designed the Contract for people who are receiving ongoing investment advice from third-party Financial
Professionals who may charge an investment advisory fee for their services. The deduction of this investment advisory fee is in addition to this Contract’s fees and expenses we assess. However, if you authorize your Financial Professional’s
firm to receive investment advisory fees deducted from your Contract and meet the requirements specified in section 1, Investment Advisory Fees, the deduction of these investment advisory fees is not subject to an MVA, does not reduce the
Annual Contribution Amounts, your Guaranteed Death Benefit Value, Income Payments, (including the amount used to determine the minimum guaranteed initial Income Payment under the level payment option), and is not subject to federal and state
income taxes or a 10% additional federal tax. The Guaranteed Death Benefit Value is either:
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total Purchase Payments reduced proportionately for withdrawals you take (including any MVA) if you select the Traditional Death Benefit, or
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the Maximum Anniversary Value (the highest Contract Value on any Index Anniversary before age 91, increased by the dollar amount of subsequent Purchase Payments,
and reduced proportionately for subsequent withdrawals you take including any MVA) if you select the Maximum Anniversary Value Death Benefit.
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All guarantees under the Contract, including
Credits, are the obligations of Allianz Life and are subject to our claims paying ability and financial strength.
We base Income Payments on a percentage (Lifetime Income Percentage) of your Contract Value, not a guaranteed value. Income Payments made while your Contract Value is positive are a
withdrawal of your own assets and reduce your Contract Value. If your Contract Value remains above zero when the Income Payments end, you may not realize a benefit from the Income Benefit; the chances of your Contract Value being reduced to
zero may be minimal.
If you change ownership or Beneficiary(s) (the person(s) you designate to receive any death benefit) this may cause Income Payments to be unavailable or end prematurely.
Annual increases to the Lifetime Income
Percentage(s) used to calculate Income Payments are not available until age 45. Income Payments have a minimum waiting period and must begin no later than age 100. Joint Income Payments are not
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
available if the age difference between spouses is more than 50
years, or more than 20 years if one spouse is age 80 on the Issue Date, or more than 25 years if one spouse is age 75 on the Issue Date.
If your Contract Value is reduced due to negative
Credits and/or deductions for Contract fees, expenses, and/or withdrawals (including any MVA) and your initial annual maximum Income Payment cannot meet the $100 required minimum, the Income
Benefit ends and you will have paid for the benefit without receiving any of its advantages. Income Payments and the Income Benefit may also end prematurely if you withdraw more than the allowed annual maximum Income Payment, or you
annuitize the Contract. For more information on the Income Benefit and Income Payments, see “How Does the Income Benefit Work” and “What Happens During the Income Period?” in the Summary; “Risks Associated with the Income Benefit” in Risk
Factors; and section 9.
Please read this prospectus before investing and
keep it for future reference. The prospectus describes all material rights and obligations of purchasers under the Contract. It contains important information about the Contract and Allianz Life that you ought to know before investing including
material state variations. This prospectus is not offered in any state, country, or jurisdiction in which we are not authorized to sell the Contracts. You should rely only on the information contained in this prospectus. We have not authorized
anyone to give you different information.
The Securities and Exchange Commission (SEC) has
not approved or disapproved these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. An investment in this Contract is not a deposit of a bank or financial institution
and is not federally insured or guaranteed by the Federal Deposit Insurance Corporation or any other federal government agency. An investment in this Contract involves investment risk including the possible loss of principal.
Allianz Life Variable Account B is the Separate
Account that contains the assets held in the AZL Government Money Market Fund. Additional information about the Separate Account has been filed with the SEC and is available upon written or oral request without charge. A Statement of Additional
Information (SAI) dated the same date as this Form N-4 prospectus includes additional information about the Contract. The SAI is also filed with the SEC on Form N-4 under File Number 333-255394 and is
incorporated by reference into this prospectus. The SAI is available without charge by contacting us at the telephone number or address listed at the back of this prospectus. The SAI’s table of contents appears after the Privacy and Security
Statement in this prospectus. The prospectus and SAI are also available on our website at www.allianzlife.com. The prospectus, SAI and other Contract information are also available on the EDGAR database on the SEC’s website (www.sec.gov).
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Glossary
This prospectus is written in plain English.
However, there are some technical words or terms that are capitalized and are used as defined terms throughout the prospectus. For your convenience, we included this glossary to define these terms.
Accumulation Phase
– the first phase of your Contract before you request Annuity Payments. The Accumulation Phase begins on the Issue Date.
Annual Contribution Amount(s) – the total amount that is subject to an MVA when you take a withdrawal during the MVA period. We establish an Annual Contribution Amount on the Index Effective Date, and we establish additional Annual
Contribution Amounts on each subsequent Index Anniversary if you make additional Purchase Payments. We do not reduce Annual Contribution Amounts for deductions we make for Contract fees, expenses, or investment advisory fees you authorize
your Financial Professional’s firm to receive from the Contract.
Annuitant – the
individual upon whose life we base the Annuity Payments. Subject to our approval, the Owner designates the Annuitant, and can add a joint Annuitant for the Annuity Phase. There are restrictions on who can become an Annuitant.
Annuity Date –
the date we begin making Annuity Payments to the Payee from the Contract.
Annuity Options –
the annuity income options available to you under the Contract.
Annuity Payments
– payments made by us to the Payee pursuant to the chosen Annuity Option.
Annuity Phase –
the phase the Contract is in once Annuity Payments begin.
Beneficiary – the
person(s) or entity the Owner designates to receive any death benefit, unless otherwise required by the Contract or applicable law.
Buffer – for any
Index Option with the Index Precision Strategy or Index Performance Strategy, this is the negative Index Return that we absorb over the duration of a Term (which can be either one, three, or six years) before applying a negative Performance
Credit. We do not apply the Buffer annually on a 3-year or 6-year Term Index Option. On the Issue Date we establish a Buffer for each Index Option with
the Index Precision Strategy and Index Performance Strategy. However, if after the Issue Date we add a new Index Option to the Index Precision Strategy or Index Performance Strategy, we establish the Buffer for it on the date we add the Index
Option to your Contract. Buffers are stated in your Contract and do not change once they are established.
Business Day –
each day on which the New York Stock Exchange is open for trading. Allianz Life is open for business on each day that the New York Stock Exchange is open. Our Business Day ends when regular trading on the New York Stock Exchange closes, which
is usually at 4:00 p.m. Eastern Time.
Cap – for any
Index Option with the Index Protection Strategy with Cap, Index Performance Strategy, or Index Guard Strategy, this is the upper limit on positive Index performance after application of any Participation Rate over the duration of a Term
(which can be either one, three, or six years) and the maximum potential Credit for an Index Option. We do not apply the Cap annually on a 3-year
or 6-year Term Index Option. On each Term Start Date, we set a Cap for each Index Option with the Index Protection Strategy with Cap, Index Performance Strategy, and Index Guard Strategy. The Caps applicable to your Contract are shown on the
Index Options Statement.
Cash Value – the
amount available upon liquidation (full withdrawal), and its one of the values available if you annuitize the Contract, or when we pay a death benefit. It is the Contract Value less any final product and rider fees and contract maintenance
charge, and increased or decreased for any MVA.
Charge Base – the
Contract Value on the preceding Quarterly Contract Anniversary (or the initial Purchase Payment received on the Issue Date if this is before the first Quarterly Contract Anniversary), increased by the dollar amount of subsequent Purchase
Payments, and reduced proportionately for subsequent withdrawals you take (including any MVA) and deductions we make for Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive
from the Contract. All withdrawals you take reduce the Charge Base, even MVA-Free Withdrawals. We use the Charge Base to determine the next product and rider fees we deduct.
Contract – the
individual flexible purchase payment index-linked and variable deferred annuity contract described by this prospectus. The Contract may also be referred to as a registered index-linked annuity.
Contract Anniversary – a twelve-month anniversary of the Issue Date or any subsequent Contract Anniversary.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Contract Value –
the current value of the Purchase Payments you invest. On any Business Day, your Contract Value is the sum of your Index Option Value(s) and Variable Account Value. Variable Account Value fluctuates each Business Day that money is held in the
AZL Government Money Market Fund. Index Option Value is increased or decreased on each Term End Date to reflect Credits, which can be negative with the Index Precision Strategy, Index Guard Strategy, and Index Performance Strategy. A
negative Credit means that you can lose principal and previous earnings. The Index Option Values also reflect the Daily Adjustment on every Business Day other than the Term Start Date or Term End Date. All
withdrawals you take reduce Contract Value dollar for dollar, even MVA-Free Withdrawals. Contract Value is also reduced dollar for dollar for deductions we make for Contract fees, expenses, and investment advisory fees that you authorize your
Financial Professional’s firm to receive from the Contract. However, Contract Value does not reflect future fees and expenses we would apply on liquidation. The Cash Value reflects all Contract fees and expenses we would apply on liquidation
(including any MVA).
Contract Year –
any period of twelve months beginning on the Issue Date or a subsequent Contract Anniversary.
Covered Person(s)
– the person(s) upon whose age and lifetime(s) we base Income Payments as discussed in section 2. Covered Person(s) are based on the Eligible Person(s) and the Income Payment type you select on the Income Benefit Date.
Credit – the
return you receive on the Term End Date from the Index Options. Credits may be positive, zero, or, in some instances, negative if you select the Index Precision Strategy, Index Guard Strategy, or Index Performance Strategy. A negative
Credit means that you can lose principal and previous earnings.
Crediting Method
– a method we use to calculate Credits for the Index Options.
Daily Adjustment
– how we calculate Index Option Values on days other than the Term Start Date or Term End Date as discussed in the Summary – What is the Daily Adjustment?; section 5, Valuing Your Contract – Daily Adjustment; and Appendix B. The Daily
Adjustment approximates the Index Option Value that will be available on the Term End Date. It is the estimated present value of the future Credit that we will apply on the Term End Date. The Daily Adjustment for the Index Protection Strategy
with DPSC and Index Protection Strategy with Cap cannot be negative.
Declared Protection Strategy Credit (DPSC) – the positive Credit you receive on a Term End Date for any Index Option with the Index Protection Strategy with DPSC if Index performance is zero or positive. You receive a Credit equal to the DPSC on the Term
End Date if the current Index Value is equal to or greater than the Index Value on the Term Start Date. We set the DPSCs on each Term Start Date. The DPSCs provide predefined upside potential. The DPSCs applicable to your Contract are shown
on the Index Options Statement.
Determining Life (Lives) – the person(s) designated at Contract issue and named in the Contract on whose life we base the guaranteed Traditional Death Benefit or Maximum Anniversary Value Death Benefit.
Eligible Person(s)
– the person(s) whose age determines each Income Percentage and Income Percentage Increase that we use to calculate the Lifetime Income Percentages and Income Payments, and on whose lifetime we base Income Payments. There are restrictions on
who can become an Eligible Person as stated in section 2.
Excess Withdrawal
– while you are taking Income Payments, this is the amount of any withdrawal you take during an Income Benefit Year that causes the total amount withdrawn in that year to exceed the annual maximum Income Payment. However, we do not consider
payments made under our minimum distribution program, or investment advisory fees you authorize your Financial Professional’s firm to receive from the Contract to be Excess Withdrawals. We treat any portion of a withdrawal you take during the
Income Benefit Year that is not an Excess Withdrawal as an Income Payment. Excess Withdrawals reduce your Contract Value, future Income Payments, Guaranteed Death Benefit Value, and may end your Contract. The Income Benefit is discussed in
section 9.
Financial Professional – the person who advises you regarding the Contract.
Floor – for any
Index Option with the Index Guard Strategy, this is the maximum amount of negative Index Return you absorb as a negative Performance Credit. On the Issue Date we establish a Floor for each Index Option with the Index Guard Strategy. However,
if after the Issue Date we add a new Index Option to the Index Guard Strategy, we establish the Floor for it on the date we add the Index Option to your Contract. Floors are stated in your Contract and do not change once they are established.
Good Order – a
request is in “Good Order” if it contains all of the information we require to process the request. If we require information to be provided in writing, “Good Order” also includes providing information on the correct form, with any required
certifications, guarantees and/or signatures, and received at our Service Center after delivery to the correct
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
mailing, email, or website address, which are all listed at the
back of this prospectus. If you have questions about the information we require, or whether you can submit certain information by fax, email or over the web, please contact our Service Center. If you send information by email or upload it to
our website, we send you a confirmation number that includes the date and time we received your information.
Guaranteed Death Benefit Value – the guaranteed value that is available to your Beneficiary(s) on the first death of any Determining Life during the Accumulation Phase. The Guaranteed Death Benefit Value is either total Purchase Payments
reduced proportionately for withdrawals you take (including any MVA) if you select the Traditional Death Benefit, or the Maximum Anniversary Value if you select the Maximum Anniversary Value Death Benefit. All withdrawals you take reduce the
Guaranteed Death Benefit Value, even MVA-Free Withdrawals. However, we do not reduce the Guaranteed Death Benefit Value for deductions we make for Contract fees, expenses, and investment advisory fees that you authorize your Financial
Professional’s firm to receive from the Contract. These deductions will, however, reduce the Contract Value we use to calculate the Maximum Anniversary Value.
Income Benefit –
a benefit that is automatically included in your Contract at issue which is described in the Summary and section 9. Income Benefit has an additional rider fee and is intended to provide a payment stream for life in the form of partial
withdrawals.
Income Benefit Anniversary – a twelve-month anniversary of the Income Benefit Date or any subsequent Income Benefit Anniversary. It is the date we determine Income Payment increases. Income Benefit Anniversaries always occur on Index
Anniversaries.
Income Benefit Date – the date you choose to begin receiving Income Payments under the Income Benefit and the Income Period begins. The Income Benefit Date must be on an Index Anniversary.
Income Benefit Supplement – the supplement that must accompany this prospectus which contains the terms used to determine Income Payments for your Contract. The Income Benefit Supplement includes the Income Payment waiting period and the
table showing the Income Percentages and Income Percentage Increases. The supplement also includes the income multiplier factor and income multiplier benefit wait period for the Income Multiplier Benefit. We cannot change these terms for your
Contract once they are established. We publish any changes to the Income Benefit Supplement at least seven calendar days before they take effect on our website at www.allianzlife.com/indexincomeadvrates. The Income Benefit Supplement is also
filed on EDGAR at www.sec.gov under Form S-1 File Number 333-255386.
Income Benefit Year – a twelve-month period beginning on the Income Benefit Date or a subsequent Income Benefit Anniversary.
Income Multiplier Benefit – a benefit automatically included with the Income Benefit, which is described in the Summary and section 9. The Income Multiplier Benefit has no additional charge and after the required wait period can increase
your income to help pay for care if you should need it.
Income Payments –
the guaranteed payments we make to you under the Income Benefit for the lifetime(s) of the Covered Person(s) that are generally based on the Contract Value and Lifetime Income Percentage for the payment type you select. Payment types include
single or joint payments under either the Level Income or Increasing Income payment options. However, if you choose the Level Income payment option and meet certain age requirements, your initial annual maximum Income Payment will not be less
than the Level Income Guarantee Payment Percentage multiplied by your total Purchase Payments reduced proportionately for withdrawals you take took (including any MVA). All withdrawals you take reduce your total Purchase Payments, even
MVA-Free Withdrawals. However, we do not reduce your total Purchase Payments for deductions we make for Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract.
Income Payments are discussed in section 9.
Income Percentages
– amounts we use to determine the Lifetime Income Percentages. We establish Income Percentages for each payment type. Income Percentages are generally higher for single payments compared to joint, and for the Level Income payment option
compared to Increasing Income. The Income Percentages are stated in the Income Benefit Supplement.
Income Percentage Increases – the amount that each Income Percentage can increase on each Index Anniversary up to and including the Income Benefit Date. We establish Income Percentage Increases for each Eligible Person based on their current
age on the Index Effective Date. Income Percentage Increases are not available until the Eligible Person(s) reaches age 45. The Income Percentage Increases are stated in the Income Benefit Supplement.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Income Period –
the period your Contract is in if you take Income Payments. The Income Period occurs during the Accumulation Phase and starts on the Income Benefit Date.
Increasing Income
– a payment option available under the Income Benefit. It provides Income Payment increases on each Income Benefit Anniversary during the Income Period if your selected Index Option(s) receives a positive Credit. These increases can continue
even if your Contract Value reduces to zero or if your Income Payments are converted to Annuity Payments.
Index (Indexes) –
one (or more) of the nationally recognized third-party broad based equity securities price return Indexes or exchange-traded fund available to you under your Contract as described in Appendix A.
Index Anniversary
– a twelve-month anniversary of the Index Effective Date or any subsequent Index Anniversary. It is the date we apply Income Percentage Increases.
Index Effective Date – the first day we allocate assets to an Index Option and we establish Income Percentage Increases for each Eligible Person. The Index Effective Date is stated on the Index Options Statement and starts the first
Index Year. When you purchase this Contract you select the Index Effective Date as discussed in section 3, Purchasing the Contract – Allocation of Purchase Payments and Contract Value Transfers.
Index Guard Strategy – one of the Crediting Methods available before the Income Period described in the Summary; and in section 5, Valuing Your Contract – Calculating Credits. The Index Guard Strategy calculates Performance Credits
based on Index Returns subject to a Cap and Floor. You can receive negative Performance Credits under this Crediting Method, which means you can lose principal and previous earnings. The Index Guard Strategy is more sensitive to smaller
negative market movements that persist over time because the Floor reduces the impact of large negative market movements. In an extended period of smaller negative market returns, the risk of loss is greater with the Index Guard Strategy than
with the Index Performance Strategy and Index Precision Strategy.
Index Option –
the index-linked investment options to which you can allocate Purchase Payments or transfer Contract Value. Each Index Option is the combination of an Index, a Crediting Method, and a Term. For the Index Performance Strategy 3-year and 6-year
Term Index Options we also include the Buffer amount.
Index Option Base
– an amount we use to calculate Credits and the Daily Adjustment. The Index Option Base is initially equal to the amounts you allocate to an Index Option. We reduce the Index Option Base proportionately for withdrawals you take (including any
MVA), and deductions we make for Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract; we increase/decrease it by the dollar of additional Purchase Payments
allocated to, and transfers into or out of the Index Option; and we increase/decrease it by the percentage of any Credits.
Index Option Value
– on any Business Day, it is equal to the portion of your Contract Value in a particular Index Option. We establish an Index Option Value for each Index Option you select. Each Index Option Value includes any Credits from previous Term End
Dates and reflects proportional reductions for previous partial withdrawals you take (including any MVA), and previous deductions we made for Contract fees, expenses, and investment advisory fees that you authorize your Financial
Professional’s firm to receive from the Contract. On each Business Day, other than the Term Start Date or Term End Date, the Index Option Values also include an increase/decrease by the Daily Adjustment percentage.
Index Options Statement – the account statement we mail to you on the Index Effective Date and each Index Anniversary thereafter. On the Index Effective Date, the statement shows the initial Index Values, DPSCs, Precision Rates, Caps,
and Participation Rates for the Index Options you selected. On each Index Anniversary, the statement shows the new Index Values, Credits received, and renewal DPSCs, Precision Rates, Caps, and Participation Rates that are effective for the
next Term for the Index Options you selected that have reached their Term End Date. The Index Options Statement also shows any applicable Buffer or Floor for your selected Index Option(s). For any 3-year or 6-year Term Index Option you
selected that has not reached its Term End Date the statement shows the current Index Anniversary’s Index Option Value, which includes the Daily Adjustment. During the Accumulation Phase and before the Income Period, the statement will also
show the current Lifetime Income Percentages for each payment type available under the Income Benefit. During the Income Period it will show the maximum Income Payment available for the next year.
Index Performance Strategy – one of the Crediting Methods available before the Income Period described in the Summary; and in section 5, Valuing Your Contract – Calculating Credits. This Crediting Method offers 1-year, 3-year, and 6-year
Terms. The Index Performance Strategy calculates Performance Credits based on Index Returns subject to any applicable Participation Rate, Cap, and Buffer. You can receive negative Performance Credits under this Crediting Method, which means
you can lose principal and previous earnings. The Index Performance Strategy is more sensitive to
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
large negative market movements because small negative market
movements are absorbed by the Buffer. In a period of extreme negative market performance, the risk of loss is greater with the Index Performance Strategy than with the Index Guard Strategy.
Index Precision Strategy – one of the Crediting Methods available before the Income Period described in the Summary; and in section 5, Valuing Your Contract – Calculating Credits. The Index Precision Strategy calculates Performance
Credits based on Index Values and Index Returns subject to the Precision Rate and Buffer. You can receive negative Performance Credits under this Crediting Method, which means you can lose principal and previous earnings. The Index Precision
Strategy may perform best in periods of small positive market movements because the Precision Rates will generally be greater than the DPSCs, but less than the Index Performance Strategy Caps. The Index Precision Strategy is more sensitive to
large negative market movements because small negative market movements are absorbed by the Buffer. In a period of extreme negative market performance, the risk of loss is greater with the Index Precision Strategy than with the Index Guard
Strategy.
Index Protection Strategy with DPSC – one of the Crediting Methods available during the entire Accumulation Phase, including the Income Period, described in the Summary; and in section 5, Valuing Your Contract – Calculating Credits. The Index
Protection Strategy with DPSC provides Credits equal to the DPSCs on the Term End Date if the current Index Value is equal to or greater than the Index Value on the Term Start Date. The Index Protection Strategy with DPSC does not allow
negative Credits, and offers the least growth opportunity as DPSCs will generally be less than Precision Rates and Caps.
Index Protection Strategy with Cap – one of the Crediting Methods available during the entire Accumulation Phase, including the Income Period, described in the Summary; and in section 5, Valuing Your Contract – Calculating Credits. The Index
Protection Strategy with Cap provides a Protection Credit based on Index Returns subject to a Cap, but does not allow negative Credits. The Index Protection Strategy with Cap offers more growth opportunity than Index Protection Strategy with
DPSC, but less than Index Precision Strategy, Index Guard Strategy, or Index Performance Strategy.
Index Return –
the percentage change in Index Value from the Term Start Date to the Term End Date, which we use to determine the Protection Credits for any Index Option with the Index Protection Strategy with Cap, Performance Credits for any Index Option
with the Index Performance Strategy or Index Guard Strategy, and negative Performance Credits for any Index Option with the Index Precision Strategy. The Index Return is the Index Value on the Term End Date, minus the Index Value on the Term
Start Date, divided by the Index Value on the Term Start Date.
Index Value – an
Index’s closing market price at the end of the Business Day on the Term Start Date and Term End Date as provided by Bloomberg or another market source if Bloomberg is not available.
Index Year – a
twelve-month period beginning on the Index Effective Date or a subsequent Index Anniversary.
Issue Date – the
date we issue the Contract. The Issue Date is stated in your Contract and starts your first Contract Year. Contract Anniversaries and Contract Years are measured from the Issue Date.
Joint Owners –
the two person(s) designated at Contract issue and named in the Contract who may exercise all rights granted by the Contract. Joint Owners must be spouses within the meaning of federal tax law.
Level Income – an
Income Benefit payment option that provides an automatic annual increase to your Income Payments if your Contract Value increases from one Income Benefit Anniversary to the next during the Income Period.
Level Income Guarantee Payment Percentage – the minimum percentage of total Purchase Payments reduced proportionately for withdrawals you took (including any MVA) that you can receive as an Income Payment if you choose the Level Income payment option and
meet certain age requirements as stated in section 9 – Calculating Your Income Payments.
Lifetime Income Percentage – the maximum percentage of Contract Value you can receive as an Income Payment on the Income Benefit Date. The Lifetime Income Percentages available to you before the Income Period are stated on the Index Options
Statement.
Lock Date – this
is the Business Day we execute a Performance Lock and capture an Index Option Value (which includes the Daily Adjustment) before the Term End Date.
Market Value Adjustment (MVA) – an increase or decrease to Contract Value based on changes in interest rates if within seven Index Years of the establishment of an Annual Contribution Amount you take a full or partial withdrawal,
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
begin Annuity Payments, or we pay a death benefit. We do not
apply an MVA to MVA-Free Withdrawals, or to deductions we make for Contract fees, expenses, or investment advisory fees you authorize your Financial Professional’s firm to receive from the Contract.
Maximum Anniversary Value – the highest Contract Value on any Index Anniversary before age 91, increased by the dollar amount of subsequent Purchase Payments, and reduced proportionately for subsequent withdrawals you take (including any
MVA), used to determine the Maximum Anniversary Value Death Benefit as discussed in the Summary and section 10. All withdrawals you take reduce your Maximum Anniversary Value, even MVA-Free Withdrawals. Deductions we make for Contract fees,
expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract do not reduce the Maximum Anniversary Value. These deductions will, however, reduce the Contract Value we use to
calculate the Maximum Anniversary Value.
Maximum Anniversary Value Death Benefit – an optional benefit described in the Summary and section 10 that has an additional rider fee and is intended to potentially provide a death benefit greater than the Traditional Death Benefit. The Maximum
Anniversary Value Death Benefit can only be added to a Contract at issue.
MVA-Free Withdrawals – withdrawals you take that are not subject to an MVA. MVA-Free Withdrawals include Income Payments, withdrawals you take under the free withdrawal privilege, and RMD payments you take under our minimum
distribution program.
Non-Qualified Contract – a Contract that is not purchased under a pension or retirement plan that qualifies for special tax treatment under sections of the Code.
Owner – “you,”
“your” and “yours.” The person(s) or entity designated at Contract issue and named in the Contract who may exercise all rights granted by the Contract.
Participation Rate
– may allow you to receive more than the Index Return if the Index Return is positive, but the Participation Rate cannot boost Index Returns beyond any declared Cap. We do not apply the Participation Rate if the Index Return is zero or negative. We do not apply the Participation Rate annually. The
Participation Rate is only available on the Index Performance Strategy 3-year and 6-year Terms. The Participation Rate is not available on Index Performance Strategy 1-year Terms. We set Participation Rates on each Term Start Date. The
Participation Rates applicable to your Contract are shown on the Index Options Statement.
Payee – the
person or entity who receives Annuity Payments during the Annuity Phase.
Performance Credit
– the Credit you receive on a Term End Date when you allocate assets to an Index Option with the Index Precision Strategy, Index Guard Strategy, or Index Performance Strategy. We base Performance Credits on Index Values and Index Returns
after application of any Participation Rate as limited by the applicable Buffer, Floor, Precision Rate, or Cap. Performance Credits can be negative, which means you can lose principal and previous earnings.
Performance Lock
– a feature that allows you to capture the current Index Option Value during the Term. A Performance Lock applies to the total Index Option Value in an Index Option, and not just a portion of that Index Option Value. After the Lock Date,
Daily Adjustments do not apply to a locked Index Option for the remainder of the Term and the Index Option Value will not receive a Performance Credit on the Term End Date.
Precision Rate –
the positive Performance Credit you receive for any Index Option with the Index Precision Strategy if Index performance is zero or positive. You receive a Performance Credit equal to the Precision Rate on the Term End Date if the current
Index Value is equal to or greater than the Index Value on the Term Start Date. We set a Precision Rate for each Index Precision Strategy Index Option on each Term Start Date. The Precision Rates applicable to your Contract are shown on the
Index Options Statement.
Protection Credit
– the Credit you receive on the Term End Date for any Index Option with the Index Protection Strategy with Cap. We base Protection Credits on positive Index Returns limited by the Cap. Protection Credits cannot be negative.
Proxy Investment
– provides a current estimate of what the Credit will be on the Term End Date taking into account any applicable Buffer, Floor, DPSC, Precision Rate, Cap, and/or Participation Rate. We use the Proxy Investment to calculate the Daily
Adjustment on Business Days other than the Term Start Date or Term End Date. For more information, see Appendix B.
Proxy Value – the
hypothetical value of the Proxy Investment used to calculate the Daily Adjustment as discussed in Appendix B.
Purchase Payment
– the money you put into the Contract.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Qualified Contract
– a Contract purchased under a pension or retirement plan that qualifies for special tax treatment under sections of the Code (for example, 401(a) and 401(k) plans), Individual Retirement Annuities (IRAs), or Tax-Sheltered Annuities (referred
to as TSA contracts). Currently, we issue Qualified Contracts that may include, but are not limited to Roth IRAs, traditional IRAs and Simplified Employee Pension (SEP) IRAs.
Quarterly Contract Anniversary – the day that occurs three calendar months after the Issue Date or any subsequent Quarterly Contract Anniversary.
Separate Account
– Allianz Life Variable Account B is the Separate Account that issues the variable investment portion of your Contract. It is a separate investment account of Allianz Life. The Separate Account holds the shares of the AZL Government Money
Market Fund subaccount that underlies the Contracts. The Separate Account is divided into subaccounts, each of which invests exclusively in a variable investment option. The only currently available variable investment option is the AZL
Government Money Market Fund. The Separate Account is registered with the SEC as a unit investment trust, and may be referred to as the Registered Separate Account.
Service Center –
the area of our company that issues Contracts and provides Contract maintenance and routine customer service. Our Service Center address and telephone number are listed at the back of this prospectus. The address for mailing applications
and/or checks for Purchase Payments may be different and is also listed at the back of this prospectus.
Term – The
period of time, from the Term Start Date to the Term End Date, in which we measure Index Return to determine Credits.
Term End Date – The
day on which a Term ends and we apply Credits. A Term End Date may only occur on an Index Anniversary. If a Term End Date does not occur on a Business Day, we consider it to occur on the next Business Day.
Term Start Date – The day on which a Term begins and we set the DPSCs, Precision Rates, Caps, and Participation Rates for an Index Option. A Term Start Date may only occur on the Index Effective Date or an Index Anniversary. If a
Term Start Date does not occur on a Business Day, we consider it to occur on the next Business Day.
Traditional Death Benefit – the guaranteed death benefit automatically provided by the Contract for no additional fee described in the Summary and section 10.
Valid Claim – the
documents we require to be received in Good Order at our Service Center before we pay any death claim. This includes the death benefit payment option, due proof of death, and any required governmental forms. Due proof of death includes a
certified copy of the death certificate, a decree of court of competent jurisdiction as to the finding of death, or any other proof satisfactory to us.
Variable Account Value – on any Business Day, it is the value of the shares in the AZL Government Money Market Fund subaccount which holds your Purchase Payments until the Index Effective Date or the next Index Anniversary. The Variable
Account Value increases and decreases based on the performance of the AZL Government Money Market Fund and reflects deduction of the fund’s operating expenses, and previous deductions we made for Contract fees, expenses, and investment
advisory fees that you authorize your Financial Professional’s firm to receive from the Contract.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Summary
The Index Advantage Income ADVSM is a product that offers index-linked investment options and allows you to defer taking regular fixed periodic payments (Annuity Payments) to a future date. During the first phase of your Contract (Accumulation Phase) your Contract Value fluctuates based on the performance of your
selected Index Options and the AZL Government Money Market Fund (for Purchase Payments that have not yet been transferred to the Index Options) and deduction of Contract fees and expenses. During this phase you can make additional Purchase
Payments (until you request Income Payments), you can take withdrawals, and if you die we pay a death benefit to your named Beneficiary(s). If you request Income Payments, your Contract will enter the Income
Period. The Income Period occurs during the Accumulation Phase. If you request Annuity Payments, the Accumulation Phase and Income Period (if applicable) ends and the Annuity Phase begins.
Annuity Payments are fixed payments we make based on the Annuity Option you select and the greater of your Contract Value (which reflects any previously deducted Contract fees, expenses, and investment advisory fees that you authorize your
Financial Professional’s firm to receive from the Contract) or Cash Value. Your Cash Value is the amount available upon liquidation (full withdrawal), and it is one of the values available if you
annuitize the Contract, or when we pay a death benefit. It is the Contract Value less any final product and rider fees and contract maintenance charge, and increased or decreased for any MVA.
Purchasing a Contract: Key Features at a Glance
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Issue Age
(see section 3)
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On the date we issue the Contract (the Issue Date), all Owners and the Annuitant must be either:
• age 80 or younger, or
• age 75 or younger if you select the Maximum Anniversary Value Death Benefit.
The Owner is the person or entity designated at issue who may exercise all Contract rights. The Annuitant is the individual upon whose life we base Annuity
Payments.
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Purchase Payment
Standards
(see section 3)
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• $5,000 minimum initial Purchase Payment due on the Issue Date.
• We restrict additional Purchase Payments during the Accumulation Phase. Each Index Year before the Income Period you cannot add more than your initial amount without our prior approval. An Index Year is a twelve-month period beginning on the Index Effective Date or a subsequent Index Anniversary. Your initial amount is all Purchase Payments received before the first Quarterly Contract
Anniversary of the first Contract Year. A Quarterly Contract Anniversary is the day that occurs three calendar months after the Issue Date or any subsequent Quarterly Contract Anniversary. A Contract Year is any period of twelve months beginning on the Issue Date or a subsequent Contract Anniversary. A Contract Anniversary is a twelve-month
anniversary of the Issue Date or any subsequent Contract Anniversary. We allow you to add up to the initial amount in the remainder of the first Index Year, and each Index Year thereafter before the Income Period begins. The minimum additional Purchase Payment we will accept is $50.
• $3 million maximum in total Purchase Payments unless we give prior approval for a higher amount.
• We do not accept additional Purchase Payments during the Income Period or the Annuity Phase.
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Purchasing a Contract: Key Features at a Glance
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Allocation of Purchase Payments and Contract Value Transfers
(see section 3)
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You can allocate your Purchase Payments to any or all of the Index Options available under your Contract. We only allow assets to move into the Index Options on
the Index Effective Date and on subsequent Index Anniversaries.
• As a result, we hold Purchase Payments in the AZL Government Money Market Fund until we transfer them to your selected Index Options according to your instructions. For additional Purchase Payments we receive after the Index Effective
Date, we transfer the amounts held in the AZL Government Money Market Fund to your selected Index Options on the next Index Anniversary. However, you cannot allocate Purchase Payments to the AZL
Government Money Market Fund.
• On each Index Option’s Term End Date, you can transfer Index Option Value (the portion of your Contract Value in a particular Index Option) between Index Options.
• We do not allow assets to move into an established 3-year or 6-year Term Index Option until the Term End Date.
• Purchase Payments you allocate to an Index Option must be held in the Index Option for the full Term before they can receive a Credit. Therefore, additional Purchase Payments
we receive after the Index Effective Date that you allocate to a 1-year Term Index Option are not eligible to receive a Credit until the second Index Anniversary after we receive them, or the fourth Index Anniversary after we receive
them for allocations to a 3-year Term Index Option, or the seventh Index Anniversary after we receive them for allocations to a 6-year Term Index Option.
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Daily Adjustment
(see “What is the Daily Adjustment?” in this Summary and section 5)
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• We apply a Daily Adjustment if before the Term End Date you take a full or partial withdrawal, or when we deduct Contract
fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract. All withdrawals you take are subject to the Daily Adjustment, even MVA-Free Withdrawals.
• The Daily Adjustment takes into account any Index gains subject to the applicable DPSC, Precision Rate, Cap, and/or Participation Rate, or either any Index losses greater than the Buffer or Index losses down to the Floor, but in the
form of the estimated present value. Therefore, the Daily Adjustment could result in a loss beyond the protection of the Buffer or Floor. However, the Daily Adjustment for the Index Protection Strategy with DPSC and Index Protection
Strategy with Cap cannot be negative.
• In extreme circumstances the Daily Adjustment could result in a loss beyond the protection of the Buffer or Floor, but it cannot result in a total loss of -100%. Such losses will be greater if the amount withdrawn is also subject to a negative MVA, or is a deduction of Contract
fees, expenses, or investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract.
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Performance Lock
(see “What is the Performance Lock?” in this Summary and section 5)
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A feature that allows you to capture the current Index Option Value during the Term. If we execute a Performance Lock for an
Index Option we do not apply the Daily Adjustment to it for the remainder of the Term and the Index Option Value will not receive a Credit on the Term End Date.
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Purchasing a Contract: Key Features at a Glance
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Market Value Adjustment (MVA)
(see section 5)
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• An increase or decrease to Contract Value based on changes in interest rates if within seven Index Years of the establishment
of an Annual Contribution Amount you take a full or partial withdrawal (including an Excess Withdrawal), begin Annuity Payments, or if we pay a death benefit. An Excess Withdrawal is the amount of
any withdrawal taken during an Income Benefit Year that causes the total amount withdrawn in that year to exceed the annual maximum Income Payment. An Income Benefit Year is a period of twelve
months beginning on the Income Benefit Date or any subsequent Income Benefit Anniversary.
• We do not apply an MVA to MVA-Free Withdrawals, or to deductions we make for Contract fees, expenses, or investment advisory fees you authorize your Financial Professional’s firm to receive from the Contract.
• The MVA will be negative if the corporate bond yield on the date of withdrawal is higher than the corporate bond yield on the date the Annual Contribution Amount was established, and vice versa. A negative MVA will decrease the
Contract Value, and a positive MVA will increase the Contract Value.
• If you take a full withdrawal, begin Annuity Payments, or if we pay a death benefit the maximum total positive or negative MVA is 10% of Contract Value. On a partial withdrawal, we limit the maximum total positive or negative MVA to
10% of the amount withdrawn.
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Product and Rider Fees
(see the Fee Tables and section 6)
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Accrued daily and deducted on each Quarterly Contract Anniversary. Each fee is calculated as a percentage of the Charge Base,
which is the Contract Value on the preceding Quarterly Contract Anniversary increased by the dollar amount of subsequent Purchase Payments, and reduced proportionately for subsequent withdrawals you take (including any MVA) and
deductions we make for Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract. All withdrawals you take reduce the Charge Base, even MVA-Free Withdrawals.
• Product fee is 0.25%.
• Rider fee is 0.70% for the Income Benefit.
• Rider fee is 0.20% for the Maximum Anniversary Value Death Benefit. If you select this benefit, you will pay 1.15% in total annual Contract fees (product fee plus the rider fees).
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Other Contract Fees and Expenses
(see the Fee Tables and section 6)
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• $50 contract maintenance charge assessed annually if the total Contract Value is less than $100,000.
• AZL Government Money Market Fund operating expenses before fee waivers and expense reimbursements of 0.66% of the average daily net assets.
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You can withdraw your Cash Value subject to any applicable federal and state taxation. Withdrawals taken before age 59 1⁄2 may also be subject to a 10% additional federal tax.
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Free Withdrawal Privilege
(see section 7)
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Allows you to withdraw 10% of your total Annual Contribution Amounts each Index Year during the Accumulation Phase and before the Income Period without incurring
an MVA.
• Any unused free withdrawal privilege in one Index Year is not added to the amount available in the next Index Year.
• If you withdraw more than the free withdrawal privilege we will apply an MVA if the withdrawal is taken from an Annual Contribution Amount that we established within the last seven Index Years.
• Not available if you take a full withdrawal of your Cash Value or
during the Income Period. If you take a full withdrawal you will be subject to an MVA on any Annual Contribution Amounts that are still within the seven Index Year MVA period. This may include amounts you previously withdrew
under the free withdrawal privilege.
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Minimum Distribution Program and Required Minimum Distribution
(RMD) Payments
(see section 7)
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If you own an Individual Retirement Annuity (IRA) or SEP IRA Contract, this program
provides payments to you designed to meet the Code’s minimum distribution requirements. These withdrawals:
• reduce the amount available under the free withdrawal privilege before the Income Period, but
• are not subject to an MVA if you exceed the free withdrawal privilege before the Income Period, and are not considered to be an Excess Withdrawal during the Income
Period.
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Purchasing a Contract: Key Features at a Glance
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Annuity Payments
(see section 8)
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Annuity Payments can provide a guaranteed lifetime fixed income stream with certain tax advantages. We designed the Annuity Payments for Owners who no longer
need immediate access to Contract Value to meet their short-term income needs.
• We offer five Annuity Options that provide payments for a guaranteed period, life, life with a guaranteed period, joint and last survivor, or joint and 2/3 survivor.
• We base Annuity Payments on the greater of your Contract Value or Cash Value, the Annuity Option you select, and the lifetime and age of the Annuitant(s).
• For an individually owned Contract, Annuity Payments can be either single or joint.
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Income Benefit
(see “How Does the Income Benefit Work?” later in this Summary and section 9)
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The Income Benefit (0.70% rider fee) is automatically included in your Contract and you cannot remove it. It provides guaranteed lifetime Income Payments based
on a percentage of your Contract Value.
• Once the Income Payment waiting period has expired, Income Payments can begin as early as age 50 or as late as age 100.
• Unlike Annuity Payments, the Income Benefit allows access to your Contract Value and death benefit for a period of time after Income Payments begin.
• Once Income Payments begin your Crediting Methods are limited to the Index Protection Strategy with DPSC and Index Protection Strategy with Cap.
• The Income Benefit also includes the Income Multiplier Benefit for no additional charge, which can increase the annual maximum Income Payment after the required wait period to help pay for care if you should need it.
For information on the terms used to determine your Income Payments,
please see the Income Benefit Supplement.
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Death Benefit
(see section 10)
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When you purchase the Contract you select either the Traditional Death Benefit (no additional fee) or the Maximum Anniversary Value Death Benefit (0.20% rider
fee). In either case, the death benefit is paid upon the first death of any Determining Life during the Accumulation Phase.
• We establish the Determining Lives at Contract issue and they generally do not change unless there is a change of ownership due to divorce, marriage, or establishment of a Trust.
• The Determining Life (or Lives) is either the Owner(s) or the Annuitant if the Owner is a non-individual.If a Determining Life dies during the Accumulation Phase your Beneficiary(s) will receive
the greater of the Contract Value, Cash Value, or the Guaranteed Death Benefit Value. The Guaranteed Death Benefit Value is either total Purchase Payments reduced proportionately for withdrawals you take (including any MVA) if you
select the Traditional Death Benefit, or the Maximum Anniversary Value if you select the Maximum Anniversary Value Death Benefit. All withdrawals
you take reduce the Guaranteed Death Benefit Value, even MVA-Free Withdrawals. However, we do not reduce the Guaranteed Death Benefit Value for deductions we make for Contract fees, expenses, and investment advisory fees that
you authorize your Financial Professional’s firm to receive from the Contract. These deductions will, however, decrease the Contract Value and Cash Value by the dollar amount withdrawn
and reduce the likelihood of receiving increases to the Maximum Anniversary Value. In addition, because the death benefit is based on the greater of Contract Value, Cash Value or the Guaranteed Death Benefit Value, deductions we make
for Contract fees, expenses, or authorized investment advisory fees reduce the death benefit available to your Beneficiaries.
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• Withdrawals you take (including Income Payments) reduce your Guaranteed Death Benefit Value proportionately, which means this value may be reduced by more than the amount withdrawn.
• The Maximum Anniversary Value Death Benefit cannot be less than the Traditional Death Benefit, but they can be equal.
• If you change Owner(s) the death benefit may be reduced to Contract Value.
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Material Contract Variations
(see Appendix D)
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The product or certain product features may not currently be available in all states or all Contracts, may vary in your state
(such as the free look), or may not be available from all selling firms or from all Financial Professionals. Your Financial Professional can also provide information regarding availability of Index Options.
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Purchasing a Contract: Key Features at a Glance
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Customer Service
(see the last page of this prospectus)
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If you need customer service (for Contract changes, information on Contract Values, requesting a withdrawal or transfer,
changing your allocation instructions, etc.) please contact our Service Center at (800) 624-0197. Our Service Center is the area of our company that issues Contracts and provides Contract
maintenance and routine customer service. You can also contact us by:
• mail at Allianz Life Insurance Company of North America, P.O. Box 561,
Minneapolis, MN 55440-0561, or
• email at Contact.Us@allianzlife.com.
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Who Should Consider Purchasing the Contract?
We designed the Contract for people who are
receiving ongoing investment advice from a Financial Professional who is appropriately licensed and in the business of providing investment advice. These people are looking for guaranteed lifetime income with continued access to Contract Value
and a death benefit for a period of time, and a level of protection for their principal while providing potentially higher returns than are available on traditional fixed annuities. This Contract is not intended for someone who is seeking
complete protection from downside risk, nor someone who is seeking unlimited investment potential.
We offer other annuity contracts that may address
your investment and retirement needs. These contracts include variable annuities, registered index-linked annuities and fixed index annuities. These annuity products may offer different features and benefits more appropriate for your needs,
including allocation options, fees and/or expenses that are different from those in the Contract offered by this prospectus. Not every contract is offered through every Financial Professional. Some Financial Professionals or selling firms may
not offer and/or limit offering of certain features and benefits, as well as limit the availability of the contracts based on criteria established by the Financial Professional or selling firm. For more information about other annuity
contracts, please contact your Financial Professional.
For example, these other annuity contracts may
have different Index Options, and different rates and minimums for the Buffers, Floors, DPSCs, Precision Rates, Caps, and Participation Rates. DPSCs, Precision Rates, Caps, and Participation Rates may also be affected, positively or negatively,
by expenses we incur in providing other contract features. For example, a product that deducts fees and expenses from Index Options may have higher DPSCs, Precision Rates, Caps, and Participation Rates than a contract that deducts fees and
expenses only from variable investment options.
How Do the Crediting Methods Work?
All Crediting Methods provide a Credit on the
Term End Date based on Index Values and Index Returns. The Index Value is the Index’s price at the end of the Business Day on the Term Start Date and Term End Date, which we use to calculate the Index
Return. A Business Day is each day the New York Stock Exchange is open for trading and it ends when regular trading on the New York Stock Exchange closes, which is usually at 4:00 p.m. Eastern Time. All
of the Crediting Methods offer 1-year Term Index Options, but only the Index Performance Strategy also offers 3-year and 6-year Term Index Options.
The Index
Protection Strategy with DPSC provides a Credit equal to the DPSC if the Index Value on the Term End Date is equal to or greater than the Index Value on the Term Start Date, regardless of the amount of actual Index Return. If the
current Index Value is less than it was on the Term Start Date, the Credit is zero.
The Index
Protection Strategy with Cap provides a Protection Credit.
•
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If the Index Return is positive, the Protection Credit is equal to the Index Return up to the Cap.
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•
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If the Index Value on the Term End Date is equal to or less than the Index Value on the Term Start Date, the Protection Credit is zero.
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The Index
Precision Strategy provides a Performance Credit.
•
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If the Index Value on the Term End Date is equal to or greater than the Index Value on the Term Start Date, regardless of the amount of actual Index Return, the Performance Credit is equal to the Precision Rate.
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•
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If the Index Return is negative and the loss is:
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–
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less than or equal to the Buffer, the Performance Credit is zero. We absorb any loss up to the Buffer.
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–
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greater than the Buffer, the negative Performance Credit is equal to the negative Index Return in excess of the Buffer. You participate in any losses beyond the Buffer.
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
The Index Guard
Strategy also provides a Performance Credit.
•
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If the Index Return is positive, the Performance Credit is equal to the Index Return up to the Cap.
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•
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If the Index Value on the Term End Date is equal to the Index Value on the Term Start Date, the Performance Credit is zero.
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•
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If the Index Return is negative, the negative Performance Credit is equal to the negative Index Return down to the Floor. You participate in any losses down to the Floor. We absorb any negative Index
Return beyond the Floor.
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The Index
Performance Strategy also provides a Performance Credit.
•
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If the Index Return is positive, the Performance Credit is equal to:
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–
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the Index Return up to the Cap for a 1-year Term.
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–
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Index Return multiplied by the Participation Rate, up to the Cap for a 3-year or 6-year Term. If the 3-year or 6-year Term is uncapped, the Performance Credit is equal to the Index Return multiplied by
the Participation Rate. We apply the Participation Rate and Cap for the entire Term length; we do not apply the Participation Rate and Cap annually on a 3-year or 6-year
Term.
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•
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If the Index Value on the Term End Date is equal to the Index Value on the Term Start Date, the Performance Credit is zero.
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•
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If the Index Return is negative and the loss is:
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–
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less than or equal to the Buffer, the Performance Credit is zero. We absorb any loss up to the Buffer. We apply the Buffer for the entire Term length; we do not
apply the Buffer annually on a 3-year or 6-year Term Index Option.
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–
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greater than the Buffer, the negative Performance Credit is equal to the negative Index Return in excess of the Buffer. You participate in any losses beyond the Buffer.
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A more detailed description of how we calculate
Credits, including numerical examples, is included in section 5, Valuing Your Contract – Calculating Credits.
• The
Index Precision Strategy, Index Guard Strategy, and Index Performance Strategy allow negative Performance Credits. A negative Performance Credit means you can lose principal
and previous earnings. These losses could be significant.
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• Because
we calculate Index Returns only on a single date in time, you may experience negative or flat performance even though the Index you selected for a given Crediting Method experienced gains through some, or most, of the Term.
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• If a 3-year or 6-year Term Index Option is “uncapped” for one Term (i.e., we do not declare a Cap for that Term) it does not mean that we will not declare a Cap for it on future Term Start Dates.
On the next Term Start Date we can declare a Cap for the next Term, or declare it to be uncapped.
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How Do the Crediting Methods Compare?
The Crediting Methods have different risk and
return potentials.
What is the asset protection?
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Index Protection Strategy with DPSC
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• Most protection.
• If the Index loses value, the Credit is zero. You do not receive a negative Credit.
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Index Protection Strategy with Cap
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• Most protection.
• If the Index loses value, the Credit is zero. You do not receive a negative Credit.
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Index Precision Strategy
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• Less protection than the Index Protection Strategy with DPSC, Index Protection Strategy with Cap, and Index
Guard Strategy. Protection may be more or less than what is available with the Index Performance Strategy depending on Buffers.
• Buffer absorbs a percentage of loss, but you receive a negative Performance Credit for losses greater than the Buffer.
• Potential for large losses in any Term.
• More sensitive to large negative market movements because small negative market movements are absorbed by the Buffer. In a period of extreme negative market performance, the risk of loss is greater with the Index Precision Strategy
than with the Index Guard Strategy.
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
What is the asset protection?
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Index Guard Strategy
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• Less protection than the Index Protection Strategy with DPSC and Index Protection Strategy with Cap, but more than Index
Precision Strategy and Index Performance Strategy.
• Permits a negative Performance Credit down to the Floor.
• Protection from significant losses.
• More sensitive to smaller negative market movements that persist over time because the Floor reduces the impact of large negative market movements.
• In an extended period of smaller negative market returns, the risk of loss is greater with the Index Guard Strategy than with the Index Performance Strategy and Index Precision Strategy.
• Provides certainty regarding the maximum loss in any Term.
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Index Performance Strategy
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• Less protection than the Index Protection Strategy with DPSC, Index Protection Strategy with Cap, and Index
Guard Strategy. Protection may be more or less than what is available with the Index Precision Strategy depending on Buffers.
• Buffers may be different between 1-year, 3-year, and 6-year Terms. Buffers can also be different between Index Options with the same Term length.
• Buffer absorbs a percentage of loss, but you receive a negative Performance Credit for losses greater than the Buffer.
• Potential for large losses in any Term.
• More sensitive to large negative market movements because small negative market movements are absorbed by the Buffer. In a period of extreme negative market performance, the risk of loss is greater with the Index Performance Strategy
than with the Index Guard Strategy.
• In extended periods of moderate to large negative market performance, 3-year and 6-year Terms may provide less protection than the 1-year Terms because, in part, the Buffer is applied over a longer period of time.
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What is the growth opportunity?
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Index Protection Strategy with DPSC
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• Growth opportunity limited by the DPSCs.
• Least growth opportunity.
• May perform best in periods of small positive market movements.
• DPSCs will generally be less than the Precision Rates and Caps.
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Index Protection Strategy with Cap
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• Growth opportunity limited by the Caps.
• May perform best in periods of small positive market movements.
• Generally more growth opportunity than the Index Protection Strategy with DPSC, but less than the Index Precision Strategy, Index Guard Strategy, and Index Performance Strategy.
• Caps will generally be greater than DPSCs, but less than the Precision Rates and Caps for the Index Guard Strategy and Index Performance Strategy.
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Index Precision Strategy
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• Growth opportunity limited by the Precision Rates.
• May perform best in periods of small positive market movements.
• Generally more growth opportunity than the Index Protection Strategy with DPSC and Index Protection Strategy with Cap, but less than the Index Performance Strategy.
• Growth opportunity may be more or less than the Index Guard Strategy depending on Precision Rates and Caps.
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Index Guard Strategy
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• Growth opportunity limited by the Caps.
• May perform best in a strong market.
• Growth opportunity that generally may be matched or exceeded only by the Index Performance Strategy. However, growth opportunity may be more or less than the Index Precision Strategy or Index Performance Strategy depending on
Precision Rates and Caps.
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
What is the growth opportunity?
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Index Performance Strategy
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• Growth opportunity limited by the Caps and/or Participation Rates. If we do not declare a Cap for a 3-year or 6-year Term Index Option there is no maximum limit on the positive Index Return for that Index Option. In addition, you can receive more than the
positive Index Return if the Participation Rate applies and is greater than its 100% minimum.
• May perform best in a strong market.
• Generally the most growth opportunity. However, growth opportunity may be less than the Index Precision Strategy or Index Guard Strategy depending on Precision Rates, Caps, and/or Participation Rates.
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What can change within a Crediting Method?
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Index Protection Strategy with DPSC
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• Renewal DPSCs for existing Contracts can change on each Term Start Date.
• DPSCs are subject to a 0.50% minimum.
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Index Protection Strategy with Cap
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• Renewal Caps for existing Contracts can change on each Term Start Date.
• Caps are subject to a 0.50% minimum.
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Index Precision Strategy
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• Renewal Precision Rates for existing Contracts can change on each Term Start Date.
• If we add a new Index Option to your Contract after the Issue Date, we establish the Buffer for it on the date we add the Index Option to your Contract. Your actual Buffers cannot change once they are established.
• Precision Rates are subject to a 3% minimum, and Buffers are subject to a 5% minimum.
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Index Guard Strategy
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• Renewal Caps for existing Contracts can change on each Term Start Date.
• If we add a new Index Option to your Contract after the Issue Date, we establish the Floor for it on the date we add the Index Option to your Contract. Your actual Floors cannot change once they are established.
• Caps are subject to a 3% minimum, and Floors are subject to a -25% minimum.
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Index Performance Strategy
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• Renewal Caps and/or Participation Rates for existing Contracts can change on each Term Start Date.
• If we add a new Index Option to your Contract after the Issue Date, we establish the Buffer for it on the date we add the Index Option to your Contract. Your actual Buffers cannot change once they are established.
• Caps are subject to a 3% minimum for 1-year Terms, 5% for 3-year Terms, or 10% for 6-year Terms. Participation Rates are subject to a 100% minimum. Buffers are subject to a 5% minimum.
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• For any Index Option with the Index Precision Strategy or Index Performance Strategy, you participate in any negative Index Return in excess
of the Buffer, which reduces your Contract Value. For example, if we set the Buffer at 5% we would absorb the first -5% of Index Return and you could lose up to 95% of the Index Option Value. However, for any Index Option with
the Index Guard Strategy, we absorb any negative Index Return in excess of the Floor. For example, if we set the Floor at -25%, your
maximum loss would be limited to -25% of the Index Option Value due to negative Index Returns.
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• The minimum Buffer and Floor are the least amount of protection that you could receive from negative Index Returns for any Index Option with the Index Precision Strategy, Index Guard Strategy, or
Index Performance Strategy.
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• DPSCs, Precision Rates, Caps, and Participation Rates as set by us from time-to-time may vary substantially based on market conditions. However,
in extreme market environments, it is possible that all DPSCs, Precision Rates, Caps, and Participation Rates will be reduced to their respective minimums of 0.50%, 3%, 5%, 10%, or 100% as stated above.
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• Buffers, Floors, DPSCs, Precision Rates, Caps, and Participation Rates can be different from Index Option to Index Option. For example, Caps for the Index Performance Strategy 1-year Terms can be different between the S&P 500®
Index and the Nasdaq-100® Index, and Caps for the S&P 500® Index can be different between 1-year and 3-year Terms on the Index Performance Strategy, and between the 1-year Terms for the Index Guard
Strategy and Index Performance Strategy. They may also be different from Contract-to-Contract depending on the Index Effective Date and the state of issuance.
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Bar Chart Examples of the Crediting Methods
Performance
The following hypothetical examples show
conceptually how the Crediting Methods might work in different market environments and assume no change in the hypothetical DPSCs, Precision Rates, Caps, and/or Participation Rates. All values below are for illustrative purposes only. The
examples do not reflect any Buffers, Floors, DPSCs, Precision Rates, Caps, and/or Participation Rates that may actually apply to a Contract. The examples do not predict or project the actual performance of the Index Advantage Income ADVSM. Although an Index or Indexes will affect your Index Option Values, the Index Options do not directly participate in any stock or equity investment
and are not a direct investment in an Index. The Index Values do not include the dividends paid on the stocks comprising an Index. An allocation to an Index Option is not a purchase of shares of any stock or index fund. These examples do not
reflect any withdrawals taken before the Term End Date, or deductions we make for Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Can the Crediting Methods, Terms, or Indexes Change?
We can add new Crediting Methods, Terms, and
Indexes to your Contract in the future, and you can allocate Purchase Payments or transfer Contract Value to them on the next Index Anniversary after we make them available to you. Once we add a Crediting Method to your Contract we cannot
remove it, or change how it calculates Credits. If we add a new Index Option to your Contract, we cannot change its Buffer or Floor after it is established. However, we can change the renewal DPSCs, Precision Rates, Caps, and/or Participation
Rates associated with any Index Option on each Term Start Date.
Once we add an Index to your Contract, we cannot
remove it without simultaneously replacing or substituting it. Index replacements and substitutions can occur either on a Term Start Date, Term End Date, or during a Term. If we substitute an Index during a Term, we will combine the return of
the previously available substituted Index with the return of the new Index. However, if we substitute an Index, we do not change the Buffers or Floors applicable to your
Contract, or the current DPSCs, Precision Rates, Caps, and/or Participation Rates that we set on the Term State Date. Any changes to the DPSCs, Precision Rates, Caps, and/or Participation Rates for the new substituted Index will occur at the
next regularly scheduled Term Start Date. For more information, see Risk Factors – Substitution of an Index and Limitation on Further Investments.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
When Does Allianz Establish the Values Used to
Determine Index Credits?
We establish the Buffers and Floors for your
Contract on the Issue Date. However, if we add a new Index Option to your Contract after the Issue Date, we establish the Buffer or Floor for it on the date we add the Index Option to your Contract. Your actual Buffers and Floors are stated in
your Contract and cannot change once they are established.
We establish the initial DPSCs, Precision Rates,
Caps, and Participation Rates for a newly issued Contract on the Index Effective Date and they cannot change until the next Term Start Date. You select the Index Effective Date when you purchase your Contract. It can be any Business Day from
the Issue Date up to and including the first Quarterly Contract Anniversary, but it cannot be the 29th, 30th or 31st of a month. You should be aware that, generally, DPSCs, Precision Rates, Caps, and
Participation Rates could change every seven calendar days. However, these rates are guaranteed to be available during the period stated on our website at www.allianzlife.com/indexincomeadvrates and cannot be superseded until that period
ends. Therefore, if you select an Index Effective Date that is after the end of the free look period, you will bear the risk that initial DPSCs, Precision Rates, Caps, and Participation Rates may change and be less advantageous to you and
that you will be subject to the contract maintenance charge, product fee, and rider fee if you then elect to cancel the Contract on or before the Index Effective Date, but after the free look period. You may review future rates at least seven
calendar days before their effectiveness at www.allianzlife.com/indexincomeadvrates. You (or your Financial Professional, if authorized) can change your Index Effective Date at any time before it occurs to be an earlier or later date by
submitting a request.
We can change the renewal DPSCs, Precision Rates,
Caps, and Participation Rates for an existing Contract on each new Term Start Date, in our discretion. Your initial and renewal DPSCs, Precision Rates, Caps, and Participation Rates are stated in your Index
Options Statement, which is the account statement we mail to you on the Index Effective Date and each Index Anniversary. The Index Options Statement also includes the Index Values on the Term Start Date and Term End Date. We use these
Index Values to determine Index Returns and Credits.
For information on the Buffers, Floors, and
initial DPSCs, Precision Rates, Caps, and Participation Rates we currently offer for newly issued Contracts, see our website at www.allianzlife.com/indexincomeadvrates. We publish any changes to these values at
least seven calendar days before the Index Effective Date that they take effect. If you select the earliest Index Effective Date, the initial rates available for review on your Issue Date will be the rates on your Index Effective Date.
However, if you choose to defer your Index Effective Date your initial rates may change from the values that were available on your Issue Date. You are responsible for reviewing the initial rates before your Index Effective Date to ensure
your allocations and the product still meet your needs.
We will send you a letter at least 30 days before
each Index Anniversary. This letter advises you that current DPSCs, Precision Rates, Caps, and Participation Rates are expiring, and that renewal rates for the next Term Start Date will be available for your
review in your account on our website at least seven calendar days before they take effect on the upcoming Index Anniversary. Renewal rates are also available on our website at www.allianzlife.com/indexincomeadvrates. The Index
Anniversary letter also reminds you of your opportunity to transfer your Index Option Values on the upcoming Term End Date.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
• If your Contract is within its free look period you
may be able to take advantage of any increase in initial DPSCs, Precision Rates, Caps, and/or Participation Rates by cancelling your Contract and purchasing a new Contract.
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• If the initial DPSCs, Precision
Rates, Caps, and/or Participation Rates available on the Index Effective Date are not acceptable to you can:
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– cancel your Contract if you are still within the free look period,
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– request to extend your Index Effective Date if you have not reached your first Quarterly Contract Anniversary,
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– on or before the Index Effective Date, cancel the Contract and request a full withdrawal of the money held in the AZL Government Money Market Fund and receive the Contract Value
less any final product and rider fees and contract maintenance charge; on or before the Index Effective Date you are not subject to an MVA or Daily Adjustment, or
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– after the Index Effective Date, cancel the Contract and request a full withdrawal of the Cash Value; after the Index Effective
Date, you will be subject to an MVA and Daily Adjustment.
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• DPSCs, Precision Rates, Caps,
and Participation Rates may be different between newly issued and existing Contracts, and between existing Contracts issued on the same month and day in different years. For example, assume that in August 2023 we set Caps for the Index
Performance Strategy 1-year Term with the S&P 500® Index as follows:
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– 13% initial rate for new Contracts issued in 2023,
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– 14% renewal rate for existing Contracts issued in 2022, and
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– 12% renewal rate for existing Contracts issued in 2021.
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What Are the Different Values Within the Contract?
The Contract provides the following values as
discussed in section 5, Valuing Your Contract.
•
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The Contract Value is the sum of your Variable Account Value and Index Option Values. Contract Value reflects any previously deducted Contract fees and expenses, but does not reflect Contract fees and expenses that we
would apply on liquidation. The Cash Value reflects all Contract fees and expenses that we would apply on liquidation and any MVA.
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•
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Your Variable Account Value is the value of the shares in the AZL Government Money Market Fund subaccount which holds your Purchase Payments until the Index Effective Date or next Index Anniversary. It reflects deduction
of the fund’s operating expenses, and previously assessed contract maintenance charge, product fee, and rider fees. It changes each Business Day based on the performance of the AZL Government Money Market Fund.
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•
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Your total Index Option Value is the sum of the values in each of your selected Index Options. Each Index Option Value includes any Credits from previous Term End Dates, reduced proportionately for
previous partial withdrawals you took (including any MVA), and previous deductions we made for Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract.
Amounts removed from the Index Options during the Term for withdrawals you take and deductions we make for fees and expenses do not receive a Credit on the Term End Date,
but the amount remaining does receive a Credit subject to the applicable Buffer, Floor, DPSC, Precision Rate, Cap, and/or Participation Rate.
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–
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On each Business Day during the Term other than the Term Start Date or Term End Date, we calculate the current Index Option Value by adding a Daily Adjustment to the Index Option Base. The Index
Option Base is the amount you allocate to an Index Option. We reduce the Index Option Base proportionately for withdrawals you take (including any MVA), and deductions we make for Contract fees, expenses, and investment
advisory fees that you authorize your Financial Professional’s firm to receive from the Contract; we increase/decrease it by the dollar amount of additional Purchase Payments allocated to, and transfers into or out of the Index Option;
and we increase/decrease it by the percentage of any Credit.
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What Is the Daily Adjustment?
The Daily Adjustment is how we calculate Index
Option Values on Business Days other than the Term Start Date or Term End Date . The AZL Government Money Market Fund is not subject to the Daily Adjustment.
The Daily Adjustment can affect the amounts
available for withdrawal, annuitization, payment of the death benefit, and the Contract Value used to determine the Charge Base and contract maintenance charge. The Daily Adjustment can be positive or negative. When the Daily Adjustment is
positive, your Index Option Value has increased since the Term Start Date.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
When it is negative, your Index Option Value has decreased
(excluding the effect of the deduction of Contract expenses or any partial withdrawal). However, the Daily Adjustment for the Index Protection Strategy with DPSC and Index Protection Strategy with Cap cannot be negative.
We calculate the Daily Adjustment for a given
Business Day before we deduct any Contract fees or expenses or process any partial withdrawal on that Business Day, including MVA-Free Withdrawals. However, the Daily Adjustment calculation is not affected by any Contract fee or expense
deduction, partial withdrawal, or MVA. The Daily Adjustment does not change the Contract fee or expense deducted, or the withdrawal amount; it only changes the Index Option Value from which we deduct the Contract fee or expense, or withdrawal.
The Daily Adjustment approximates the Index
Option Value that will be available on the Term End Date. It is the estimated present value of the future Credit that we will apply on the Term End Date. The Daily Adjustment takes into account:
(i)
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any Index gains during the Term subject to the applicable DPSC, Precision Rate, Cap, and/or Participation Rate,
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(ii)
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either any Index losses greater than the Buffer or Index losses down to the Floor (not applicable to the Index Protection Strategy with DPSC or the Index Protection Strategy with Cap), and
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(iii)
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the number of days until the Term End Date.
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The Daily Adjustment does this by using the
hypothetical value of a Proxy Investment (Proxy Value) each Business Day, other than the Term Start Date or Term End Date, based on the formulas described in Appendix B. The Proxy Investment provides a current estimated present value of what the Credit will be on the Term End Date taking into account the applicable Buffer, Floor, DPSC, Precision Rate, Cap, and/or Participation
Rate. The Daily Adjustment is not the actual Index return on the day of the calculation, and the estimated present value Credit is not guaranteed. Therefore, the Daily Adjustment could result in a loss beyond the protection of the Buffer or
Floor. In extreme circumstances the Daily Adjustment could result in a loss beyond the protection of the Buffer or Floor, but it cannot result in a total loss of -100%. Such losses will be greater if the amount withdrawn is also subject to a negative MVA, or is a deduction of Contract fees, expenses, or investment advisory fees that you authorize your Financial
Professional’s firm to receive from the Contract.
A withdrawal taken during the Term may not
receive the full benefit of the Buffer or Floor because the Daily Adjustment takes into account what may potentially happen between the withdrawal date and the Term End Date. All other factors being equal, even if the current Index return
during the Term is greater than the Precision Rate or Cap, the Daily Adjustment will usually be lower than the Precision Rate or Cap. For the Index Protection Strategy with DPSC, even if the current Index return during the Term is greater than
the or equal to zero, the Daily Adjustment will usually be lower than the DPSC. This is because there is a possibility that the Index return could decrease before the Term End Date. Similarly, even though a negative Index return may be within
the amount of the Buffer for the Index Precision Strategy and Index Performance Strategy, you still may receive a negative Daily Adjustment because there is a possibility that the Index Return could decrease before the Term End Date. The Daily
Adjustment for 3-year and 6-year Term Index Options may be more negatively impacted by changes in the expected volatility of Index prices than 1-year Term Index Options due to the difference in Term length. Also, the risk of a negative Daily
Adjustment is greater for 3-year and 6-year Term Index Options than 1-year Term Index Options due to the Term length. 3-year and 6-year Term Index Options with a Participation Rate above 100% may also have larger fluctuations in the Daily
Adjustment than Index Options either without a Participation Rate, or with a Participation Rate equal to 100%. Finally, a negative Index return for the Index Guard Strategy may result in you receiving a Daily Adjustment lower than the Floor,
because the Daily Adjustment reflects the present value of the Floor and you will not receive the full benefit of the Floor until the Term End Date. A negative Daily Adjustment may cause you to
realize loss of principal or previous earnings.
The Daily Adjustment’s risks are discussed in
more detail in Risk Factors – Risk of Negative Returns. The specific details of the Daily Adjustment formula are described in Appendix B and in Exhibit 99(a) of the Form S-1 Registration Statement filed with the SEC, of which this prospectus is
a part. This information is incorporated by reference into this prospectus. You can obtain a copy of Exhibit 99(a) by calling (800) 624-0197, or visiting our website at www.allianzlife.com.
What is the Performance Lock?
You can capture the current Index Option Value
(which includes the Daily Adjustment) on any Business Day during the Term through our Performance Lock feature. You (or your Financial Professional, if authorized) can request Performance Locks based on the Daily Adjustment. On our website the
Daily Adjustment is included in the Index Option Value return figures. Additionally, you can transfer assets out of a 3-year or 6-year Term Index Option before the Term End Date by executing a Performance Lock on or before the second Index
Anniversary of a 3-year Term, or on or before the fifth Index
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Anniversary of a 6-year Term. The Business Day that we execute a
Performance Lock is the Lock Date for that Index Option.
We will not provide advice or notify you regarding whether you should exercise a Performance Lock or the optimal time for doing so. We will not warn you if you
exercise a Performance Lock at a sub-optimal time. We are not responsible for any losses related to your decision whether or not to exercise a Performance Lock.
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How Does the Income Benefit Work?
The Income Benefit is automatically included in
your Contract at issue and you cannot remove it. It provides guaranteed lifetime Income Payments until annuitization. Unlike Annuity Payments, the Income Benefit allows access to your Contract Value and death benefit for a period of time after
Income Payments begin. However, once Income Payments begin only the Index Options with the Index Protection Strategy with DPSC and Index Protection Strategy with Cap are available to you. The Income Benefit has a rider fee as discussed in the
Fee Tables, and section 6, Expenses.
We designed Income Payments to last for the
lifetime of the Covered Person(s). Covered Person(s) are based on the Eligible Person(s) and the Income Payment type you select on the Income Benefit Date. We establish Eligible
Person(s) at issue based on the Contract’s ownership and tax qualification status.
We generally base Income Payments on the Lifetime
Income Percentage and your Contract Value. We base each Lifetime Income Percentage on its Income Percentage(s) and Income Percentage Increase (the amount that each
Income Percentage can increase on each Index Anniversary up to and including the Income Benefit Date). On the Index Effective Date we establish:
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An Income Percentage for each payment type using the Eligible Person’s current age, or younger Eligible Person’s current age for joint payments. This Income Percentage is also the initial Lifetime Income Percentage for
each payment type.
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An Income Percentage Increase for each Eligible Person based on their current age (or younger Eligible Person’s current age for joint payments). However, if there are two Eligible Person(s) the Index
Options Statement will not display a single Lifetime Income Percentage for an Eligible Person who is only a Beneficiary, because only an Eligible Person who is also an Owner (or Annuitant if the Owner is a non-individual) can become a
Covered Person if you select single payments.
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During the Accumulation Phase on each Index
Anniversary on and before the Income Benefit Date, we add an Income Percentage Increase to each Lifetime Income Percentage once the Eligible Person (or younger Eligible Person for joint payments) reaches age 45. This means if an Eligible Person is younger than age 44 on the Issue Date:
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you will not receive an increase to a Lifetime Income Percentage based on that Eligible Person until the Index Anniversary that the Eligible Person (or younger Eligible Person for joint payments) reaches age 45, and
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you will pay a rider fee during the period you are not eligible for an Income Percentage Increase.
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The table showing the Income Percentages and
Income Percentage Increases is stated in the Income Benefit Supplement. Additional Purchase Payments we receive after the Index Effective Date will adjust each Lifetime Income Percentage on the next Index Anniversary based on:
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the Income Percentage for the Eligible Person’s current age, and
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the Variable Account Value’s percentage of total Contract Value.
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If we receive additional Purchase Payments after
the Eligible Person reaches age 45, these Purchase Payments will increase the available Income Payment because they increase the Contract Value, although they actually decrease each Lifetime Income Percentage. An example of this is included in
section 9, Lifetime Income Percentage Calculation Example.
Then when you are ready to take Income Payments,
you can choose which Lifetime Income Percentage we use to calculate your payment. You will always be able to choose between Lifetime Income Percentages for the Level Income and Increasing Income payment options. Level
Income provides an automatic annual increase to your Income Payments if your Contract Value increases from one Income Benefit Anniversary to the next. If you choose the Level Income payment option and meet certain age requirements,
your initial Income Payment will not be less than a percentage (Level Income Guarantee Payment Percentage) of your total Purchase Payments reduced proportionately for withdrawals you took (including any
MVA). All withdrawals you take reduce your total Purchase Payments, even MVA-Free Withdrawals. However, we do not reduce your total Purchase Payments for deductions we make for Contract fees, expenses, and
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
investment advisory fees that you authorize your Financial
Professional’s firm to receive from the Contract. Increasing Income provides Income Payment increases on each Income Benefit Anniversary during the Income Period if your selected Index Option(s) receives
a positive Credit
If there are two Eligible Person(s) who both meet
the exercise age requirements, you will also be able to choose between Lifetime Income Percentages for single and joint payments. If both Eligible Persons are also Owners, you will also be able to choose between single Lifetime Income
Percentages based on each Eligible Person. The Lifetime Income Percentages available before the Income Benefit Date are displayed on the Index Options Statement. During the Income Period this statement will show the annual maximum Income
Payment available for the next year. The annual maximum Income Payment displayed for the Level Income payment option will reflect the Level Income Guarantee Payment Percentage if this calculation results in a greater payment and you meet the
age requirements stated in section 9, Calculating Your Income Payments.
There are restrictions on which Eligible Person can
become a Covered Person if you select single Income Payments. Joint Income Payments are not available if the age difference between spouses is more than 50 years, or more than 20 years if the Traditional Death Benefit applies and one spouse is
age 80 on the Issue Date, or more than 25 years if the Maximum Anniversary Value Death Benefit applies and one spouse is age 75 on the Issue Date (for more information see section 2, Eligible Person(s) and Covered Person(s)).
Income Payments are not available until the Index
Anniversary that occurs on or after the Income Payment waiting period (which is stated in the Income Benefit Supplement) expires and the Eligible Person(s) reaches age 50. Income Payments must begin no later than age 100. If you do not begin Income Payments during the eligibility period, the Income Benefit ends and you will have paid for the benefit without receiving any of its advantages. In addition, before the
Income Period you are paying for a benefit that you are not currently using.
You choose your Income Payment frequency and
amount subject to the annual maximum permitted payment. The payment option (Level Income or Increasing Income) you select determines how and when your annual maximum Income Payment will increase from one Income Benefit Anniversary to the next
as described in section 9, Income Benefits - Automatic Annual Income Payment Increases. An Income Benefit Anniversary is a twelve-month anniversary of the Income Benefit Date that Income Payments begin.
We use Contract Value to calculate your initial
annual maximum Income Payment, and Income Payment increases under the Level Income payment option. Negative Index Option performance, withdrawals you take, and deductions we make for Contract fees, expenses,
and investment advisory fees you authorize your Financial Professional’s firm to receive from the Contract decrease the Contract Value, which reduces the initial annual maximum Income Payment available to you, and the likelihood you will
receive Income Payment increases if you select the Level Income payment option. Once established, the annual maximum Income Payment can only decrease if you take an Excess Withdrawal. Taking Excess Withdrawals can cause your Income Payments and Contract to end prematurely.
The Income Benefit also includes the
Income Multiplier Benefit which, after the required wait period, can increase your income to help pay for care if you should need it. If you qualify for this benefit, we multiply your annual maximum Income Payment by the income multiplier
factor. The income multiplier factor and income multiplier benefit wait period are stated in the Income Benefit Supplement.
• YOU SHOULD NOT PURCHASE THIS CONTRACT WITHOUT FIRST OBTAINING THE CURRENT INCOME BENEFIT SUPPLEMENT. We publish any changes to the Income Benefit
Supplement at least seven calendar days before they take effect on our website at www.allianzlife.com/indexincomeadvrates.
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• Please discuss the Income Benefit’s appropriateness with your Financial Professional and tax adviser.
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What Happens During the Income Period?
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You will receive Income Payments as long as a Covered Person is alive and continues to meet the requirements stated in section 2. However, Income Payments and the Income Benefit may end
prematurely if you:
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change the Owner(s) or Beneficiary and all Covered Persons are removed from the Contract because they no longer meet the requirements stated in section 2,
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take an Excess Withdrawal that reduces the Contract Value to $2,000 or less, or
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you annuitize your Contract. However, we can convert your Income Payment to Annuity Payments as described in section 8, The Annuity Phase – When Annuity Payments Begin.
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
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If you begin Income Payments before age 59 1⁄2, the payments will
generally be subject to a 10% additional federal tax.
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Any part of your annual maximum Income Payment that you do not withdraw in a given Income Benefit Year remains in your Contract for the remainder of that year, but is not added to the annual maximum payment available next
year.
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Excess Withdrawals reduce your annual maximum Income Payment by the percentage of Contract Value withdrawn (including any MVA) on the next Income Benefit Anniversary.
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You cannot make additional Purchase Payments. If your Contract includes the Traditional Death Benefit your Guaranteed Death Benefit Value no longer increases.
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The Contract Value continues to fluctuate as a result of Index Option performance. However, only the Index Protection Strategy with DPSC and Index Protection Strategy with Cap are available to you. This may limit your
Contract’s performance potential, and if your Contract includes the Maximum Anniversary Value Death Benefit, this may also limit your Guaranteed Death Benefit Value.
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The Contract Value decreases on a dollar for dollar basis with each Income Payment, Excess Withdrawal, and deductions we make for Contract fees, expenses, and investment advisory fees that you authorize your Financial
Professional’s firm to receive from the Contract. If your Contract includes the Maximum Anniversary Value Death Benefit, this decrease in Contract Value also reduces the likelihood of locking in investment gains to the Maximum
Anniversary Value.
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Each Income Payment and any Excess Withdrawal also reduces your Guaranteed Death Benefit Value by the percentage of Contract Value withdrawn (including any MVA), which
means this value may be reduced by more than the amount withdrawn.
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The Income Benefit rider fee continues until the Business Day the Contract Value reduces to zero, you annuitize the Contract, or the Income Benefit ends.
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If your Contract also includes the Maximum Anniversary Value Death Benefit, its rider fee continues as indicated in section 6, Expenses.
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The free withdrawal privilege is no longer available.
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If you exercise the Income Multiplier Benefit, we will increase your annual maximum Income Payment for the remainder of that Income Benefit Year and the next year. To continue receiving this increase each Income Benefit
Year you must reestablish eligibility. Any increase to your Income Payments as a result of this benefit will more rapidly reduce your Guaranteed Death Benefit Value.
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If your Contract Value reduces to zero during the Income Period for any reason other than an Excess Withdrawal or annuitization that does not convert your Income Payments to Annuity Payments, you will
continue to receive your maximum available Income Payment at the previous selected payment frequency until the earlier of the death of the Owner or last surviving Covered Person. If you exercised the Income Multiplier Benefit it will
also end on the Income Benefit Anniversary that occurs on or immediately after your Contract Value reduces to zero, and although you receive the maximum available Income Payment, it will be less than the amount you previously received
under the Income Multiplier Benefit.
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An example of the effect of an Excess Withdrawal on
the Guaranteed Death Benefit Value and the annual maximum Income Payment is included in section 9, Income Benefit – Excess Withdrawals.
Risk Factors
The Contract involves certain risks that you
should understand before purchasing. You should carefully consider your income needs and risk tolerance to determine whether the Contract is appropriate for you. The level of risk you bear and your potential investment performance will differ
depending on the Index Options you choose.
Liquidity Risks
We designed the Contract to be a long-term
investment that you can use to help build and provide income for retirement. The Contract is not suitable for short-term investment.
If you need to take a full or partial withdrawal
during the MVA period, we apply an MVA unless the withdrawal is an MVA-Free Withdrawal. We also apply the MVA during the MVA period if you take Annuity Payments or if we pay a death benefit. While MVA-Free Withdrawals provide some liquidity,
they are permitted in only limited amounts or in special circumstances. If you need to withdraw most or all of your Contract Value in a short period, you will exceed the MVA-Free Withdrawal amounts available to you and we will apply an MVA.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
The MVA can be positive or negative according to
the interest rate environment as measured by the corporate bond yields through the Bloomberg Barclays US Long Corporate Bond Index. In periods when bond yields have significantly decreased, the MVA limit (the maximum total positive or negative
MVA is either 10% of the amount withdrawn on a partial withdrawal, or 10% of Contract Value for a full withdrawal, Annuity Payments, or the death benefit) may reduce the amount you would have received from a positive MVA. In general, as the
time remaining in the MVA period drops, a more substantial bond yield change is required to reach the 10% MVA limit. However, there are also other factors influencing how much bond yields would have to drop or increase to reach the 10% MVA
limit including any gains or losses in the Contract and corporate bond yields at the time each Annual Contribution Amount begins. For example, assume you purchase a Contract with a single Purchase Payment of $100,000 allocated to one Index
Option, the Issue Date is the Index Effective Date, the initial bond yield is 3%, and you take no partial withdrawals. On the second Index Anniversary, the Contract Value has decreased to $90,000 and you request a full withdrawal. The maximum
negative MVA of -10% of Contract Value would occur if bond yields increased by 1.96% or more. If instead you wait and take a full withdrawal on the sixth Index Anniversary when the Contract Value has increased to $120,000, the maximum negative
MVA of -10% of Contract Value would occur if bond yields increased by 14.04% or more.
We calculate the MVA as a percentage (called the
MVA factor) of the amount of Purchase Payment withdrawn from an Annual Contribution Amount, not a percentage of Contract Value. Consequently, if the Contract Value has declined since the Annual Contribution Amount(s) were established and the
MVA is negative, it is possible that the percentage of Contract Value withdrawn to cover the negative MVA would be greater than the MVA factor. For example, assume you buy the Contract with a single Purchase Payment of $10,000, your Index
Effective Date is the Issue Date, and the yield on the Bloomberg Barclays US Long Corporate Bond Index on the Index Effective Date is 2%. On the 5th
Index Anniversary your Contract Value is $8,000 after we deduct Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract and you request a full withdrawal. If the
yield on the Bloomberg Barclays US Long Corporate Bond Index has increased to 3%, the MVA factor is -1.932%. The MVA would be -$193.20 (-1.932% of $10,000). This results in you receiving $7,806.80.
In addition, upon a full withdrawal the free
withdrawal privilege is not available to you, and we apply an MVA against Annual Contribution Amounts that are still within their MVA period. On a full withdrawal your total Annual Contribution Amounts may be
greater than your Contract Value because the following reduce your Contract Value, but do not reduce your Annual Contribution Amounts: prior MVA-Free Withdrawals; deductions we make for Contract fees, expenses, or investment advisory fees you
authorize your Financial Professional’s firm to receive from the Contract; and/or poor performance.
For more information on the MVA, including how we
calculate the MVA factor, see section 5, Valuing Your Contract – Market Value Adjustment (MVA).
Amounts withdrawn from this Contract may also be
subject to a 10% additional federal tax if taken before age 59 1⁄2.
We only apply Credits to the Index Options once
each Term on the Term End Date, rather than on a daily basis. In the interim, we calculate Index Option Values based on the Daily Adjustment. Any assets removed from an Index Option during the Term for withdrawals you take (including MVA-Free
Withdrawals), Annuity Payments, or deductions we make for Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract, or if we pay a death benefit, will not be
eligible to receive a Credit on the Term End Date. These removed assets will not receive the full benefit of the Index Value and Index Return that would have been available on the Term End Date, or the full benefit of any Buffer or Floor. You
will receive a Credit only on the Index Option Value remaining in an Index Option on the Term End Date.
You may transfer Index Option Values among the
Index Options only on the Term End Date. At other times, you can only move assets out of an Index Option by taking a full or partial withdrawal, or entering the Annuity Phase. Additionally, you can transfer assets out of a 3-year or 6-year Term
Index Option before the Term End Date by executing a Performance Lock on or before the second Index Anniversary of a 3-year Term, or on or before the fifth Index Anniversary of a 6-year Term. These restrictions may limit your ability to react
to changes in market conditions. You should consider whether investing in an Index Option is consistent with your financial needs.
Income Benefit Risks
The Income Benefit is automatically included in
the Contract for an additional rider fee and you cannot remove it.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
We generally base Income Payments on the Lifetime
Income Percentage you select and your Contract Value, not a guaranteed value. Decreases in Contract Value due to negative Index performance during the Accumulation Phase up to and
including the Income Benefit Date, deductions for Contract fees and expenses, and withdrawals, also decrease the Income Payment amount available to you.
If you choose the Level Income payment option and
meet the age requirements stated in section 9, Calculating Your Income Payments, your initial annual maximum Income Payment will not be less than the Level Income Guarantee Payment Percentage multiplied by your total Purchase Payments reduced
proportionately for withdrawals you took (including any MVA). However, the Level Income Guarantee Payment Percentage is not available to you under the Level Income payment option if you do not meet the age requirements stated in section 9, or
if you choose Increasing Income payment option.
Income Payments made while your Contract Value is
positive are a withdrawal of your own assets and reduce your Contract Value. If your Contract Value remains above zero when the Income Payments end, you may not realize a benefit from the Income Benefit; the chances of your Contract Value being
reduced to zero may be minimal.
We also base Income Payments on the Eligible
Person(s) that we establish at issue. If you change Owners or Beneficiary(s), we may remove an Eligible Person or Covered Person as stated in section 2, which may cause Income Payments to be
unavailable or end prematurely.
We use the age of the Eligible Person(s) to
determine the Income Percentage(s) and Income Percentage Increases. Income Percentage Increases are not available until age 45. This means if an Eligible Person is younger than age 44 on the Issue Date, you will not receive an increase to a Lifetime Income Percentage based on that Eligible Person until the Index Anniversary that the Eligible Person (or younger Eligible Person for joint payments)
reaches age 45, and you will pay a rider fee during the period you are not eligible for an Income Percentage Increase.
The eligibility period to begin Income Payments
is subject to a waiting period and both a minimum and maximum age requirement for the Eligible Person(s). For single Income Payments we only allow an Eligible Person who is an Owner to become a Covered Person, and joint Income Payments may not
be available if the age difference between spouses is too great, as stated in section 2, Eligible Person(s) and Covered Person(s). If you do not begin Income Payments during the eligibility
period, the Income Benefit ends and you will have paid for the benefit without receiving any of its advantages.
In addition, if you have Contract Value in a
3-year or 6-year Term Index Option when you begin Income Payments and the Income Benefit Date is not a Term End Date, we will execute a Performance Lock for that Index Option if it is not locked and then immediately calculate and begin your
Income Payments.
The initial annual maximum Income Payment
available to you must be at least $100. If your Contract Value on the Income Benefit Date is reduced and this $100 minimum cannot be met, the Income Benefit ends and you will have paid for the
benefit without receiving any of its advantages. Income Payments and the Income Benefit may also end prematurely if you take Excess Withdrawals, or you annuitize the Contract. However, we can convert your Income Payment to Annuity
Payments as described in section 8, The Annuity Phase – When Annuity Payments Begin.
The Income Multiplier Benefit can provide
increased income if you are confined for care, or are unable to perform at least two activities of daily living. However, this benefit has a waiting period and you must meet certain requirements to receive it. If you are unable to meet these
requirements the Income Multiplier Benefit may not be available to you when you need it. If you qualify for the Income Multiplier Benefit, it also may not provide enough income to pay for the care you require. For joint Covered Persons, if you
both qualify for this benefit at the same time you will get the same payment increase as a single Covered person; we do not apply the increase separately for each Covered Person.
For more information on the Income Benefit and
Income Payments, see “How Does the Income Benefit Work?” and “What Happens During the Income Period?” in the Summary; and section 9.
Risk of Change to the Income Benefit Supplement
Prior to the Issue Date
The Income Payment waiting period and the table
showing the Income Percentages and Income Percentage Increases for your Contract and are stated in the Income Benefit Supplement that is in effect on the date you sign your application. The supplement also includes the income multiplier factor
and income multiplier benefit wait period for the Income Multiplier Benefit. Your Financial Professional will give you a copy of the prospectus with the current Income Benefit supplement when you apply for a Contract. If we do not receive your
initial Purchase Payment within 60 calendar days of the date you sign the application, and the Income Benefit Supplement terms have changed since this date, you will receive the Income Benefit Supplement terms that are in effect on the Issue
Date instead of the terms that were in effect when you applied for
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
the Contract. You bear the risk that if there is a more than a
60-day delay between the time you apply for the Contract and the Issue Date the Income Benefit Supplement terms may change and be less advantageous to you. When we issue the Contract, we send you the current prospectus with the current Income
Benefit Supplement. We cannot change these terms for your Contract once they are established. We publish any changes to these terms in an amended Income Benefit Supplement at least seven calendar days before they take effect on our website at
www.allianzlife.com/indexincomeadvrates. The amended Income Benefit Supplement is also filed on EDGAR at www.sec.gov under Form S-1 File Number 333-255386, and Form N-4 File Number 333-255394. You can contact us to receive the Income Benefit
Supplement applicable to your Contract by calling our Service Center at the toll-free telephone number listed at the back of this prospectus.
Risks of Investing in Securities
Returns on securities and securities Indexes can
vary substantially, which may result in investment losses. The historical performance of the available Index Options and the AZL Government Money Market Fund does not guarantee future results. It is impossible to predict whether underlying
investment values will fall or rise. Trading prices of the securities underlying the Index Options and the AZL Government Money Market Fund are influenced by economic, financial, regulatory, geographic, judicial, political and other complex and
interrelated factors. These factors can affect capital markets generally and markets on which the underlying securities are traded and these factors can influence the performance of the underlying securities.
Index Option returns depend on the performance of
an Index although you are not directly invested in the Index. Because the S&P 500® Index, Russell 2000® Index, Nasdaq-100® Index, EURO STOXX 50® and iShares® MSCI Emerging Markets ETF are each
comprised of a collection of equity securities, in each case the value of the component securities is subject to market risk, or the risk that market fluctuations may cause the value of the component securities to go up or down, sometimes
rapidly and unpredictably. In addition, the value of equity securities may decline for reasons directly related to the issuers of the securities.
S&P 500® Index. The S&P 500®
Index is comprised of equity securities issued by large-capitalization U.S. companies. In general, large-capitalization companies may be unable to respond quickly to new competitive challenges, and also may not be able to attain the high
growth rate of successful smaller companies.
Russell 2000® Index. The Russell 2000®
Index is comprised of equity securities of small-capitalization U.S. companies. In general, the securities of small-capitalization companies may be more volatile and may involve more risk than the securities of larger companies.
Nasdaq-100® Index. The Nasdaq-100®
Index is comprised of equity securities of the largest U.S. and non-U.S. companies listed on The Nasdaq Stock Market, including companies across all major industry groups except the financial industry. To the extent that the Nasdaq-100® Index is comprised of securities issued by companies in a particular sector, that company’s securities may not perform as well as companies in
other sectors or the market as a whole. Also, any component securities issued by non-U.S. companies (including related depositary receipts) are subject to the risks related to investments in foreign markets (e.g., increased price volatility;
changing currency exchange rates; and greater political, regulatory, and economic uncertainty).
EURO STOXX 50®. EURO STOXX 50® is
comprised of the equity securities of large-capitalization companies in the Eurozone. The securities comprising EURO STOXX 50® are subject to the
risks related to investments in foreign markets (e.g., increased price volatility; changing currency exchange rates; and greater political, regulatory, and economic uncertainty), and are significantly affected by the European markets and
actions of the European Union.
iShares® MSCI Emerging Markets ETF. The iShares® MSCI Emerging Markets ETF seeks to track the investment results of the MSCI Emerging Markets Index, which is designed to measure equity market
performance in the global emerging markets. The underlying index may include large-and mid-capitalization companies. iShares® MSCI Emerging
Markets ETF is an exchange-traded fund. The performance of the iShares® MSCI Emerging Markets ETF may not replicate the performance of, and may
underperform the underlying index. The price of the iShares® MSCI Emerging Markets ETF will reflect expenses and fees that will reduce its
relative performance. Moreover, it is also possible that the iShares® MSCI Emerging Markets ETF may not fully replicate or may, in certain
circumstances, diverge significantly from the performance of the underlying index. Information about the iShares® MSCI Emerging Markets ETF is
publicly available at www.ishares.com/prospectus.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
The COVID-19 pandemic has at times led to significant volatility and negative returns in the financial markets. These market conditions have impacted the
performance of the Indexes to which the Index Options are linked, as well as securities held by the AZL Government Money Market Fund. If these market conditions continue or reoccur, and depending on your individual circumstances (e.g., your selected Index Options and the timing of any Purchase Payments, transfers, or withdrawals), you may experience (perhaps significant) negative returns under the Contract. The COVID-19
pandemic and other market factors have resulted in an abnormally low interest rate environment, in which certain rates have gone negative. This low level of rates can affect the returns of an Index, the level of DPSCs, Precision Rates,
Caps, and Participation Rates, and other product features, and the performance of your Contract. The duration of the COVID-19 pandemic, and the future impact that the pandemic may have on the financial markets and global economy, cannot
be foreseen. You should consult with a Financial Professional about how the COVID-19 pandemic and the recent market conditions may impact your future investment decisions related to the Contract, such as purchasing the Contract or
making Purchase Payments, transfers, or withdrawals, based on your individual circumstances.
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Risk of Negative Returns
The AZL Government Money Market Fund does not
provide any protection against negative returns. You can lose principal and previous earnings for Purchase Payments held in the AZL Government Money Market Fund and such losses could be
significant.
If you allocate Purchase Payments or transfer
Contract Value to an Index Option with the Index Precision Strategy, Index Guard Strategy, or Index Performance Strategy, negative Index Returns may cause Performance Credits to be either negative after application of the Buffer or negative
down to the amount of the Floor. For the Index Performance Strategy, we apply the Buffer for the entire Term length; we do not apply the Buffer annually on a 3-year or 6-year Term Index Option. Ongoing deductions we make for Contract fees,
expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract could also cause amounts available for withdrawal to be less than what you invested even if Index performance has been
positive. You can lose principal and previous earnings if you allocate Purchase Payments or transfer Contract Value to the Index Options with the Index Precision Strategy, Index Guard Strategy,
or Index Performance Strategy, and such losses could be significant. If you allocate Purchase Payments or transfer Contract Value to the Index Options with the Index Protection Strategy with DPSC or Index Protection Strategy with Cap you can
also lose principal and previous earnings if you do not receive the DPSC or Protection Credit, or if the Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract
are greater than the DPSC or Protection Credit. The maximum potential negative Performance Credit for the Index Performance Strategy and Index Precision Strategy is based on the Buffer. If the Buffer is
10% the maximum negative Performance Credit is -90%, and if the Buffer is 20% the maximum negative Performance Credit is -80%. The maximum potential negative Performance Credit for the Index Guard Strategy is the Floor (e.g., if the Floor
-10% that is also the maximum potential negative Performance Credit). Such losses will be greater if you take a withdrawal that is subject to a negative MVA, or when we make deductions
for Contract fees, expenses, or investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract.
We calculate Index Options Values on each
Business Day during a Term (other than the Term Start Date or Term End Date) by adding the Daily Adjustment. The Daily Adjustment affects the total Contract Value available for withdrawal, annuitization, and death benefits, and it affects how
we determine the contract maintenance charge and Charge Base for the product and rider fees. The Daily Adjustment can be less than the Precision Rate or Cap even if the current Index return during the Term is greater than the Precision Rate or
Cap. In addition, even though the current Index return during the Term may be positive, the Daily Adjustment may be negative due to changes in Proxy Value inputs, such as volatility, dividend yield, and interest rate. However, the Daily
Adjustment for the Index Protection Strategy with DPSC and Index Protection Strategy with Cap cannot be negative. The Daily Adjustment is generally negatively affected by:
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interest rate decreases,
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dividend rate increases,
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poor market performance, and
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
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the expected volatility of Index prices. Increases in the expected volatility of Index prices negatively affect the Index Precision Strategy and Index Performance Strategy with 1-year Terms, while decreases in the
expected volatility of Index prices negatively affect the Index Guard Strategy. For the Index Performance Strategy with 3-year and 6-year Terms, and Index Protection Strategy with Cap, the impact of changes in the expected volatility of
Index prices is dependent on the market environment and the applicable Caps and Participation Rates. For the Index Protection Strategy with DPSC, the impact of changes in the expected volatility of Index prices is dependent on the
market environment.
|
The Daily Adjustment for 3-year and 6-year Term
Index Options may be more negatively impacted by changes to interest rates, dividend rates, market performance and the expected volatility of Index prices than 1-year Term Index Options because the longer Term length amplifies the impact of
these market parameters on the expected Index Option Value at the Term End Date. The impact of the Cap and Buffer on the Daily Adjustment for a 1-year Term Index Option is greater than it is for a 3-year or 6-year Term Index Option because we
apply the Cap and Buffer for the entire Term length, and the Term length is shorter for a 1-year Term. 3-year and 6-year Term Index Options with a Participation Rate above 100% may also have larger fluctuations in the Daily Adjustment than
Index Options either without a Participation Rate, or with a Participation Rate equal to 100%.
If you take a withdrawal from an Index Option
with the Index Precision Strategy, Index Guard Strategy, or Index Performance Strategy before the Term End Date, you could lose principal and previous earnings because of the Daily Adjustment even if Index performance is positive on that day or has been positive since the Term Start Date. If the current Index return during the Term is negative, the
Daily Adjustment for these Index Options could result in losses greater than the protection provided by the Buffer or Floor. In extreme circumstances the Daily Adjustment could result in a loss beyond
the protection of the Buffer or Floor, but it cannot result in a total loss of -100%. Such losses will be greater if the amount withdrawn is also subject to a negative MVA, or is a
deduction of Contract fees, expenses, or investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract.
Risks Associated with Calculation of Credits
We calculate Credits each Term on the Term End
Date. Because we calculate Index Returns only on a single date in time, you may experience negative or flat performance even though the Index you selected for a given Crediting Method experienced gains through some, or most, of the Term. If you
allocate Purchase Payments or transfer Contract Value to the Index Options with Index Protection Strategy with DPSC or Index Protection Strategy with Cap, positive returns are limited by the DPSCs and Caps. You are not subject, however, to
potential negative Credits. The Precision Rates on the Index Options with Index Precision Strategy, and the Caps on the Index Options with Index Guard Strategy and Index Performance Strategy also limit positive returns and could cause
performance to be lower than it would otherwise have been if you invested in a mutual fund or exchange-traded fund designed to track the performance of the applicable Index. For the Index Performance Strategy, we apply the Caps and/or
Participation Rates for the entire Term length; we do not apply the Caps and/or Participation Rates annually on a 3-year or 6-year Term Index Option.
The Index Options do not directly participate in
the returns of the Indexes or the Indexes’ component securities, and do not receive any dividends payable on these securities. Index returns would be higher if they included the dividends from the component securities. The past ten years of
actual average of the annual Index returns without and with dividends would have been as follows:
|
January 1, 2011 through December 31, 2020
|
|
S&P 500®
Index
|
|
Nasdaq-100®
Index
|
|
Russell 2000®
Index
|
|
EURO
STOXX 50®
|
|
iShares® MSCI
Emerging Markets ETF
|
Returns without dividends
|
12.15%
|
|
20.28%
|
|
10.65%
|
|
3.22%
|
|
2.27%
|
Returns with dividends
|
14.45%
|
|
21.66%
|
|
12.17%
|
|
7.09%
|
|
4.38%
|
DPSCs, Precision Rates, Caps, and Participation
Rates may be adjusted on the next Term Start Date and may vary significantly from Term to Term. Changes to DPSCs, Precision Rates, Caps, and Participation Rates may significantly affect the amount of Credit you receive. For more information,
see the “Changes to Declared Protection Strategy Credits (DPSCs), Precision Rates, Caps, Participation Rates, Buffers, and Floors” discussion later in this section.
The Crediting Methods only capture Index Values
on the Term Start Date and Term End Date, so you will bear the risk that the Index Value might be abnormally low on these days.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Risks Associated with Performance Locks
If a Performance Lock is executed:
•
|
You will no longer participate in Index performance, positive or negative, for the remainder of the Index Year for the locked Index Option. This means that under no circumstances will your Index Option Value increase
during the remainder of the Index Year.
|
•
|
You will not receive a Credit on any locked Index Option on the Term End Date.
|
•
|
We use the Daily Adjustment calculated at the end of the current Business Day on the Lock Date to determine your locked Index Option Value. This means you
will not be able to determine in advance your locked Index Option Value, and it may be higher or lower than it was at the point in time you requested a Performance Lock, or if you set a lower target your locked Index Option Value could
be less than your selected target. Through your account on our website you can request a Performance Lock based on upper and/or lower targets you set using Index Option Value returns.
|
•
|
If a Performance Lock is executed when your Daily Adjustment has declined, you will lock in any loss. It is possible that you would have realized less of a loss or no loss if the Performance Lock occurred at a later time,
or if the Index Option was not locked.
|
•
|
We will not provide advice or notify you regarding whether you should exercise a Performance Lock or the optimal time for doing so. We will not warn you if you exercise a Performance Lock at a
sub-optimal time. We are not responsible for any losses related to your decision whether or not to exercise a Performance Lock.
|
Substitution of an Index and Limitation on
Further Investments
There is no guarantee that the Indexes will be
available during the entire time that you own your Contract, including the Index we use to calculate the MVA. For the Index Options, if we substitute a new Index for an existing Index, the performance of the new Index may be different and this
may affect your ability to receive positive Credits. We may substitute a new Index for an existing Index if:
•
|
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 hedging instruments to hedge the Index, or we are not licensed to use the Index,
|
•
|
the method of calculation of the Index Values changes substantially, resulting in significantly different Index Values and performance results. This could occur, for example, if an Index altered the types of securities
tracked, or the weighting of different categories of securities, or
|
•
|
we determine in our sole discretion that the substitution is necessary. It is our policy that we will exercise this discretion only to respond as we deem necessary to unanticipated events outside of our
direct control. This might include other events similar to those listed above, other changes to the Index (such as name or ownership changes) that legally may be considered a substitution or that do not align with our business strategy
or values, or a breach by the Index provider of the Index intent or performance expectations.
|
If we add or substitute an Index, we first seek
any required regulatory approval (from each applicable state insurance regulator) and then provide you with written notice. We also provide you with written notice if an Index changes its name. Substitutions of an Index for the Index Options
may occur during a Term. If we substitute an Index during a Term we will combine the return of the replaced existing Index from the Term Start Date to the substitution date with the return of the new Index from the substitution date to the Term
End Date. If we substitute an Index during a Term:
•
|
we do not change the Charge Base we use to calculate the product and rider fees, and
|
•
|
the Buffers, Floors, DPSCs, Precision Rates, Caps, and Participation Rates for the replaced Index will apply to the new Index. We do not
change the Buffers and Floors applicable to your Contract, or the current DPSCs, Precision Rates, Caps, and Participation Rates that we set on the Term Start Date.
|
Changes to DPSCs, Precision Rates, Caps, and
Participation Rates associated with the new Index, if any, may occur at the next regularly scheduled Term Start Date. Depending on the constitution of the replaced Index, the volatility of its investments, and our ability to hedge the Index’s
performance, we may determine, in our discretion, to increase or decrease renewal DPSCs, Precision Rates, Caps, and Participation Rates associated with the new Index. However, we would not implement any change to reflect this difference until
the next Term Start Date after the substitution. The substitution of an Index during a Term may result in an abnormally large change in the Daily Adjustment on the day we substitute the Index.
The selection of a substitution Index is in our
discretion; however, it is anticipated that any substitute Index will be substantially similar to the Index it is replacing and we will replace any equity Index with a broad-based equity index.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
We may also discontinue accepting new allocations
into a specific Index Option at any time.
Changes to Declared Protection Strategy Credits
(DPSCs), Precision Rates, Caps, Participation Rates, Buffers, and Floors
We establish Buffers, Floors, and initial and
renewal DPSCs, Precision Rates, Caps, and Participation Rates as indicated under “When Does Allianz Establish the Values Used to Determine Index Credits?” in the Summary section. This section also includes information on the notice we provide
you of renewal changes on each Index Anniversary.
You should be aware that, generally, DPSCs,
Precision Rates, Caps, and Participation Rates could change every seven calendar days. However, these rates are guaranteed to be available during the period stated on our website at www.allianzlife.com/indexincomeadvrates and cannot be
superseded until that period ends. If you select the earliest Index Effective Date, the initial rates available for review on your Issue Date will be the rates on your Index Effective Date. However, if you choose to defer your Index Effective
Date your initial rates may change from the values that were available on the Issue Date. You are responsible for reviewing the initial rates before your Index Effective Date to ensure your allocations and the product still meet your needs. In
addition, if you select an Index Effective Date that is after the end of the free look period, you will bear the risk that initial DPSCs, Precision Rates, Caps, and Participation Rates may change and be less advantageous to you and that you
will be subject to the contract maintenance charge, product fee, and rider fee if you then elect to cancel the Contract on or before the Index Effective Date, but after the free look period. You may review future rates at least seven calendar
days before their effectiveness at www.allianzlife.com/indexincomeadvrates. You (or your Financial Professional, if authorized) can change your Index Effective Date at any time before it occurs to be an earlier or later date by submitting a
request.
On each Term End Date you have the option of
remaining allocated to your current Index Options at the renewal DPSCs, Precision Rates, Caps, and Participation Rates that we set on the next Term Start Date, or transferring to another permitted Index Option. At least seven calendar days
before each Index Anniversary we publish renewal rates for the next Term Start Date for your review in your account on our website, and on our public website at www.allianzlife.com/indexincomeadvrates. If you do not review renewal change
information when it is published, or take no action to transfer to another permitted Index Option, you will remain allocated to your current Index Options and will automatically become subject to the renewal DPSCs, Precision Rates, Caps, and
Participation Rates until the next Term End Date.
You risk the possibility that the renewal DPSCs,
Precision Rates, Caps, and Participation Rates you receive may be less than you would find acceptable. If you do not find the renewal rates acceptable, you must give us transfer instructions no later than the close of the Business Day on the
Term End Date (or the next Business Day if the Term End Date is a non-Business Day) or you will be subject to these renewal DPSCs, Precision Rates, Caps, and Participation Rates for the next Term. When your renewal rates change the only options
available to you are to transfer Index Option Value between Index Options, or take a full withdrawal (which may be subject to a negative MVA).
Initial and renewal DPSCs, Precision Rates, Caps,
and Participation Rates may vary significantly depending upon a variety of factors, including:
•
|
market volatility,
|
•
|
our hedging strategies and investment performance,
|
•
|
the availability of hedging instruments,
|
•
|
the amount of money available to us through Contract fees and expenses to purchase hedging instruments,
|
•
|
your Index Effective Date,
|
•
|
the level of interest rates,
|
•
|
utilization of Contract benefits by Owners, and
|
•
|
our profitability goals.
|
The effect of a change in interest rates or other
market conditions may not be direct or immediate. There may be a lag in changes to DPSCs, Precision Rates, Caps, and Participation Rates. In a rising interest rate environment, increases in DPSCs, Precision Rates, Caps, and Participation Rates,
if any, may be substantially slower than increases in interest rates.
We manage our obligation to provide Credits in
part by trading call and put options, and other derivatives on the available Indexes. The costs of the call and put options and other derivatives vary based on market conditions, and we may adjust future renewal DPSCs, Precision Rates, Caps,
and Participation Rates to reflect these cost changes. The primary factor
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
affecting the differences in the initial DPSCs, Precision Rates,
Caps, and Participation Rates for newly issued Contracts and renewal rates for existing Contracts is the difference in what we can earn from these investments for newly issued Contracts versus what we are earning on the investments that were
made, and are being held to maturity, for existing Contracts. In some instances we may need to reduce both initial and renewal DPSCs, Precision Rates, Caps, and Participation Rates, or we may need to substitute an Index. You bear the risk that
we may reduce DPSCs, Precision Rates, Caps, and Participation Rates, which reduces your opportunity to receive positive Credits. You also bear the risk that the Buffers and Floors for your Contract are small, which increases the risk that you
could receive negative Performance Credits and incur losses.
Investment in Derivative Hedging Instruments
The Index Options are supported by bonds and
other fixed income securities which are also used to support the Contract guarantees, cash, and derivative hedging instruments used to hedge the movements of the applicable Index.
At Contract issue, we invest a substantial
majority of the initial Contract Value in fixed income securities, with most of the remainder invested in derivative hedging instruments. The derivative hedging instruments are purchased to track and hedge Index movements and support our
obligations with regard to the Index Options. The derivative hedging instruments we purchase include put options, call options, futures, swaps, and other derivatives.
We currently limit our purchase of derivative
hedging instruments to liquid securities. However, like many types of derivative hedging instruments, these securities may be volatile and their price may vary substantially. In addition, because we pay Credits regardless of the performance of
derivative hedging instruments we purchase, we may incur losses on hedging mismatches or errors in hedging. Our experience with hedging securities may affect renewal DPSCs, Precision Rates, Caps, and Participation Rates for existing Contracts.
Risks of Deducting Investment Advisory Fees From
the Contract
We designed the Contract to be owned by
individuals (or a trust or other entity acting as an agent for a natural person) who are receiving ongoing investment advice from a Financial Professional. You can authorize your Financial Professional’s firm to receive investment advisory fees
deducted from your Contract. Deductions we make for investment advisory fees reduce your Contract Value and Cash Value dollar for dollar. We do not consider these deductions to be RMD payments or Income Payments, and they do not reduce the
Maximum Anniversary Value under the Maximum Anniversary Value Death Benefit. However, your initial annual maximum Income Payment, Income Payment increases under the Level Income payment option, and increases to the Maximum Anniversary Value are
based on Contract Value. So these deductions reduce your initial annual maximum Income Payment, and reduce the likelihood you will receive Income Payment increases if you select the Level Income payment option, or receive increases to the
Maximum Anniversary Value if you select the Maximum Anniversary Value Death Benefit. Contract Value is also one of the components we use to calculate RMD payments, so these deductions will reduce the Contract Value we use to calculate your RMD
payments. In addition, because the death benefit is based on the greater or Contract Value, Cash Value or the Guaranteed Death Benefit Value, deductions we make for investment advisory fees reduce the death benefit available to your
Beneficiaries.
Our Financial Strength and Claims-Paying Ability
We make Income Payments, Annuity Payments, and
pay death benefits from our general account. Our general account assets are subject to claims by our creditors, and any payment we make from our general account is subject to our financial strength and claims-paying ability. We apply Credits
from an unregistered, non-unitized, non-insulated separate account (Separate Account IANA). Like our general account, the assets in Separate Account IANA are subject to our general business operation
liabilities and the claims of our creditors, and are also subject to our financial strength and claims paying ability. For more information on Separate Account IANA, see section 12, Other Information – Our Unregistered Separate Account.
As a result of the COVID-19 pandemic, economic uncertainties have arisen which could negatively impact Allianz Life’s net income and surplus. The extent to which
the COVID-19 pandemic impacts our business (including our ability to timely process applications or claims), net income, and surplus, as well as our capital and liquidity position, will depend on future developments, which are highly
uncertain and cannot be estimated, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Regulatory Protections
Allianz Life is not an investment company and
therefore we are not registered as an investment company under the Investment Company Act of 1940, as amended, and the protections provided by this Act are not applicable to the guarantees we provide. The Separate Account is, however,
registered as an investment company. Any allocations you make to an Index Option are not part of the Separate Account. Allianz Life is not an investment adviser and so is not subject to the Investment Advisers Act of 1940, and does not provide
investment advice to you in connection with your Contract.
Your Contract is registered in accordance with
the Securities Act of 1933 and the offering of the Contract must be conducted in accordance with the requirements of this Act. In addition, the offer and sale of the Contract is subject to the provisions of the Securities Exchange Act of 1934.
The Contract is filed with and approved by each
state in which the Contract is offered. State insurance laws provide a variety of regulatory protections.
Fee Tables
These tables describe the fees and expenses you
pay when purchasing, owning and taking a withdrawal from the Contract. For more information, see section 6, Expenses. These tables do not reflect any investment advisory fees that you pay from your other assets, or fees, expenses, and
investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract. If investment advisory fees were reflected, fees and expenses would be higher. Amounts withdrawn from the Index Options may be subject
to an MVA, which can be negative as discussed in section 5, Valuing Your Contract - Market Value Adjustment (MVA). The maximum negative MVA that we can apply on a full withdrawal is -10% of the Contract Value,
and on a partial withdrawal it is -10% of the amount withdrawn.
Owner Transaction Expenses
Premium Tax(1)
|
3.5%
|
(as a percentage of each Purchase Payment)
|
|
|
Index Protection Strategy
with DPSC and
Index Protection Strategy
with Cap
|
|
Index Precision
Strategy
and
Index Performance
Strategy
|
|
Index
Guard
Strategy
|
Daily Adjustment Maximum Potential Loss
|
0%
|
|
99%
|
|
35%
|
(as a percentage of Index Option Value, applies for distributions from an Index Option before the Term End Date)(2)
|
|
|
|
|
|
Owner Periodic Expenses
Contract Maintenance Charge(3)
|
$50
|
(per Contract per year)
|
|
(1)
|
Not currently deducted, but we reserve the right to do so in the future. This is the maximum charge we could deduct if we exercise this right, as discussed in section 6, Expenses – Premium Tax.
|
(2)
|
This shows the maximum potential loss due to the application of the Daily Adjustment. The Daily Adjustment could result in a loss beyond the protection of the Buffer or Floor. The Daily Adjustment applies if you take a
full or partial withdrawal, or when we deduct Contract fees, expenses, or investment advisory fees you authorize your Financial Professional’s firm to receive from the Contract before the Term End Date. The actual Daily Adjustment
calculation is determined by a formula described in Appendix B.
|
(3)
|
Waived if the Contract Value is at least $100,000, as discussed in section 6, Expenses – Contract Maintenance Charge.
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Contract Annual Expenses
|
Annual Contract Fees(4)
(as a percentage of the Charge Base)
|
Product Fee
|
0.25%
|
Rider Fee for the Income Benefit
|
0.70%
|
Rider Fee for the optional Maximum Anniversary Value Death Benefit
|
0.20%
|
Total Contract Fees for Contracts with the Income Benefit and optional Maximum Anniversary Value Death Benefit
|
1.15%
|
(4)
|
We assess the product and rider fees during the Accumulation Phase (and Income Period, if applicable), but we do not assess the product or rider fees during the Annuity Phase. See section 6, Expenses – Annual Contract
Fees: Product and Rider Fees.
|
Annual Operating Expenses of the AZL Government
Money Market Fund
The table below describes in detail the total
annual operating expenses of the AZL Government Money Market Fund before fee waivers and/or expense reimbursements. We show the expenses as a percentage of the AZL Government Money Market Fund's average daily net assets for the most recent
fiscal year ended December 31, 2020. Expenses may vary in current and future years. See the AZL Government Money Market Fund's prospectus for further information regarding the expenses you may expect to pay.
The Index Options do not assess any separate
operating expenses, and are not included in the following table.
|
Management
fees
|
Rule 12b-1
fees
|
Other
expenses
|
Acquired fund
fees and expenses
|
Total annual fund operating
expenses before fee
waivers and/or expense
reimbursements
|
BLACKROCK
|
AZL Government Money Market Fund
|
.35
|
.25
|
.06
|
–
|
.66
|
Examples
These examples are intended to help you compare
the cost of investing in this Contract with the costs of other variable annuity contracts. These examples assume you make a $10,000 investment and the AZL Government Money Market Fund earns a 5% annual return. These examples use the AZL
Government Money Market Fund even though you cannot allocate Purchase Payments directly to the fund. The AZL Government Money Market Fund holds your Purchase Payments before they are transferred to the Index Options on the Index Effective or
the next Index Anniversary. These examples are not a representation of past or future expenses. Your Contract expenses may be more or less than the examples below, depending on whether and when you take withdrawals. These examples do not
reflect any investment advisory fees that you pay from your other assets, or fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract. If investment advisory fees were
reflected, costs would be higher.
We deduct the $50 contract maintenance charge in
the examples on each Contract Anniversary during the Accumulation Phase (or the next Business Day if the Contract Anniversary is a non-Business Day). We may waive this charge under certain circumstances, as described in section 6, Expenses –
Contract Maintenance Charge. During the Annuity Phase, we deduct the contract maintenance charge proportionately from each Annuity Payment. We deduct the annual Contract fees (maximum charge of 0.25% product fee, 0.70% rider fee for the Income
Benefit, and a 0.20% rider fee for the optional Maximum Anniversary Value Death Benefit) in the examples on each Quarterly Contract Anniversary during the Accumulation Phase, as described in section 6, Expenses – Annual Contract Fees: Product
and Rider Fees.
0.66% total annual operating expenses for the AZL Government Money Market Fund before any fee waivers or expense reimbursements:
|
1 Year
|
3 Years
|
5 Years
|
10 Years
|
• If you surrender your Contract (take a full withdrawal) at the end of each time period.
|
$234
|
$722
|
$1,238
|
$2,671
|
• If you annuitize your Contract and begin Annuity Payments at the end of each time period. The earliest available Annuity Date (the date we begin making Annuity
Payments) is two years after the Issue Date.
|
N/A
|
$722
|
$1,238
|
$2,671
|
• If you do not surrender your Contract.
|
$234
|
$722
|
$1,238
|
$2,671
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Condensed Financial Information
The statutory financial statements of Allianz
Life Insurance Company of North America are included in Appendix E and Appendix F of this prospectus. The financial statements of Allianz Life Variable Account B are included in Appendix B of the Form N-4 SAI.
Accumulation unit value (AUV) information for the
subaccount offered under the Contract offered by this prospectus, as of December 31, 2020, is listed in the table below. This information should be read in conjunction with the financial statements and related notes of the Separate Account
included in Appendix B of the SAI.
(Number of accumulation units in thousands)
Period or Year Ended
|
AUV at Beginning of Period
|
AUV at End of Period
|
Number of Accumulation Units
Outstanding at End of Period
|
AZL Government Money Market Fund
|
12/31/2018
|
N/A
|
12.893
|
375.00
|
12/31/2019
|
12.893
|
13.072
|
3867.00
|
12/31/2020
|
13.072
|
13.099
|
8622.00
|
1. The
Contract
An annuity is a contract between you as the
Owner, and an insurance company (in this case Allianz Life), where you make payments to us and we invest that money in the Index Options you select. The AZL Government Money Market Fund holds the money you invest before it is transferred to the
Index Options. Depending on market conditions, your Contract may gain or lose value based on the returns of your selected Index Options and the AZL Government Money Market Fund. When you are ready to take money out, we make payments to you
according to your instructions and any restrictions associated with the payment option you select that is described in this prospectus. Other than to add benefits that are beneficial to you, we do not make any changes to your Contract without
your permission except as may be required by law.
The Contract has an Accumulation Phase and an
Annuity Phase. If you begin taking Income Payments, your Contract will also have an Income Period. The Income Period occurs during the Accumulation Phase.
The Accumulation Phase is the first phase of your Contract, and it begins on the Issue Date. During the Accumulation Phase, we invest your money in the Index Options you select and the AZL
Government Money Market Fund on a tax-deferred basis. Tax deferral means you are not taxed on any earnings or appreciation on the assets in your Contract until you take money out of your Contract. (For more information, see section 11, Taxes.)
During the Accumulation Phase you can take
withdrawals (subject to any MVA). You can also make additional Purchase Payments before the Income Period subject to the restrictions set out in section 3, Purchase Requirements. The Contract also offers at issue the optional Maximum
Anniversary Value Death Benefit for an additional rider fee (see section 10) if all Owners and the Annuitant are age 75 or younger on the Issue Date. The Maximum Anniversary Value Death Benefit can only be added to a Contract at issue. The
Maximum Anniversary Value Death Benefit potentially provides a death benefit greater than the Traditional Death Benefit based on the Maximum Anniversary Value (highest Contract Value on any Index Anniversary before age 91, increased by the
dollar amount of subsequent Purchase Payments, and reduced proportionately for subsequent withdrawals you take including any MVA).
During the Income Period we make regular periodic Income Payments based on the life of the Covered Person(s). During the Income Period we also restrict your selection of Crediting Methods to the Index
Protection Strategy with DPSC or Index Protection Strategy with Cap, and you cannot make additional Purchase Payments. However, unlike the Annuity Phase, you will have access to your Contract Value and death benefit for a period of time after
Income Payments begin. If you do not take Income Payments your Contract will not have an Income Period. The Income Period ends on the earlier of the last Business Day before the Annuity Date, or the date the Income Benefit ends. Income Payments
can continue for the life of the Covered Person(s) if you do not take more than your allowed annual maximum payment.
If you request Annuity Payments, the Accumulation
Phase and Income Period (if applicable) of your Contract ends and you enter the Annuity Phase. During the Annuity Phase we make regular fixed periodic Annuity Payments based on
guaranteed period, life, life with a guaranteed period, joint and last survivor, or joint and 2/3 survivor. We send Annuity Payments to the Payee (the person or entity who receives
Annuity Payments during the Annuity Phase). You can choose when Annuity Payments begin, subject to certain restrictions. We base Annuity Payments on the greater of Contract Value or Cash Value and the payout rates for the Annuity Option you
select. If the Annuity Date occurs during the Income Period
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
and your Income Payments are greater than the Annuity Payments
as calculated for certain Annuity Options, you can elect to convert to Income Payments to Annuity Payments as described in section 8 – When Annuity Payments Begin. Your Annuity Payments do not change unless an Annuitant dies, or we convert
Income Payments made under the Increasing Income payment option to Annuity Payments. The Increasing Income payment option is discussed in section 9, Automatic Annual Income Payment Increases. The Annuity Phase ends when we make the last Annuity
Payment under your selected Annuity Option. For more information, see section 8, The Annuity Phase.
When the Accumulation Phase Ends
The Accumulation Phase ends upon the earliest of
the following.
•
|
The Business Day we process your request for a full withdrawal.
|
•
|
The Business Day before the Annuity Date.
|
•
|
Upon the death of any Owner (or the Annuitant if the Owner is a non-individual), the Business Day we first receive 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 Index Options and the AZL Government Money Market Fund until the complete distribution of the death
benefit. A Valid Claim is the documents we require to be received in Good Order at our Service Center before we pay any death claim.
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Investment Advisory Fees
We designed the Contract to be owned by
individuals (or a trust or other entity acting as an agent for a natural person) who are receiving ongoing investment advice from a Financial Professional. If you want to authorize your Financial Professional’s firm to receive investment
advisory fees deducted from your Contract, you can complete our service form designed specifically for that authorization. Once our Service Center receives this form in Good Order and we approve it, your Financial Professional’s firm will be
able to receive investment advisory fees from your Contract. Upon receipt and approval of an investment advisory fee request in Good Order from your Financial Professional’s firm, we deduct these investment advisory fees from the Contract and
pay them to your Financial Professional’s firm. We deduct investment advisory fees that you authorize your Financial Professional to receive from the Contract proportionately from each Index Option and the AZL Government Money Market Fund
unless you provide us with alternate instructions. For these investment advisory fees not to be treated as a taxable distribution, and to be exempt from the 10% additional federal tax if you are under age 59 1⁄2, we require:
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the total amount of investment advisory fees cannot exceed 1.5% of the Contract Value in each Contract Year.
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that the investment advisory fee compensate the Financial Professional only for advice they provide to you with respect to this Contract and not for any other services or accounts,
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this Contract be solely liable for paying these investment advisory fees directly to your Financial Professional’s firm, and
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while we are deducting these fees from the Contract, you agree to not pay investment advisory fees to your Financial Professional or anyone else from any other assets.
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If you meet these requirements, deductions for
these investment advisory fees:
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are not treated as a taxable distribution,
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are not subject to the 10% additional federal tax if you are under age 59 1⁄2,
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are not subject to an MVA;
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are not considered to be an Income Payment, Excess Withdrawal, or RMD payment under our minimum distribution program; and
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do not reduce the Annual Contribution Amounts, free withdrawal privilege, total Purchase Payments reduced proportionately for
withdrawals you take (including any MVA) used to determine the minimum initial Income Payment under the Level Income payment option, or your Contract's Guaranteed Death Benefit Value.
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If you do not meet these requirements, deductions
for these investment advisory fees may result in a taxable distribution. You should consult a tax adviser regarding the tax treatment of the payment of investment advisory fees from your Contract since federal
and/or state taxing authorities could determine that such fees should be treated as taxable distributions.
The maximum investment advisory fee that we will
pay to your Financial Professional’s firm in any Contract Year is 1.5% of Contract Value. Each time we deduct an investment advisory fee we determine its percentage by dividing the fee
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
amount by the Contract Value determined at the end of the
Business Day after we process all other transactions. We will not pay any portion of the investment advisory fee that would exceed 1.5% of Contract Value in any Contract Year. For example, assume your
Financial Professional’s firm requests fee payment twice a year. If the first fee requested is $700 and your Contract Value after processing all other transactions is $100,000, this fee is 0.7%. This leaves a maximum of 0.8% (1.5% - 0.7%) of
the Contract Value available for payment of the second fee. The amount of Contract Value available for deduction of investment advisory fees will be affected by the Daily Adjustment (which can be negative).
Deductions we make for investment advisory fees
reduce your Contract Value (and therefore Cash Value) by the amount withdrawn on a dollar for dollar basis. These deductions also reduce the following by the percentage of Contract Value withdrawn: Charge Base, Index Option Base, Index Option
Value, and Variable Account Value.
Deductions for investment advisory fees do not
reduce the Maximum Anniversary Value under the Maximum Anniversary Value Death Benefit. These deductions will, however, reduce the Contract Value we use to calculate your initial annual maximum Income Payment, Income Payment increases under the
Level Income payment option, and the Maximum Anniversary Value under the Maximum Anniversary Value Death Benefit. Contract Value is also one of the components we use to calculate RMD payments, so these deductions may also reduce your RMD
payments. These deductions decrease the Contract Value, and reduce the likelihood you will receive Income Payment increases under the Level Income payment option, or lock in investment gains to
Maximum Anniversary Value under the Maximum Anniversary Value Death Benefit. In addition, because the death benefit is based on the greater or Contract Value, Cash Value or the Guaranteed Death Benefit Value, deductions we make for investment
advisory fees reduce the death benefit available to your Beneficiaries.
If you do not complete our service form which
authorizes your Financial Professional’s firm to receive investment advisory fees deducted from your Contract, and instead you take money from the Contract and use it to pay investment advisory fees, we will treat this as a withdrawal. This withdrawal is subject to federal and state income taxes, may be subject to a 10% additional federal tax if you are under age 59 1⁄2, will be subject to an MVA, and the
amount of Contract Value available for withdrawal may be affected by the Daily Adjustment (which can be negative). This withdrawal
reduces the Contract Value, and the amount available under the free withdrawal privilege by the dollar amount withdrawn. If taken during the Income Period, we will treat the withdrawal as an Excess Withdrawal if it causes total withdrawals
during the Income Benefit Year to exceed the annual maximum Income Payment. It may also reduce your Contract's Guaranteed Death Benefit Value by more than the amount withdrawn and these reductions could be significant. You should consult a tax adviser regarding the tax treatment of investment advisory fee payments. Please consult with your Financial Professional to determine the options for paying investment advisory fees regarding advice that is
provided to you related to this Contract.
Your Financial Professional acts on your behalf,
not ours. We are not party to any agreement between you and your Financial Professional, nor are we responsible for your Financial Professional’s actions. We do not verify that deductions for investment advisory fees align with the terms of
your agreement with your Financial Professional. We do not set your investment advisory fee or receive any part of it. Any deductions for investment advisory fees you pay is in addition to this Contract’s fees and expenses. We do not pay sales
commissions in connection with sales of the Contract. However, Financial Professionals and their managers may be eligible for various benefits such as production incentive bonuses, insurance benefits, and non-cash compensation items that we may
provide jointly with our principal underwriter, Allianz Life Financial Services, LLC. You should ask your Financial Professional about compensation they receive for this Contract. Allianz Life is not an investment adviser, and does not provide
investment advice in connection with sales of the Contract. We are not a fiduciary to you, and do not make recommendations or assess suitability.
You can submit a written request to our Service
Center on a form satisfactory to us to allow your Financial Professional to make Index Option transfers and allocation changes on your behalf. However, we reserve the right to review a Financial Professional’s trading history before allowing
him or her to make transfers. If, in our sole discretion, we believe the financial Financial Professional’s trading history indicates excessive trading, we can deny your request. If we approve it, your Financial Professional is subject to the
same trading restrictions that apply to Owners. We can deny or revoke trading authority in our sole discretion.
Investment Advisory Fee Deduction Example
These calculations show the effects on the
Contract Value, Cash Value, and available Guaranteed Death Benefit Value of authorizing your Financial Professional’s firm to receive investment advisory fees deducted from your Contract. These deductions immediately reduce the Contract Value
and Cash Value on a dollar for dollar basis, but they do not reduce the Guaranteed Death Benefit Value if they meet the requirements stated in this section. The example assumes we deduct
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
the maximum available investment advisory fee of 1.50% of
Contract Value once a year and pay it directly to your Financial Professional’s firm.
Investment Advisory Fee
Withdrawal That Is Not
a Taxable Distribution
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Contract
Value
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Cash
Value
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Guaranteed Death Benefit
Value for a Contract with the
Traditional Death Benefit
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Guaranteed Death Benefit Value
for a Contract with the
Maximum Anniversary Value
Death Benefit
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Prior to 1st fee deduction
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$ 100,000
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$ 97,000
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$ 90,000
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$ 105,000
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$1,500 fee deduction
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– $1,500
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– $1,500
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= – $0
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= – $0
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After fee deduction
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$ 99,300
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$ 96,300
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$ 90,000
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$ 105,000
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Prior to 2nd fee deduction
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$ 100,500
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$ 97,100
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$ 90,000
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$ 105,000
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$1,507 fee deduction
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– $1,507
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– $1,507
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= – $0
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= – $0
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After fee deduction
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$ 98,993
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$ 95,593
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$ 90,000
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$ 105,000
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Prior to 3rd fee deduction
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$ 97,800
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$ 95,200
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$ 90,000
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$ 105,000
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$1,467 fee deduction
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– $1,467
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– $1,467
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= – $0
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= – $0
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After fee deduction
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$ 96,333
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$ 93,733
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$ 90,000
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$ 105,000
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The death benefit is the greater of the Contract
Value, Cash Value, or the Guaranteed Death Benefit Value. After we deduct the investment advisory fees the death benefit would either be the:
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$99,300 Contract Value under the Traditional Death Benefit, or the $105,000 Guaranteed Death Benefit Value under the Maximum Anniversary Value Death Benefit after the first fee.
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$98,993 Contract Value under the Traditional Death Benefit, or the $105,000 Guaranteed Death Benefit Value under the Maximum Anniversary Value Death Benefit after the second fee.
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$96,333 Contract Value under the Traditional Death Benefit, or the $105,000 Guaranteed Death Benefit Value under the Maximum Anniversary Value Death Benefit after the third fee.
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Please see section 9, Income Benefit – Excess
Withdrawals for an example showing the impact of not authorizing your Financial Professional’s firm to receive investment advisory fees deducted from your Contract, and instead taking an Excess Withdrawal of $1,500 from the Contract to pay
investment advisory fees to your Financial Professional.
When the Contract Ends
The Contract ends when:
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all applicable phases of the Contract (Accumulation Phase, Income Period and/or Annuity Phase) have ended, and/or
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if we received a Valid Claim, all applicable death benefit payments have been made.
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For example, if you take a full withdrawal of the
total Cash Value, both the Accumulation Phase and the Contract end even though the Income Period and Annuity Phase never began and we did not make any death benefit payments.
2. Ownership,
Annuitant, Determining Life, Beneficiary, and Payee
Owner
The Owner designated at Contract issue has all
the rights under the Contract. The Owner may be an individual, or a non-individual (e.g. a trust, tax-exempt entity, or corporation). Qualified Contracts and non-individually owned Contracts can only have one Owner. A Qualified Contract is purchased under a pension or retirement plan that qualifies for special tax treatment under sections of the Code.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Joint Owner
A Non-Qualified Contract can be owned by up to
two individual Owners (Joint Owners). Joint Owners must be spouses within the meaning of federal tax law. We generally require the signature of both Joint Owners on any forms that are submitted to our
Service Center.
Annuitant
The Annuitant is the individual on whose life we
base Annuity Payments. Subject to our approval, you designate an Annuitant when you purchase a Contract. For Qualified Contracts, before the Annuity Date the Owner must be the Annuitant unless the Contract is owned by a qualified plan or is
part of a custodial arrangement. You can change the Annuitant on an individually owned Non-Qualified Contract at any time before the Annuity Date. You cannot change the Annuitant if the Owner
is a non-individual. Subject to our approval, you can add a joint Annuitant on the Annuity Date. For Qualified Contracts, the ability to add a joint Annuitant is subject to any plan requirements associated with the Contract. For
individually owned Contracts, if the Annuitant who is not an Owner dies before the Annuity Date, the sole Owner (or younger Joint Owner) automatically becomes the new Annuitant, but the Owner can subsequently name another Annuitant.
Designating different persons as Owner(s) and
Annuitant(s) can have important impacts on whether a death benefit is paid, and on who receives it as indicated below. For more examples, please see the Appendix A to the Form N-4 SAI. In order to convert
Income Payments to Annuity Payments the Covered Person(s) must be named as the Annuitant(s) as discussed in section 8, when Annuity Payments Begin. Designating different persons as Covered Person(s) and Annuitant(s) will cause the
Income Benefit and Income Payments to end at the maximum permitted Annuity Date. Use care when designating Owners, Covered Person(s) and Annuitant(s), and consult your Financial Professional if you have questions.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Upon the Death of a Sole Owner
Action if the Contract is in the Accumulation Phase
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We pay a death benefit to the Beneficiary unless the Beneficiary is the surviving spouse and continues the Contract. The Income Benefit and any Income Payments will also end unless the Beneficiary is both a surviving
spouse and either an Eligible Person (if Income Payments have not begun) or a Covered Person (if Income Payments have begun).
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If the deceased Owner was a Determining Life and the surviving spouse Beneficiary continues the Contract:
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we increase the Contract Value to equal the Guaranteed Death Benefit Value if greater and available, and the death benefit ends,
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the surviving spouse becomes the new Owner,
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if Income Payments have not begun the Accumulation Phase continues,
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if Income Payments have begun they can only continue if the surviving spouse is a Covered Person; otherwise the Income Benefit ends, and
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upon the surviving spouse’s death, his or her Beneficiary(s) receives the Contract Value.
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If the deceased Owner was not a Determining Life, the Traditional Death Benefit Maximum Anniversary Value Death Benefit are not available and the Beneficiary(s) receives the Contract Value.
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Action if the Contract is
in the Annuity Phase
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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.
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If the deceased was not an Annuitant, Annuity Payments to the Payee continue. No death benefit is payable.
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If the deceased was the only surviving Annuitant, Annuity Payments end or continue as follows.
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Annuity Option A or C, payments end when the guaranteed period ends.
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Annuity Option B, F, or G, payments end. If Income Payments were converted to Annuity Payments under Annuity Option B or F, we will also pay any remaining value to the named Beneficiary(s).
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For more information on the Annuity Options, please see section 8.
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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.
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Determining Life (Lives)
The Determining Life (Lives) are the
individuals on whose life we base the Guaranteed Death Benefit Value provided by the Traditional Death Benefit or Maximum Anniversary Value Death Benefit. We establish the Determining Life (Lives) at Contract issue. For an individually owned
Contract the Determining Life (Lives) are the Owner(s). For a non-individually owned Contract the Determining Life is the Annuitant. After the Issue Date the Determining Life (Lives) only change if:
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you remove a Joint Owner due to divorce, then we also remove that person as a Determining Life,
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you add or change a Joint Owner, then that person will become a Determining Life if they are the current spouse within the meaning of federal tax law of an existing Owner, or
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you establish a jointly owned Non-Qualified Contract and change ownership to a Trust, then we remove the prior Owner who is not the Annuitant as a Determining Life.
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Beneficiary
The Beneficiary is the person(s) or
entity you designate to receive any death benefit. You can change the Beneficiary or contingent Beneficiary at any time before your death unless you name an irrevocable Beneficiary. If a Beneficiary dies before you, or you and a Beneficiary
die within 120 hours of each other, that Beneficiary’s interest in this Contract ends unless your Beneficiary designation specifies otherwise. If there are no surviving primary Beneficiaries, we pay the death benefit to the contingent
Beneficiaries who survive you. If there are no surviving Beneficiaries or if there is no named Beneficiary, we pay the death benefit to your estate or the Owner if the Owner is a non-individual.
• FOR JOINTLY OWNED CONTRACTS: The sole primary Beneficiary is the surviving Joint Owner regardless of any other named primary Beneficiaries. If both Joint Owners die within 120 hours
of each other, we pay the death benefit to the named contingent Beneficiaries or equally to the estate of the Joint Owners if there are no named contingent Beneficiaries.
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• NAMING AN ESTATE AS A BENEFICIARY: If an estate is the Beneficiary, the estate must be the sole primary Beneficiary, unless the Spouse is the sole primary Beneficiary. If
the Spouse is the sole primary Beneficiary, then an estate can be a contingent beneficiary.
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Eligible Person(s) and Covered Person(s)
We determine Eligible Persons on the Issue Date
based on the Contract’s ownership and tax qualification status. We use Eligible Person(s) to determine the Income Percentage and Income Percentage Increase, when you will begin receiving Income Percentage Increases, when Income Payments are
available to you, and the payment type (single or joint) available to you.
We base Income Payments on the lives of the
Covered Person(s). We determine the Covered Person(s) on the Income Benefit Date based on the available Eligible Person(s), their marital status, and the payment type you select. Joint Income Payments are only available if there are two
Eligible Persons on the Income Benefit Date who are also spouses within the meaning of federal tax law and they meet the requirements stated here. Because Income Payments must begin no later
than age 100, joint Income Payments are not available if:
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there is more than a 50-year age difference between spouses;
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you select the Traditional Death Benefit and purchase this Contract at the maximum issue age of 80 and there is more than a 20-year age difference between spouses; or
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you select the Maximum Anniversary Value Death Benefit and purchase this Contract at the maximum issue age of 75 and there is more than a 25-year age difference between spouses.
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Eligible Person and Covered Person Requirements
For a single, individual Owner:
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You, the Owner, are an Eligible Person.
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If you and the sole primary Beneficiary are spouses within the meaning of federal tax law, the sole primary Beneficiary is also an Eligible Person.
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If you select single Income Payments only you, the Owner, can be the Covered Person.
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If you select joint Income Payments you must designate yourself, the Owner, to be a Covered Person.
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For Joint Owners:
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Both Joint Owners are Eligible Persons.
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If you select single Income Payments you can designate either Eligible Person to be the Covered Person.
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If you select joint Income Payments you must designate both Joint Owners to be the Covered Persons.
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For Contracts owned by a non-individual:
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The Annuitant is the Eligible Person.
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For Non-Qualified Contracts, we only allow one Eligible Person and joint Income Payments are not available.
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For Qualified Contracts, if the Owner is a qualified plan or a custodian and the Annuitant and sole contingent Beneficiary are spouses within the meaning of federal tax law, the sole contingent Beneficiary is also an
Eligible Person. However, joint Income Payments are only available if the qualified plan or custodian is also the sole primary Beneficiary. This structure allows the surviving non-Annuitant spouse to continue to receive Income Payments,
assuming the surviving non-Annuitant spouse is the beneficiary under the qualified plan or custodial IRA.
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If you select single Income Payments only the Annuitant can be the Covered Person.
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If an Eligible Person or a Covered Person is no
longer an Owner, Joint Owner, Annuitant, sole primary Beneficiary, or sole contingent Beneficiary as required above due to death, change in spousal status, an assignment or change of ownership/Beneficiary, we will remove that person from the
Contract as an Eligible Person or Covered Person. If an Eligible Person is removed, you cannot designate that person to be a Covered Person. If a Covered Person is removed, that person is no longer a Covered Person. If we remove all Eligible Persons or Covered Persons from the Contract, the Income Benefit ends.
You can only add or replace an Eligible Person on
or before the date you request Income Payments. If you add or change an Owner, sole primary Beneficiary or sole contingent Beneficiary that person will become an Eligible Person if they are the current spouse
within the meaning of federal tax law of an existing Eligible Person and meet the requirements stated in this section. If you add or replace an Eligible Person we will recalculate your Lifetime Income Percentages based on the age of the new
Eligible Person on the Index Effective Date and Index Anniversaries, if applicable, as stated in the
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Summary – How Does the Income Benefit Work? At any given time
there cannot be more than two Eligible Persons. After the Income Benefit Date, you cannot add, remove, or replace a Covered Person even if you add or change an Owner, or Beneficiary.
Change in Spousal Status of Eligible Persons or
Covered Persons
If at any time joint Eligible Persons or joint
Covered Persons are no longer spouses you must send us written notice. If we receive notice on or before the Income Benefit Date, joint Income Payments will not be available to you unless you remarry and add your new spouse as a Joint Owner or
sole primary or contingent Beneficiary according to the requirements stated in this section. If we receive notice after the Income Benefit Date, we will remove one former spouse from the Contract as a Covered Person and also as an Owner, Joint
Owner, Annuitant and/or Beneficiary.
Upon notification of divorce, we treat any
request to reduce or divide benefits under this Contract as a request for a withdrawal of Contract Value payable to you. We process the withdrawal and remove one spouse from the Contract as an Eligible Person or Covered Person, Owner, Annuitant
and/or Beneficiary, according to your instructions or any applicable court order. This withdrawal is subject to any applicable tax or MVA, and may cause Income Payments and the Income Benefit to end prematurely. However, if you do not notify us
of the divorce, the Contract continues and upon the death of an Owner, we pay any applicable death benefit to the Beneficiary(s) and the Contract and the Income Benefit both end.
Payee
The Payee is the person or entity who receives
Annuity Payments during the Annuity Phase. The Owner receives tax reporting on those payments. Generally we require the Payee to be an Owner. However, we may allow you to name a charitable trust, financial institution, qualified plan, or an
individual specified in a court order as a Payee subject to our approval. For Qualified Contracts owned by a qualified plan, the qualified plan must be the Payee.
Assignments, Changes of Ownership and Other
Transfers of Contract Rights
You can assign your rights under this Contract to
someone else during the Accumulation Phase. An assignment may be absolute or limited, and includes changes of ownership, collateral assignments, or any other transfer of specific Contract rights. After an assignment, you may need the consent of
the assignee of record to exercise certain Contract rights depending on the type of assignment and the rights assigned.
You must submit your request to assign the
Contract in writing to our Service Center. We will not consent if the assignment would violate or result in noncompliance with any applicable state or federal law or regulation.
We record the assignment as of the date you
signed the request, unless you specify otherwise. We are not responsible for the validity or effect of the assignment. We are not liable for any actions we take or payments we make before we receive your request in Good Order and record it. A
request is in “Good Order” when it contains all the information we require to process it. Assigning the Contract does not change, revoke or replace the originally named Annuitant or Beneficiary; if you
also want to change the Annuitant or Beneficiary you must make a separate request.
• An
assignment may be a taxable event. In addition, there are other restrictions on changing the ownership of a Qualified Contract and Qualified Contracts generally cannot be assigned absolutely or on a limited basis. You should consult with your tax adviser before assigning this Contract.
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• An assignment will only change the Determining Life (Lives) if it involves removing a Joint Owner due to divorce, replacing Joint Owners with a Trust, or adding a Joint Owner if that person is a
spouse within the meaning of federal tax law of the existing Owner.
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3. Purchasing
the Contract
Purchase Requirements
To purchase this Contract, on the Issue Date all
Owners and the Annuitant must be:
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age 80 or younger, or
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age 75 or younger if you select the Maximum Anniversary Value Death Benefit.
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The Purchase Payment requirements for this
Contract are as follows.
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The minimum initial Purchase Payment due on the Issue Date is $5,000.
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
•
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We restrict additional Purchase Payments. Each Index Year during the Accumulation Phase and before the Income Benefit Date you cannot add more than your initial amount without our prior
approval. Your initial amount is all Purchase Payments received before the first Quarterly Contract Anniversary of the first Contract Year. We allow you to add up to the initial amount in the remainder of the first Index Year. The
minimum additional Purchase Payment we will accept is $50.
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We do not accept additional Purchase Payments on or after the Income Benefit Date, or on or after the Annuity Date.
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The maximum total Purchase Payments we accept without our prior approval is $3 million.
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We may, at our sole discretion, waive the minimum
Purchase Payment requirements.
Once we receive your initial Purchase Payment and
all necessary information in Good Order at our Service Center, we issue the Contract within two Business Days and allocate your payment to the AZL Government Money Market Fund before we transfer it to your selected Index Options. If you do not
give us all of the information we need, we contact you or your Financial Professional. If for some reason we are unable to complete this process within five Business Days, we either send back your Purchase Payment or get your permission to keep
it until we get all of the necessary information. If you make additional Purchase Payments, we add this money to your Contract on the Business Day we receive it in Good Order.
If you submit a Purchase Payment and/or
application to your Financial Professional, we do not begin processing the payment and/or application until we receive it. A Purchase Payment is “received” when it arrives at our Service Center from the address for mailing checks listed at the
back of this prospectus regardless of how or when you submitted them. We forward Purchase Payments we receive at the wrong address to the last address listed at the back of this prospectus, which may delay processing.
We may terminate your ability to make additional
Purchase Payments because we reserve the right to decline any or all Purchase Payments at any time on a nondiscriminatory basis. This applies to Contracts issued in all states except as disclosed in Appendix D.
If mandated under applicable law, we may be required to reject a Purchase Payment. If we exercise our right to decline additional Purchase Payments, this may limit your ability to fund your Contract’s guaranteed benefits such as
the Income Benefit, Traditional Death Benefit or Maximum Anniversary Value Death Benefit.
Applications Sent Electronically
We accept manually signed applications that are
in Good Order and are sent by fax, or email, or uploaded to our website. It is important to verify receipt of any faxed application, or to receive a confirmation number when using email or the web. We are not liable for applications that we do
not receive. A manually signed application sent by fax, email or over the web is considered the same as an application delivered by mail. Our electronic systems (fax, email or website) may not always be available; any electronic system can
experience outages or slowdowns which may delay application processing. Although we have taken precautions to help our system handle heavy use, we cannot promise complete reliability. If you experience problems, please submit your written
application by mail to our Service Center. We reserve the right to discontinue or modify our electronic application policy at any time and for any reason.
Allocation of Purchase Payments and Contract
Value Transfers
The allocation instructions you provide on your
application automatically become your default allocation instructions. We use these allocation instructions for all Purchase Payments we receive unless you change them. We only allow Purchase
Payments to move into the Index Options on the Index Effective Date and on subsequent Index Anniversaries. As a result, we hold Purchase Payments we receive on days other than the Index Effective Date or an Index Anniversary in the AZL
Government Money Market Fund until we transfer them to your selected Index Options according to your most recent allocation instructions. For additional Purchase Payments we receive after the Index Effective Date, this transfer occurs on the
next Index Anniversary. We apply any Purchase Payments we receive on the Index Effective Date or on an Index Anniversary directly to the Index Options on that day; these Purchase Payments are not held in the AZL Government Money Market Fund.
We only allow Index Option Value transfers between
Index Options on Term End Dates. We do not allow assets to move into an established 3-year or 6-year Term Index Option until the Term End Date.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
You select the Index Effective Date when you
purchase your Contract. It can be any Business Day up to and including the first Quarterly Contract Anniversary, but it cannot be the 29th, 30th or 31st of a month.
On your application if you select…
|
Your Index Effective Date will be either…
|
the earliest Index Effective Date
|
• your Issue Date, or
• the first Business Day of the next month if the Issue Date is the 29th, 30th, or 31st of a month
|
the deferred Index Effective Date
|
• your first Quarterly Contract Anniversary, or
• the next Business Day if the first Quarterly Contract Anniversary occurs on a non-Business Day, or the first Business Day of the next month if the first Quarterly Contract Anniversary is the 29th, 30th, or 31st of a month
|
You should be aware that, generally, DPSCs,
Precision Rates, Caps, and Participation Rates could change every seven calendar days. However, these rates are guaranteed to be available during the period stated on our website at www.allianzlife.com/indexincomeadvrates and cannot be
superseded until that period ends. If you select the earliest Index Effective Date, the initial rates available for review on your Issue Date will be the rates on your Index Effective Date. However, if you choose to defer your Index Effective
Date your initial rates may change from the values that were available on the Issue Date. You are responsible for reviewing the initial rates before your Index Effective Date to ensure your allocations and the product still meet your needs. In
addition, if you select an Index Effective Date that is after the end of the free look period, you will bear the risk that initial DPSCs, Precision Rates, Caps, and Participation Rates may change and be less advantageous to you and that you
will be subject to the contract maintenance charge, product fee, and rider fee if you then elect to cancel the Contract on or before the Index Effective Date, but after the free look period. You may review future rates at least seven calendar
days before their effectiveness at www.allianzlife.com/indexincomeadvrates. You (or your Financial Professional, if authorized) can change your Index Effective Date at any time before it occurs to be an earlier or later date by submitting a
request. However, your new Index Effective Date cannot be later than the deferred Index Effective Date listed above. We must receive your request in Good Order at our Service Center before the end of the
Business Day on which you want the Index Effective Date to occur. Once your Index Effective Date occurs, all Index Options for your Contract will have the same Index Anniversary.
You can change your allocation instructions at
any time without fee or penalty. These changes are effective on the Business Day we receive them in Good Order at our Service Center. We accept changes to allocation instructions from any Owner unless you instruct otherwise. We may allow you to
authorize someone else to change these allocation instructions on your behalf. Changes to your allocation instructions will transfer existing Index Option Values on the Term End Date.
We notify you at least 30 days in advance of each
Index Anniversary as a reminder that on the upcoming anniversary you may transfer Index Option Value between Index Options. You request transfers between Index Options by changing your
allocation instructions. For more information, see the “Electronic Allocation Instructions” discussion next in this section. On each Term End Date, if we have not received allocation instruction changes from you all assets invested
continue to be invested in the Index Options at the renewal DPSCs, Precision Rates, Caps, and Participation Rates.
We must receive all Index Option allocation
instruction changes (which will transfer your Index Option Values) in Good Order at our Service Center before the end of the Business Day on the Term End Date (or the next Business Day if the Term End Date is a non-Business Day).
• In order to apply Purchase Payments
we receive after the Index Effective Date to your selected Index Option(s) on the next Index Anniversary, we must receive them before the end of the Business Day on the Index Anniversary (or before the end of the prior Business Day if
the anniversary is a non-Business Day).
|
• Purchase Payments we hold in the AZL Government Money Market before transferring them to your selected Index Options are subject to Contract fees and expenses (e.g. product fee),
and market risk and may lose value.
|
Electronic Allocation Instructions
We use reasonable procedures to confirm that
electronic allocation instructions given to us are genuine. If we do not use such procedures, we may be liable for any losses due to unauthorized or fraudulent instructions. We record telephone instructions and log all fax, email and website
instructions. We reserve the right to deny any allocation instruction change, and to discontinue or modify our electronic instruction privileges at any time for any reason.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Please note that telephone, fax, email and/or the
website may not always be available. Any electronic system, whether it is ours, yours, your service provider’s, or your Financial Professional’s, can experience outages or slowdowns for a variety of reasons, which may delay or prevent our
processing of your allocation instruction change. Although we have taken precautions to help our systems handle heavy use, we cannot promise complete reliability. If you are experiencing problems, you should submit your instructions in writing
to our Service Center.
By authorizing electronic instructions, you
authorize us to accept and act upon these instructions for your Contract. There are risks associated with electronic communications that do not occur with a written request. Anyone authorizing or making such requests bears those risks. You
should protect your website password, because the website is available to anyone with your password; we cannot verify that the person providing instructions on the website is you, or is authorized by you.
Free Look/Right To Examine Period
If you change your mind about the Contract, you
can cancel it within the free look period stated on the first page of your Contract. In most states, this is ten days after you receive the Contract. If you cancel your Contract during the free look period, in most states we return your
Contract Value as of the Business Day we receive your cancellation request in Good Order. This may be more or less than your initial Purchase Payment. In states that require us to return Purchase Payments less withdrawals if you cancel your
Contract, we return Contract Value if greater.
IRA Contracts require us to return Purchase
Payments less withdrawals. If you cancel your IRA Contract, we return the greater of Purchase Payments less withdrawals or Contract Value.
Some states and certain IRA Contracts require
return of Purchase Payments. For these Contracts, we reserve the right to hold your initial Purchase Payment in the AZL Government Money Market Fund until the free look period ends, and then re-allocate your Contract Value, less fees and
expenses, according to your Purchase Payment default instructions. If we hold your initial Purchase Payment in the AZL Government Money Market Fund during the free look period and the requested Index Effective Date would occur during this time,
we change your Index Effective Date to the next Business Day after the free look period that is not the 29th, 30th or 31st of the month. Then, if you:
•
|
cancel your Contract during this time, we return the greater of Purchase Payments less withdrawals and less any investment advisory fees deducted from your Contract if you authorize your Financial Professional’s firm to
receive these fees, or Contract Value. We do not apply an MVA or deduct any other Contract fees or expenses if you cancel your Contract during the free look period.
|
•
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do not cancel your Contract during this time, we re-allocate your Contract Value to the Index Options according to your Purchase Payment default instructions on the Index Effective Date.
|
In the Contract, the free look provision is also
called the right to examine.
4. AZL
Government Money Market Fund
The following table lists the AZL Government
Money Market Fund's associated investment advisers and subadvisers, investment objectives, and principal investment strategies. Depending on market conditions, you can gain or lose value by investing in the AZL Government Money Market Fund. In
the future, we may add, eliminate or substitute variable investment options to the extent permitted by the federal securities laws and, when required, the SEC.
You should read the AZL Government Money Market
Fund's prospectus carefully. There are potential risks associated with the AZL Government Money Market Fund's investment strategies. The operation of the AZL Government
Money Market Fund and its various risks and expenses are described in its prospectus. We send you the current copy of the AZL Government Money Market Fund's prospectus when we issue the Contract. (You can also obtain the current AZL
Government Money Market Fund's prospectus by contacting your Financial Professional or calling us at the toll-free telephone number listed at the back of this prospectus.)
Currently, the AZL Government Money Market Fund
is not a publicly available mutual fund. It is available only as a variable investment option in variable annuity contracts or variable life insurance policies issued by life insurance companies or in some cases, through participation in
certain qualified pension or retirement plans. A material conflict of interest may arise between insurance companies, owners of different types of contracts, and retirement plans or their participants. The AZL Government Money Market Fund's
Board of Directors monitors for material conflicts, and determines what action, if any, should be taken to address any conflicts.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
The AZL Government Money Market Fund's name,
investment objectives and policies may be similar to the names, investment objectives and policies of other portfolios managed by the same investment advisers. Although the names, objectives and policies may be similar, the AZL Government Money
Market Fund's investment results may be higher or lower than these other portfolios’ results. The investment advisers cannot guarantee, and make no representation, that these similar portfolios' investment results will be comparable even though
the AZL Government Money Market Fund has the same name, investment advisers, objectives, and policies.
The AZL Government Money Market Fund pays 12b-1
fees to the Contracts’ distributor, our affiliate, Allianz Life Financial Services, LLC, for distribution and/or administrative services. In addition, we may enter into certain arrangements under which we, or Allianz Life Financial Services,
LLC, are compensated by the AZL Government Money Market Fund's advisers, distributors and/or affiliates for administrative services and benefits we provide to the AZL Government Money Market Fund. The compensation amount usually is based on the
AZL Government Money Market Fund's aggregate assets purchased through contracts we issue or administer. Some advisers may pay us more or less than others. The maximum service fee we currently receive from any variable investment option in any
variable annuity contract we offer is 0.35% annually of the average aggregate amount invested by us in the variable investment options.
We offer other variable annuity contracts that
may invest in the AZL Government Money Market Fund. These contracts may have different charges and may offer different benefits more appropriate to your needs. For more information about these contracts, please contact our Service Center.
Allianz Investment Management LLC is an
adviser/subadviser that is affiliated with us through common ownership.
Investment
Management
Company and
Adviser/Subadviser
|
Investment
Option Name
|
Asset Class
|
Investment
Objective
|
Principal Investment Strategies
(Normal market conditions)
|
Blackrock
|
Allianz Investment Management LLC/BlackRock Advisors, LLC
|
AZL Government Money Market Fund
|
Cash Equivalent
|
Current income consistent with stability of principal
|
Invests at least 99.5% of its total assets in cash, government securities, or repurchase agreements that are collateralized
fully. Invests at least 80% in government securities or in repurchase agreements collateralized by government securities. Investments include U.S. Treasury bills, notes and other obligations issued or guaranteed as to principal and
interest by the U.S. Government, its agencies or instrumentalities, and repurchase agreements secured by such obligations. In addition, the Fund may invest in variable and floating rate instruments. During extended periods of low
interest rates, and due in part to contract fees and expenses, the yield of the AZL Government Money Market Fund may also become extremely low and possibly negative.
|
Substitution and Limitation on Holdings
We may substitute another variable investment
option for the AZL Government Money Market Fund for any reason in our sole discretion. To the extent required by the Investment Company Act of 1940 or other applicable law, we do not substitute any shares without SEC approval and providing you
notice. A new or substitute variable investment option may have different fees and expenses. We may limit the amount of additional Purchase Payments held in the AZL Government Money Market Fund if marketing, tax or investment considerations
warrant, or for any reason in our sole discretion. We may also close the AZL Government Money Market Fund. The fund companies that sell shares of the AZL Government Money Market Fund to us, pursuant to participation agreements, may end those
agreements and discontinue offering us their shares.
Excessive Trading and Market Timing
Currently the Contract does not offer any variable investment options to which you can allocate money. If we were to offer variable investment options in the
future they would be subject to the following provisions.
|
We may restrict or modify your right to make
transfers to prevent any use that we consider to be part of a market timing program.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Frequent transfers, programmed transfers,
transfers into and then out of a variable investment option in a short period of time, and transfers of large amounts at one time (collectively referred to as “potentially disruptive trading”) may have harmful effects for other Owners,
Annuitants and Beneficiaries. These risks and harmful effects include the following.
•
|
Dilution of the interests of long-term investors in a variable investment option, if market timers or others transfer into a variable investment option at prices that are below their true value, or transfer out at prices
above their true value.
|
•
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An adverse effect on portfolio management, such as causing a variable investment option to maintain a higher level of cash or causing a variable investment option to liquidate investments prematurely.
|
•
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Increased brokerage and administrative expenses.
|
We attempt to protect our Owners and the variable
investment options from potentially disruptive trading through our Excessive Trading and Market Timing policies and procedures. Under these policies and procedures, we may modify your transfer privileges for some or all of the variable
investment options as follows:
•
|
Limit transfer frequency (for example, prohibit more than one transfer a week, or more than two a month, etc.).
|
•
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Restrict the transfer method (for example, requiring all transfers be sent by first-class U.S. mail and rescinding electronic transfer privileges).
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•
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Require a minimum time period between each transfer into or out of the same variable investment option. Our current Excessive Trading and Market Timing policy, which is subject to change without notice, prohibits “round
trips” within 14 calendar days. We do not include transfers into and/or out of the AZL Government Money Market Fund when available in your Contract or any automatic transfers made under any of our programs or Contract features. Round
trips are transfers into and back out of the same variable investment option, or transfers out of and back into the same variable investment option.
|
•
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Refuse transfer requests made on your behalf by an asset allocation and/or market timing service.
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•
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Limit the dollar amount of any single Purchase Payment or transfer request to a variable investment option.
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•
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Prohibit transfers into specific variable investment options.
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•
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Impose other limitations or restrictions to the extent permitted by federal securities laws.
|
We also reserve the right to reject any specific
Purchase Payment allocation or transfer request from any person if in the investment adviser’s, subadviser’s or our judgment, a variable investment option may be unable to invest effectively in accordance with its investment objectives and
policies. This could occur, for example, where frequent or rapid trading causes the investment adviser to hold an excess of uninvested cash to meet redemption requests, or to sell investment positions to fund redemptions, thereby affecting
variable investment option returns. Similarly, rapid or frequent trading may cause a variable investment option to incur excessive transaction fees, which also could affect performance.
We retain some discretion in determining what
actions constitute potentially disruptive trading and in determining when and how to impose trading restrictions. Currently, we attempt to deter disruptive trading as follows. If a transfer(s) is/are
identified as potentially disruptive trading, we may (but are not required to) send a warning letter. If the conduct continues and we determine it constitutes disruptive trading, we also impose transfer restrictions. Transfer restrictions may
include refusing electronic transfers and requiring all transfers be sent by first-class U.S. mail. If the disruptive trading affects only a single variable investment option, we may prohibit transfers into or Purchase Payment allocations to
that variable investment option. We do not enter into agreements permitting market timing and would not permit activities determined to be disruptive trading to continue. We also reserve the right to impose transfer restrictions if we
determine, in our sole discretion, that transfers disadvantage other Owners. We notify you in writing if we impose transfer restrictions on you.
We adopted these policies and procedures as a
preventative measure to protect all Owners from the potential effects of disruptive trading, while also abiding by your legitimate interest in diversifying your investment and making periodic asset re-allocations based on your personal
situation or overall market conditions. We attempt to protect your interests in making legitimate transfers by providing reasonable and convenient transfer methods that do not harm other Owners.
We may make exceptions when imposing transfer
restrictions if we determine a transfer is appropriate, although it may technically violate our policies and procedures discussed here. In determining if a transfer is appropriate, we may, but are not required to, take into consideration its
relative size, whether it was purely a defensive transfer into the AZL Government Money Market Fund, and whether it involved an error or similar event. We may also reinstate electronic transfer privileges after we revoke them, but we do not
reinstate these privileges if we believe they might be used for future disruptive trading.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
We cannot guarantee the following.
•
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Our monitoring will be 100% successful in detecting all potentially disruptive trading activity.
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•
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Revoking electronic transfer privileges will successfully deter all potentially disruptive trading.
|
In addition, some of the variable investment
options are available to other insurance companies and we do not know if they adopted policies and procedures to detect and deter potentially disruptive trading, or what their policies and procedures might be. Because we may not be completely
successful at detecting and preventing market timing activities, and other insurance companies that offer the variable investment options may not have adopted adequate market timing procedures, there is some risk that market timing activity may
occur and negatively affect other Owners.
We may, without prior notice to any party, take
whatever action we deem appropriate to comply with any state or federal regulatory requirement. In addition, purchase orders for a variable investment option’s shares are subject to acceptance by that variable investment option’s manager. We
reserve the right to reject, without prior notice, any variable investment option transfer request or Purchase Payment if the purchase order is rejected by the investment manager. We have entered into agreements required under SEC Rule 22c-2
(Rule 22c-2 agreements) whereby, upon request by an underlying fund or its designee, we must provide information about you and your trading activities to the underlying fund or its designee. Under the terms of the Rule 22c-2 agreements, we are
required to: (1) provide details concerning every purchase, redemption, transfer, or exchange of variable investment options during a specified period; and (2) restrict your trading activity if the party receiving the information so requests.
Under certain Rule 22c-2 agreements, if we fail to comply with a request to restrict trading activity, the underlying fund or its designee may refuse to accept buy orders from us until we comply.
Variable investment options may add or change
policies designed to restrict market timing activities. For example, variable investment options may impose restrictions on transfers between variable investment options in an affiliated group if the investment adviser to one or more of the
variable investment options determines that the person requesting the transfer has engaged, or is engaging in, market timing or other abusive trading activities. In addition, a variable investment option may impose a short-term trading fee on
purchases and sales within a specified period. You should review the variable investment options’ prospectuses regarding any applicable transfer restrictions and the imposition of any fee to discourage short-term trading. The imposition of
these restrictions would occur as a result of variable investment option restrictions and actions taken by the variable investment options’ managers.
This Contract is not designed for professional market timing organizations, or other persons using programmed, large, or frequent transfers, and we may restrict
excessive or inappropriate transfer activity.
|
The retention of some level of discretion by us
may result in disparate treatment among persons engaging in potentially disruptive trading, and it is possible that some persons could experience adverse consequences if others are able to engage in potentially disruptive trading practices that
have negative effects.
Voting Privileges
We legally own the AZL Government Money Market
Fund shares. However, when the AZL Government Money Market Fund holds a shareholder vote that affects your investment, we ask you to give us voting instructions. We then vote all of our shares, including any we own on our behalf, in proportion
to those instructions. Because most Owners do not give us instructions and we vote shares proportionally, a small number of Owners may determine a vote’s outcome. If we determine we no longer need to get your voting instructions, we will decide
how to vote the shares. Only Owners have voting privileges. Annuitants, Beneficiaries, Payees and other persons have no voting privileges unless they are also Owners.
We determine your voting interest as follows:
•
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You can provide voting instructions based on the dollar value of the AZL Government Money Market Fund’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.
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
5. Valuing
Your Contract
Your Contract Value is the total of the Variable
Account Value and all Index Option Values.
Variable Account Value increases when….
|
Variable Account Value decreases when….
|
• we hold Purchase Payments in the AZL Government Money Market Fund before transferring them to your selected
Index Options, or
• there is positive AZL Government Money Market Fund performance
|
• we take assets out of the AZL Government Money Market Fund and transfer them to your selected Index Options,
• there is negative AZL Government Money Market Fund performance, or
• we deduct Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract
|
Contract fees and expenses we deduct from the AZL Government Money Market Fund include the product fee, rider fee, and contract maintenance
charge as described in section 6, Expenses.
|
The AZL Government Money Market Fund does not
provide any protection against loss of principal. You can lose principal and previous earnings for Purchase Payments held in the AZL Government Money Market Fund.
Index Option Values increase when….
|
Index Option Values decrease when….
|
• you add assets to an Index Option by Purchase Payment or Contract Value transfer, or
• you receive a positive Credit or Daily Adjustment
|
• you take assets out of an Index Option by withdrawal (including any MVA) or Contract Value transfer,
• you receive a negative Credit or Daily Adjustment, or
• we deduct Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract
|
Contract fees and expenses we deduct from the Index Options include the product fee, rider fee, and contract maintenance charge as described in
section 6, Expenses.
|
We apply transfers of Contract Value and Purchase
Payments to the Index Options on the Index Effective Date and Index Anniversaries. We apply Credits to the Index Options on the Term End Dates. Contract expenses are deducted at different times during the Index Year as stated in section 6,
Expenses. The Daily Adjustment applies on any Business Day other than the Term Start Date or the Term End Date.
Credits are subject to the applicable Buffer,
Floor, DPSC, Precision Rate, Cap, and/or Participation Rate. Positive Credits are not guaranteed and Credits can be zero under all the Index Options. Credits can be negative after application of the Buffer for
any Index Option with the Index Precision Strategy or Index Performance Strategy, or negative down to the Floor for any Index Option with the Index Guard Strategy. A negative Performance Credit means that you can lose principal and
previous earnings. These losses can be significant.
Determining Variable Account Value
The Separate Account holds the assets for the
Purchase Payments held in the AZL Government Money Market Fund before we transfer them to the Index Options. The Separate Account is divided into subaccounts, one of which invests exclusively in the shares of the AZL Government Money Market
Fund.
We convert Purchase Payments held in the AZL
Government Money Market Fund into subaccount accumulation units. The subaccount’s daily price (accumulation unit value) is based on the AZL Government Money Market Fund’s price. The AZL Government Money Market Fund’s price is typically
determined at the end of each Business Day, and any Purchase Payment received at or after the end of the current Business Day receives the next Business Day’s price. The AZL Government Money Market Fund's
price reflects deduction of its operating expenses.
We calculate your Variable Account Value at the
end of each Business Day by multiplying the subaccount’s accumulation unit value by its number of accumulation units.
On the Issue Date, the number of accumulation
units in the subaccount is equal to the amount allocated to the subaccount divided by its accumulation unit value. At the end of each Business Day, the number of subaccount accumulation units:
•
|
increase when we add Purchase Payments to the AZL Government Money Market Fund, and
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
•
|
decrease when assets are removed from the AZL Government Money Market Fund by transfer, withdrawals you request, or when we deduct Contract fees, expenses, and investment advisory
fees that you authorize your Financial Professional’s firm to receive from the Contract.
|
We arbitrarily set the initial accumulation unit
value for the subaccount. At the end of each Business Day, we determine the new accumulation unit value for the subaccount by multiplying the prior Business Day’s accumulation unit value by the AZL Government Money Market Fund’s percentage
change in price since the prior Business Day. The percentage change in price includes the AZL Government Money Market Fund’s market performance.
Example
•
|
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 Business Day, we determine that the accumulation unit value is $13.25 for the subaccount of the AZL Government Money Market Fund.
|
•
|
We then divide $3,000 by $13.25 and credit your Contract that night with 226.415094 subaccount accumulation units for the AZL Government Money Market Fund.
|
Determining Index Option Values
We calculate an Index Option Value for each Index
Option at the end of each Business Day. Generally, the Index Option Value is equal to the Index Option Base plus any applicable Daily Adjustment. The Daily Adjustment applies on Business Days other than the Term Start Date or the Term End Date.
The Daily Adjustment can be positive or negative and is discussed later in this section.
On the first Term Start Date, both the Index
Option Value and the Index Option Base for each of your selected Index Options are initially equal to the amount of:
•
|
any Purchase Payment received that day which you allocated to that Index Option, and
|
•
|
any Contract Value transferred into that Index Option.
|
At the end of each subsequent Business Day for
each selected Index Option, we first either apply:
•
|
the Daily Adjustment if this is not the Term End Date, or
|
•
|
a Credit if this is the Term End Date.
|
We calculate Credits as described under
“Calculating Credits” next in this section and apply them as follows:
•
|
We multiply each Index Option Base by its Credit and add this amount to its Index Option Base.
|
•
|
Then we set each Index Option Value equal to its Index Option Base.
|
Lastly, we increase and/or decrease each Index
Option Base and Index Option Value for additional Purchase Payments, transfers, partial withdrawals you take (including any MVA), and deductions we make for Contract fees, expenses, and investment advisory fees that you authorize your Financial
Professional’s firm to receive from the Contract.
•
|
Additional Purchase Payments received on the Term End Date 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 or transferred.
|
•
|
Transfers out of this Index Option reduce these values by the dollar amount removed from the Index Option.
|
•
|
Partial withdrawals you take (including any MVA), and deductions we make for Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from
the Contract reduce these values by the dollar amount withdrawn from the Index Option.
|
–
|
We deduct partial withdrawals you take, and deductions we make for Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract from the Index
Options proportionately based on the percentage of Contract Value in each Index Option using values determined at the end of the Business Day before we process the withdrawal or deduct the Contract expense.
|
–
|
We then reduce each Index Option Base by the same percentage that the amount withdrawn reduced its associated Index Option Value.
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Example
•
|
Your Contract Value is $100,000 and you selected two Index Options. The first Index Option has an Index Option Value of $75,000 and an Index Option Base of $72,000. The second Index Option has an Index Option Value of
$25,000 and an Index Option Base of $22,000. You take a $10,000 partial withdrawal (including any MVA).
|
•
|
Your partial withdrawal reduces your Index Option Value by the percentage of Contract Value in each Index Option (Index Option Value ÷ Contract Value).
|
–
|
For the first Index Option this percentage is 75% ($75,000 ÷ $100,000) and the $10,000 partial withdrawal reduces this value by $7,500 ($10,000 x 75%). For the second Index Option this percentage is 25% ($25,000 ÷
$100,000) and the $10,000 partial withdrawal reduces this value by $2,500 ($10,000 x 25%).
|
•
|
We then reduce each Index Option Base by the same percentage that the amount withdrawn reduced its associated Index Option Value (amount withdrawn from Index Option Value ÷ Index Option Value).
|
–
|
For the first Index Option this percentage is 10% ($7,500 ÷ $75,000) and the $10,000 partial withdrawal reduces this value by $7,200 ($72,000 x 10%). For the second Index Option this percentage is also 10% ($2,500 ÷
$25,000) and the $10,000 partial withdrawal reduces this value by $2,200 ($22,000 x 10%).
|
•
|
Deductions we make for Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract also reduce these values proportionately in the same way as a
partial withdrawal.
|
|
First Index Option
|
|
Second Index Option
|
|
Index Option Value
|
|
Index Option Base
|
|
Index Option Value
|
|
Index Option Base
|
Prior to partial withdrawal
|
$ 75,000
|
|
$ 72,000
|
|
$ 25,000
|
|
$ 22,000
|
$10,000 partial withdrawal
|
– $7,500
|
|
– $7,200
|
|
– $2,500
|
|
– $2,200
|
|
|
|
|
|
|
|
|
After partial withdrawal
|
$ 67,500
|
|
$ 64,800
|
|
$ 22,500
|
|
$ 19,800
|
• Amounts
removed from the Index Options during the Term for partial withdrawals you take and deductions we make for Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the
Contract do not receive a Credit on the Term End Date. However, the remaining amount in the Index Options is eligible for a Credit on the Term End Date.
|
• You cannot specify from which Index Option or the AZL Government Money Market Fund (if applicable) we deduct Contract expenses; we deduct Contract expenses from each Index Option and the AZL Government Money Market Fund
proportionately based on its percentage of Contract Value. However, you can specify from which Index Option or the AZL Government Money Market Fund (if applicable) we deduct a partial withdrawal. There
is no consistent financial advantage to providing partial withdrawal deduction instructions.
|
Calculating Credits
We base Credits on Index Values and Index
Returns. We measure Index Values on the Term Start Date and Term End Date using the Index’s price at the end of the Business Day as provided by Bloomberg or another market source if Bloomberg is not available. If the Term Start Date or Term End
Date is a non-Business Day we use the next Business Day’s Index price. If you select the EURO STOXX 50®, we determine Index Returns without any
exchange rate adjustment. Because we calculate Index Returns only on Term End Dates, the Index Return does not necessarily reflect the highest or lowest Index Values that occurred during the
Term.
Crediting Method
|
If Index Value is less than it was on the
Term Start Date
(i.e., Index Return is negative):
|
If Index Value is equal to or greater than it was on the Term Start Date
(i.e., Index Return is zero or positive):
|
Index Protection Strategy with DPSC
|
Credit is zero
|
Credit is equal to the DPSC set on the Term Start Date
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Crediting Method
|
If Index Value is less than it was on the
Term Start Date
(i.e., Index Return is negative):
|
If Index Value is equal to or greater than it was on the Term Start Date
(i.e., Index Return is zero or positive):
|
Index Protection Strategy with Cap
|
Credit is zero
|
Protection Credit is equal to the Index Return up to the Cap set on the Term Start DateAssume the Cap is 5%. If the Index Return is…
• 0%, the Protection Credit is zero.
• 4%, the Performance Credit is 4%.
• 12%, the Performance Credit is 5%.
|
Index Precision Strategy
|
Performance Credit is equal to the negative Index Return in excess of the BufferAssume the Buffer is 10%. If the Index Return
is…
• -8%, the Performance Credit is zero.
• -12%, the Performance Credit is -2%.
|
Performance Credit is equal to the Precision Rate set on the Term Start Date
|
Index Guard Strategy
|
Performance Credit is equal to the negative Index Return subject to the FloorAssume the Floor is -10%. If the Index Return is…
• -8%, the Performance Credit is -8%.
• -12%, the Performance Credit is -10%.
|
Performance Credit is equal to the Index Return up to the Cap set on the Term Start DateAssume the Cap is 8%. If the Index Return is…
• 0%, the Performance Credit is zero.
• 6%, the Performance Credit is 6%.
• 12%, the Performance Credit is 8%.
|
Index Performance Strategy – 1-year Term
|
Performance Credit is equal to the negative Index Return in excess of the Buffer.
Assume the Buffer for the 1-year Term is 10%. If the Index Return for the year is…• -8%, the Performance Credit is zero.
• -12%, the Performance Credit is -2%.
|
Performance Credit is equal to the Index Return up to the Cap set on the Term Start Date
Assume the Cap for the 1-year Term is 8%. If the Index Return for the year is…• 0%, the Performance Credit is zero.
• 6%, the Performance Credit is 6%.
• 12%, the Performance Credit is 8%.
|
Index Performance Strategy – 3-year Term
|
Performance Credit is equal to the negative Index Return in excess of the Buffer.
Assume the Buffer for the 3-year Term is 10%. If the Index Return for the Term is…• -19%, the Performance Credit is -9%.
• -24%, the Performance Credit is -14%.
|
Performance Credit is equal to the Index Return multiplied by the Participation Rate, up to any Cap set on the Term Start Date
Assume the Participation Rate is 100% and the Cap is 80%. If the Index Return for the Term is…• 0%, the Performance Credit is zero.
• 65%, the Performance Credit is 65%.
• 90%, the Performance Credit is 80%.
If instead, the Participation Rate is 110% and the 3-year Term were uncapped, then if the Index Return for the Term is…• 0%, the Performance Credit is zero.
• 65%, the Performance Credit is 71.5%.
• 90%, the Performance Credit is 99%.
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Crediting Method
|
If Index Value is less than it was on the
Term Start Date
(i.e., Index Return is negative):
|
If Index Value is equal to or greater than it was on the Term Start Date
(i.e., Index Return is zero or positive):
|
Index Performance Strategy – 6-year Term
|
Performance Credit is equal to the negative Index Return in excess of the Buffer.
Assume the Buffer for the 6-year Term is 10%. If the Index Return for the Term is…• -19%, the Performance Credit is -9%.
• -24%, the Performance Credit is -14%.
|
Performance Credit is equal to the Index Return multiplied by the Participation Rate, up to any Cap set on the Term Start Date
Assume the Participation Rate is 100% and the Cap is 95%. If the Index Return for the Term is…• 0%, the Performance Credit is zero.
• 65%, the Performance Credit is 65%.
• 90%, the Performance Credit is 90%.
If instead, the Participation Rate is 110% and the 6-year Term were uncapped, then if the Index Return for the Term is…• 0%, the Performance Credit is zero.
• 65%, the Performance Credit is 71.5%.
• 90%, the Performance Credit is 99%.
|
Daily Adjustment
We designed the Daily Adjustment to provide an
Index Option Value during the Term on days other than the Term Start Date or the Term End Date. The Daily Adjustment can affect the amounts available for withdrawal, annuitization, payment of the death benefit, and the Contract Value used to
determine the Income Payments, Charge Base, and contract maintenance charge. It is discussed in the Summary - What is the Daily Adjustment?; and in Risk Factors – Risk of Negative Returns. The Daily Adjustment formula is described in Appendix B
and in Exhibit 99(a) of the Form S-1 Registration Statement filed with the SEC, of which this prospectus is a part. This information is incorporated by reference into this prospectus. You can obtain a copy of Exhibit 99(a) by calling (800)
624-0197, or visiting our website at www.allianzlife.com.
Performance Locks
We must receive a Performance Lock request in
Good Order before the end of the current Business Day to lock an Index Option on that day. Otherwise the Lock Date will occur on the next Business Day that your request is in Good Order. We do not allow Performance Locks to occur on Term End
Dates. For requests submitted in writing, we do not consider the request to be received until it arrives at our Service Center. You can continue to request Performance Locks while you are receiving Income Payments. For the Increasing Income
payment option, you can continue to request Performance Locks even after your Contract Value reduces to zero as long as your Income Payments continue, or are converted to Annuity Payments.
You (or your Financial Professional, if
authorized) can request a Performance Lock based on targets you set only through your account on our website. You can set upper and/or lower targets for each Index Option each Term. Setting a
target close to the current Index Option Value return (or close to the Daily Adjustment once Contract Value is reduced to zero) may cause a Performance Lock to occur very quickly. You can change or cancel targets at any time before we
execute a Performance Lock. Each Index Option’s targets automatically expire on the earlier of the Lock Date, or the last Business Day before the Term End Date. By setting targets you are
authorizing us to automatically execute a Performance Lock at the end of the Business Day on the Lock Date upon which the target is reached.
A Performance Lock can be executed once each Term
for each of these Index Options. A Performance Lock applies to the total Index Option Value in an Index Option, and not just a portion of that Index Option Value. We use the Daily Adjustment calculated at the end of the current Business Day on
the Lock Date to determine your locked Index Option Value. This “locked” Index Option Value may be more or less than the “unlocked” Index Option Value that is available for your review on the Lock Date because the unlocked Index Option Value
was determined at the end of the prior Business Day. After the Lock Date, the Index Option Value stays in the locked Index Option for the remainder of the Term, Daily Adjustments do not apply for the
remainder of the Term and the locked Index Option Value will not receive a Performance Credit on the Term End Date. However, a locked Index Option Value can decrease if you take a partial withdrawal or when we deduct Contract expenses. On the
next Index Anniversary that occurs on or immediately after the Lock Date, all
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
locked Index Options will be unlocked, we will transfer the
locked Index Option Value according to your instructions, and Daily Adjustments will again apply for the new Term. If you do not provide us with transfer instructions, the Index Option Value will remain in the same Index Option with a new Term
Start Date.
A Performance Lock can help eliminate doubt about
future Index performance and possibly limit the impact of a negative Performance Credit you would otherwise receive. A Performance Lock can also allow you to transfer assets out of a 3-year or 6-year Term Index Option before the Term End Date
if you execute it on or before the second Index Anniversary of a 3-year Term, or on or before the fifth Index Anniversary of a 6-year Term. The disadvantage of executing a Performance Lock is that the relevant Index Value could increase by the
Term End Date, and you will not participate in that increase. In addition, if you execute a Performance Lock, you may receive less than the full protection of the Buffer or Floor, than you would have received if you waited for us to apply the
Performance Credit on the Term End Date.
Market Value Adjustment (MVA)
We designed Index Advantage Income ADVSM to provide guaranteed retirement income, and one way we back that guarantee is by making long-term investments. The MVA helps us manage investment
risk by aligning your Cash Value with the current value of the long-term investments backing your Contract guarantees (such as the Income Benefit). By managing the investment risk through the MVA, it may allow us to offer better DPSCs,
Precision Rates, Caps, and Participation Rates.
The MVA can be positive or negative according to
the interest rate environment as measured by the corporate bond yields through the Bloomberg Barclays US Long Corporate Bond Index. If the yield for the Bloomberg Barclays US Long Corporate Bond Index is not published on any day that we
calculate an MVA we use the rate from the most recent day it was published. As the chart below illustrates, bond yields typically have an inverse relationship to the MVA.
In general, if corporate bond yields
at the time of the withdrawal are…
|
then the
MVA will be…
|
Less than they were when the
Annual Contribution Amount was established
|
Positive
|
Equal to what they were when the
Annual Contribution Amount was established
|
Zero
|
Greater than what they were when the
Annual Contribution Amount was established
|
Negative
|
We apply an MVA if you take a withdrawal
(including an Excess Withdrawal), begin Annuity Payments, or if we pay a death benefit within seven Index Years of the establishment of an Annual Contribution Amount. We do not apply an MVA to MVA-Free
Withdrawals; to deductions for Contract fees, expenses, or investment advisory fees you authorize your Financial Professional’s firm to receive from the Contract; or if you cancel your Contract within the free look period. The free withdrawal privilege is not available on a full withdrawal. If you take a full withdrawal you will be subject to an MVA on any Annual Contribution Amounts that are still within the seven Index Year
MVA period.
The total MVA is the sum of the MVAs for each
Annual Contribution Amount. The MVA for each Annual Contribution Amount is equal to the amount of Purchase Payment being withdrawn from that Annual Contribution Amount multiplied by the MVA factor. On the Index Effective Date we establish the
first Annual Contribution Amount, which is all Purchase Payments received on or before that date less withdrawals you took. We establish additional Annual Contribution Amounts on subsequent Index Anniversaries if you make additional Purchase
Payments. Each additional Annual Contribution Amount is equal to the Purchase Payments received after the last established Annual Contribution Amount up to and including the current Index Anniversary less withdrawals you took. Withdrawals you
take that are subject to an MVA reduce your Annual Contribution Amounts by the dollar amount withdrawn. However, we do not reduce Annual Contribution Amounts for MVA-Free Withdrawals, or deductions we make for Contract fees, and expenses, or
investment advisory fees you authorize your Financial Professional’s firm to receive from the Contract. In addition, when you request a partial withdrawal that is subject to an MVA, the MVA may increase or decrease the amount we need to
withdraw from an Annual Contribution Amount in order to send you the amount you request (please see the example below). The maximum total positive or negative MVA is 10% of Contract Value if you take a full withdrawal, begin Annuity Payments,
or if we pay a death benefit. On a partial withdrawal, the maximum total positive or negative MVA is 10% of the amount withdrawn.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
The MVA factor is equal to (A ÷ B)t -1, where:
•
|
A is one plus the initial yield on the Bloomberg Barclays US Long Corporate Bond Index on the Index Effective Date or Index Anniversary that we established the Annual Contribution Amount.
|
•
|
B is one plus the yield on the Bloomberg Barclays US Long Corporate Bond Index at the end of the last Business Day prior to the date we apply the MVA.
|
•
|
t is the number of days from the date we apply the MVA to the next Index Anniversary, divided by 365, plus the number of whole Index Years remaining in the Annual Contribution Amount’s MVA period.
|
Calculating an MVA on a partial withdrawal
|
Example
|
For purposes of calculating an MVA on a partial withdrawal, we withdraw Purchase Payments on a “first-in-first-out” (FIFO) basis
as indicated below.
|
You make an initial Purchase Payment on a Non-Qualified Contract of $55,000 on the Index Effective Date (your 1st Annual Contribution Amount), and make another Purchase Payment on the first Index Anniversary of $45,000 (your 2nd Annual Contribution Amount), for a total Annual Contribution Amount of $100,000. The yield on the Bloomberg Barclays US Long Corporate Bond
Index on the Index Effective Date is 2.00%, and is 3.00% on the first Index Anniversary (these are “A” in the MVA factor formula).
On the third Index Anniversary, your Contract Value is $110,000, the yield on the Bloomberg Barclays US Long Corporate Bond Index is 2.50% (this is “B” in the MVA factor formula), Income Payment have not yet begun, and you request a
$70,000 withdrawal. The time remaining in each Annual Contribution Amount is 4 years for the 1st amount, and 5 years for the 2nd amount (“t” in our MVA factor formula). We withdraw money and compute the MVA as follows.
|
1. First we withdraw from any Variable Account Value in the AZL Government Money Market Fund. This withdrawal is not subject to
an MVA, but it does reduce the Purchase Payments we apply to the next Annual Contribution Amount dollar for dollar.
|
1. Variable Account Value in the AZL Government Money Market Fund. You made no
Purchase Payments during the third Index Year, so there is no Variable Account Value in the fund and this does not apply.
|
2. Next we withdraw from any Annual Contribution Amounts that are beyond the seven Index Year MVA period. This withdrawal is not
subject to an MVA and it reduces your Annual Contribution Amounts dollar for dollar.
|
2. Annual Contribution Amounts beyond the MVA period. Both Annual Contribution
Amounts are still within the MVA period, so this does not apply.
|
3. Amounts available as an MVA-Free Withdrawal. This includes partial withdrawals you take during the
Accumulation Phase and before the Income Period under the free withdrawal privilege, Income Payments, and RMD payments under our minimum distribution program. MVA-Free Withdrawals are not subject to an MVA and do not reduce your Annual
Contribution Amounts.
|
3. Amounts available as an MVA-Free Withdrawal. You did not take
any other withdrawals this Index Year, so the entire free withdrawal privilege (10% of your total Annual Contribution Amounts, or $10,000) is available to you without incurring an MVA. This withdrawal will not reduce your Annual
Contribution Amounts.
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Calculating an MVA on a partial withdrawal
|
Example
|
4. Next, on a FIFO basis, we withdraw from any Annual Contribution Amounts within your Contract’s seven Index Year MVA period
and assess an MVA. The MVA for an Annual Contribution Amount is equal to the amount of Purchase Payment withdrawn from that Annual Contribution Amount multiplied by the MVA factor. We determine your total MVA by multiplying each Annual
Contribution Amount by its applicable MVA and then totaling the MVAs. These withdrawals reduce your Annual Contribution Amounts.
|
4. Annual Contribution Amounts within the MVA period on a FIFO basis. The total amount we withdraw
from the 1st Annual Contribution Amount is $55,000, which is subject to a -$1,065.34 MVA, and you receive $53,934.66. We determine this
amount as follows:
The MVA factor is [(A ÷ B)t -1] =
[(1 + 2%) ÷ (2% + 2.50%)]4 – 1] = -1.94%.
(amount withdrawn) x (1 + MVA factor) = the amount you receive, or: $55,000 x 0.9806) = $53,934.66
Next we withdraw from the 2nd Annual Contribution Amount.
So far, you received $64,934.66 ($10,000 under the free withdrawal privilege, and $53,934.66 from the 1st Annual Contribution Amount which
is now reduced to $0), so you must receive an additional $6,065.34 to equal the $70,000 you requested. We determine the amount we must withdraw from the 2nd Annual Contribution Amount as follows:
The MVA factor is [(A ÷ B)t -1] =
[(1 + 3%) ÷ (1 + 2.50%)]5 – 1 = 2.46%.
We calculate the amount withdrawn and its partial MVA as follows:
(the amount you receive) ÷ (1 + MVA factor) = amount withdrawn, or:
$6,065.34 ÷ (1 + 2.46%) = $5,919.55
Because the MVA is positive we withdraw $5,919.55 from the 2nd Annual Contribution Amount to get you $6,065.34.
|
5. Finally, we withdraw from any Contract earnings. This withdrawal is not subject to an MVA and does not
reduce your Annual Contribution Amounts.
|
5. Contract earnings. We already withdrew your requested amount, so this does not apply.
In total we withdrew $70,919.55 from your Contract, of which you received $70,000 due to the partial MVA of -$919.55 (which is less than the 10% limit on the amount
withdrawn). We also reduced the 1st Annual Contribution Amount from $55,000 to $0, and your 2nd Annual Contribution Amount from $45,000 to $39,080.45 ($45,000 - $5,919.55).
|
Upon a full withdrawal, we first deduct any final
product and rider fees and contract maintenance charge from your Contract Value before we calculate the MVA. We then add or deduct any applicable MVA from the total remaining Contract Value and send you the Cash Value. For a partial withdrawal,
we pay you the amount you requested and deduct this amount and any MVA from the total Contract Value. We deduct any partial withdrawal (including any MVA) proportionately from each Index Option unless you provide us with alternate instructions.
If a partial withdrawal occurs on a day that we also deduct the product or rider fees or contract maintenance charge, we deduct these fees and expenses before we calculate and deduct the partial withdrawal (including any MVA) from the Contract
Value. If this is also a day that we deduct investment advisory fees you authorize your Financial Professional’s firm to receive from the Contract, we deduct these fees after the partial withdrawal.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
• Upon a full withdrawal the free withdrawal privilege
is not available to you, and we apply an MVA against Annual Contribution Amounts that are still within their MVA period. On a full withdrawal your total Annual Contribution Amounts may be greater than
your Contract Value because the following reduce your Contract Value, but do not reduce your Annual Contribution Amounts:
|
– prior MVA-Free Withdrawals,
|
– deductions we make for Contract fees, expenses, or investment advisory fees you authorize your Financial Professional’s firm to receive from the
Contract, and/or
|
– poor performance.
|
• Withdrawals may also be subject
to ordinary income taxes, and a 10% additional federal tax if you are under age 59 1⁄2, and the amount of Contract Value available for withdrawal may be affected by the Daily Adjustment (which can be negative).
|
• For tax purposes in most instances, withdrawals from Non-Qualified Contracts are considered to come from earnings first, not Purchase Payments.
|
6. Expenses
Contract fees and expenses reduce your investment
return and are described here in detail. We set the Contract fees and expenses on the Issue Date and they cannot change.
Annual Contract Fees: Product and Rider Fees
The product fee compensates us for providing all
your Contract’s benefits, including our contractual obligation to make Annuity Payments and certain Contract and distribution expenses. The product fee also compensates us for assuming the expense risk that the current fee is less than future
Contract administration costs as well as the cost of providing certain features under the Contract. The rider fees compensate us for the benefits provided by the Income Benefit and Maximum Anniversary Value Death Benefit, including the
benefits’ guarantees. If the product and rider fees cover these costs and risks, any excess is profit to us. We anticipate making such a profit.
|
Annual Contract Fees
(as a percentage of the Charge Base)
|
Product Fee(1)
|
0.25%
|
Rider Fee for the Income Benefit
|
0.70%
|
Rider Fee for the optional Maximum Anniversary Value Death Benefit(2)
|
0.20%
|
Total Contract Fees for Contracts with the Income Benefit and optional Maximum Anniversary Value Death Benefit
|
1.15%
|
(1)
|
Upon the death of the Owner, we continue to assess this product fee under death benefit payment Option B, and with optional payments under death benefit payment Option C, as noted in section 10, Death Benefit.
|
(2)
|
We no longer assess the 0.20% rider fee for the Maximum Anniversary Value Death Benefit once we receive either the first Valid Claim from any one Beneficiary, or due proof of a Determining Life’s death
if you and the Determining Life are different individuals and the Determining Life predeceases you.
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
The product and rider fees are annualized rates
that we calculate and accrue on a daily basis as a percentage of the Charge Base during the Accumulation Phase as follows.
Issue Date
|
Non-Quarterly Contract Anniversaries
|
Quarterly Contract Anniversaries*
|
• The Charge Base is equal to your initial Purchase Payment.• We begin calculating and accruing the daily
product fee, and rider fee if applicable, on the day after the Issue Date.
|
• First we calculate and accrue the daily product and rider fees, using the Charge Base. If this is a non-Business Day we use the Charge Base
from the end of the prior Business Day.• Then if this is a Business Day we increase/decrease the Charge Base as follows.
– If we receive an additional Purchase Payment, we increase the Charge Base by the dollar amount we receive.
– If you take a partial withdrawal, or we deduct Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract, we decrease the Charge Base by the percentage of
Contract Value withdrawn (including any MVA). All withdrawals you take reduce the Charge Base, even MVA-Free Withdrawals.
|
• First we process all daily transactions and determine your Contract Value. Daily transactions include any gains/losses due to AZL Government
Money Market Fund performance or application of any Daily Adjustment (or Credit if this is also the Term End Date), any additional Purchase Payment, any partial withdrawals you take (including any MVA), and deductions we make for
Contract fees and expenses (including deduction of the accrued daily product and rider fees for the prior quarter) and any investment advisory fees that you authorize your
Financial Professional’s firm to receive from the Contract. All partial withdrawals you take reduce the Charge Base, even MVA-Free Withdrawals.
– We deduct the accrued product and rider fees for the prior quarter on a dollar for dollar basis from the Contract Value, and proportionately from each Index Option and the AZL Government Money Market Fund.• Then we set the Charge Base
equal to this Contract Value and we calculate and accrue the next quarter’s daily product and rider fees using the newly set Charge Base.* Or the next Business Day if the Quarterly Contract Anniversary is a non-Business Day.
|
Example: Contract Value is $125,000; Charge Base is $127,000; a $10,000 partial withdrawal
(including any MVA) would decrease the Charge Base by $10,160. [($10,000 ÷ $125,000) x $127,000]
Any increase/decrease to the Charge Base will increase/decrease the daily product and rider fees we calculate and accrue on the next day.
|
Examples of how we calculate the product and rider fees are included in Appendix C.
|
We do not treat the deduction of the accrued product and rider fees as a withdrawal when computing your Guaranteed Death Benefit Value (see section 10). However,
if you select the Maximum Anniversary Value Death Benefit we deduct all Contract fees and expenses on the Index Anniversary (including the accrued product and rider fees if this is also a Quarterly Contract Anniversary) before we
capture any annual investment gains in the Maximum Anniversary Value.
|
Deduction of the final product and rider fees
•
|
If you take a full withdrawal we deduct the final accrued product and rider fees before processing the withdrawal.
|
•
|
If you annuitize the Contract, we deduct the final accrued product and rider fees before calculating Annuity Payments.
|
•
|
Upon the death of an Owner (or Annuitant if the Owner is a non-individual), we deduct the final accrued rider fee for the Maximum Anniversary Value Death Benefit before calculating the death benefit,
and we deduct the final accrued product fee before calculating the death benefit if death benefit payment Option A or Annuity Payments under death benefit payment Option C is selected. If the Income Benefit ends due to death, we also
deduct its final rider fee before calculating the death benefit. For more information on the death benefit payment options see section 10, Death Benefit.
|
If on a Quarterly Contract Anniversary (or the next Business Day if the Quarterly Contract Anniversary is a non-Business Day) the Contract Value is less than the
accrued product and rider fees, we deduct your total remaining Contract Value to cover the accrued product and rider fees and reduce your Contract Value to zero. If the deduction of the accrued product and rider fees reduces your
Contract Value to zero and the Income Benefit and your selected death benefit have ended, we treat this as a full withdrawal and your Contract ends.
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Contract Maintenance Charge
Your annual contract maintenance charge is $50.
This charge is for Contract administration and maintenance expenses. We waive this charge as follows:
•
|
During the Accumulation Phase (and Income Period, if applicable), if the Contract Value is at least $100,000 on the Contract Anniversary.
|
•
|
During the Annuity Phase if the Contract Value on the last Business Day before the Annuity Date is at least $100,000.
|
•
|
When paying death benefits.
|
During the Accumulation Phase, we deduct the
contract maintenance charge:
•
|
on a dollar for dollar basis from the Contract Value on the Contract Anniversary (or the next Business Day if the Contract Anniversary is a non-Business Day), and
|
•
|
we deduct it proportionately from each Index Option and the AZL Government Money Market Fund.
|
If you take a full withdrawal from your Contract
(other than on a Contract Anniversary), we deduct the full contract maintenance charge. We do not treat the deduction of the contract maintenance charge as a withdrawal when computing your Guaranteed Death Benefit Value. During the Annuity
Phase, we deduct the contract maintenance charge proportionately from each Annuity Payment (e.g., if you request semi-annual Annuity Payments we deduct 50% of the contract maintenance charge from each Annuity Payment).
Premium Tax
Premium tax is based on your state of residence
at the time you make each Purchase Payment. In states that assess a premium tax, we do not currently deduct it from the Contract, although we reserve the right to do so in the future. Premium tax normally ranges from 0% to 3.5% of the Purchase
Payment, depending on the state or governmental entity.
Income Tax
Currently, we do not deduct any Contract related
income tax we incur, although we reserve the right to do so in the future.
AZL Government Money Market Fund Expenses
The AZL Government Money Market Fund's assets are
subject to operating expenses (including management fees). These expenses are described in the Fee Tables and in the AZL Government Money Market Fund's prospectus. These expenses reduce the AZL Government Money Market Fund's performance and,
therefore, negatively affect your Contract Value and any payments based on Contract Value.
7. Access to
Your Money
Your Contract Value is available under the
following circumstances:
•
|
by taking a withdrawal (including withdrawals under the free withdrawal privilege; Income Payments and Excess Withdrawals; and for Qualified Contracts only, RMD payments under our minimum distribution program);
|
•
|
by taking Annuity Payments; or
|
•
|
when we pay a death benefit.
|
You can take withdrawals during the Accumulation
Phase, however, Income Payments and Excess Withdrawals are only available during the Income Period. We process withdrawal requests based on values next determined after receipt of the request in Good Order at our Service Center. Values are
normally determined at the end of each Business Day. We process any withdrawal request received at or after the end of the current Business Day using values determined on the next Business Day.
Any partial withdrawal must be for at least
$100.* The Contract Value after a partial withdrawal must be at least $2,000.** We reserve the right to treat a partial withdrawal that reduces the Contract Value below this minimum as a full withdrawal.
*
|
Does not apply to RMD payments under our required minimum distribution program.
|
**
|
Does not apply to Income Payments or RMD payments under our required minimum distributions program.
|
We deduct any partial withdrawal first from the
AZL Government Money Market Fund, then proportionately from each Index Option. Partial withdrawals deducted from the AZL Government Money Market Fund do not include an MVA, but amounts withdrawn from the Index Options will include any
applicable MVA.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
When you take a full withdrawal of the Cash Value
we process your request on the Business Day we receive it in Good Order at our Service Center as follows:
•
|
total Contract Value,
|
•
|
less any final product and rider fees, and contract maintenance charge, and
|
•
|
increased or decreased for any MVA.
|
See the Fee Tables and section 6, Expenses for a
discussion of the Contract fees and expenses. For information on the MVA see section 5, Valuing Your Contract.
We pay withdrawals promptly, but in no event
later than seven days after receipt of your request in Good Order at our Service Center, unless the suspension of payments or transfers provision is in effect (see the discussion later in this section).
• Withdrawals may be subject to an
MVA, state and federal taxation, and a 10% additional federal tax if you are under age 59 1⁄2,
and the amount of Contract Value available for withdrawal may be affected by the Daily Adjustment (which can be negative).
|
• Joint
Owners: We send each Joint Owner a check for half of the withdrawal amount and tax that Joint Owner individually. This can create a discrepancy in taxation if only one Joint
Owner is under age 59 1⁄2 because that Joint Owner will be subject to the 10% additional federal tax.
|
• 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
(including a full withdrawal), or death benefits until we receive instructions from the appropriate regulator. If, pursuant to SEC rules, the AZL Government Money Market Fund suspends payment of redemption proceeds in connection with a
fund liquidation, we will delay payment of any transfer, full or partial withdrawal, or death benefit from the AZL Government Money Market Fund subaccount until the fund is liquidated.
|
Free Withdrawal Privilege
Each Index Yearduring the Accumulation Phase and
before the Income Period, you can withdraw up to 10% of your total Annual Contribution Amounts without incurring an MVA (the free withdrawal privilege). Any unused free withdrawal privilege in one Index Year is not added to the amount available
to you in the next Index Year. Withdrawals from Annual Contribution Amounts that are outside the seven Index Year MVA period are not subject to an MVA and do not reduce your free withdrawal privilege. RMD payments you take under our minimum
distribution program are not subject to an MVA, but do reduce your free withdrawal privilege.
The free withdrawal privilege is not available upon a full withdrawal or during the Income Period.
|
Minimum Distribution Program and Required
Minimum Distribution (RMD) Payments
If you own an IRA or SEP IRA Contract, you can
participate in the minimum distribution program during the Accumulation Phase (and Income Period, if applicable). Under this program, we make payments to you designed to meet the applicable minimum distribution requirements imposed by the Code
for this Qualified Contract. RMD payments are not subject to an MVA, but they reduce the free withdrawal privilege amount during the Index Year. We do not consider deductions we make for investment advisory fees that you authorize your
Financial Professional’s firm to receive from the Contract to be RMD payments. However, Contract Value is one of the components we use to calculate RMD payments, so these deductions may reduce your RMD payments. We can make payments to you on a
monthly, quarterly, semi-annually or annually. However, if your Contract Value is less than $25,000, we only make annual payments. You cannot aggregate RMD payments between this Contract and other qualified contracts that you own. We must
receive your program form instructions in Good Order at our Service Center before the end of the Business Day before payments begin.
When you request Income Payments, we ask for
instructions regarding your RMD needs for this Contract. If you choose to use Income Payments to satisfy your RMD needs, we determine whether this calendar year’s total RMD has been satisfied by your Income Payments and any Excess Withdrawals.
If the RMD amount for this Contract has not been satisfied, we send you this remaining amount as one RMD payment by the end of the calendar year. We consider this payment to be a withdrawal, but it is not an Excess Withdrawal and it is not
subject to an MVA. For more information, see section 9, Income Benefit – Calculating Your Income Payments.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
You should consult a tax adviser before purchasing a Qualified Contract that is subject to RMD payments.
|
Suspension of Payments or Transfers
We may be required to suspend or postpone
transfers or payments for withdrawals* for more than seven days after receipt of your request in Good Order at our Service Center, for any period when:
•
|
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 AZL Government Money Market Fund shares is not reasonably practicable or we cannot reasonably value the shares; or
|
•
|
during any other period when the SEC, by order, so permits for the protection of Owners.
|
*
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Including Income Payments and Excess Withdrawals.
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8. The
Annuity Phase
Prior to annuitization, you can take a full
withdrawal and receive your Cash Value. If you take a full withdrawal on any day other than a Term Start Date or Term End Date we apply the Daily Adjustment to the Index Option Values before we deduct the final Contract fees and expenses and
apply any MVA.
Annuity Payments offer a guaranteed lifetime
income stream with certain tax advantages and are designed for Owners who no longer need immediate access to Contract Value to meet their short-term income needs.
You can request regular periodic fixed Annuity
Payments. The Payee receives the Annuity Payments. You receive tax reporting on the payments, whether or not you are the Payee. We may require proof of the Annuitant(s)’ age before we make any life contingent Annuity Payment. If you misstate
the Annuitant(s)’ age or gender, we recalculate the Annuity Payments based on the correct age or gender.
Calculating Your Annuity Payments
We base Annuity Payments upon the following:
•
|
The Contract Value less the final product and rider fees, or Cash Value on the Annuity Date.
|
•
|
The age of the Annuitant and any joint Annuitant on the Annuity Date.
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•
|
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.
|
If the Annuity Date is not a Term End Date,
Contract Value reflects the Daily Adjustment if you selected a 3-year or 6-year Term Index Option. However, for 1-year Term Index Options each Index Anniversary is a Term End Date. Therefore, 1-year Term Index Options are not subject to a Daily
Adjustment on the Annuity Date. We guarantee the dollar amount of Annuity Payments and this amount remains fixed and does not change during the entire annuity payment option period that you selected, except as provided under Annuity Option G,
or if your Income Payments under the Increasing Income payment option are converted to Annuity Payments. We deduct the contract maintenance charge proportionately from each Annuity Payment (e.g., if you request semi-annual Annuity Payments we
deduct 50% of the contract maintenance charge from each Annuity Payment). However, if your Contract Value on the last Business Day before the Annuity Date is at least $100,000 we waive the contract maintenance charge during the Annuity Phase.
Annuity Payment Options
You can choose one of the Annuity Options
described below. After Annuity Payments begin, you cannot change the Annuity Option.
Option A - Guaranteed Period. We make Annuity Payments for a guaranteed period of ten years.
Option B - Life.
We make Annuity Payments during the life of the Annuitant, and the last payment is the one that is due before the Annuitant’s death. If the Annuitant dies shortly after the Annuity Date, the Payee may receive less than your investment in the
Contract.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Option C - Life with Guaranteed Period. We make Annuity Payments during the life of the Annuitant, with payments for a minimum guaranteed period that you select. The guaranteed period must be either five or ten years
Option F - Joint and Survivor. We make Annuity Payments during the lifetimes of the Annuitant and the joint Annuitant. Upon the death of one Annuitant, Annuity Payments to the Payee continue during the lifetime of the surviving joint Annuitant.
If both Annuitants die shortly after the Annuity Date, the Payee may receive less than your investment in the Contract.
Option G - Joint and 2/3 Survivor Annuity. We make Annuity Payments during the lifetimes of the Annuitant and the joint Annuitant. Upon the death of one Annuitant, Annuity Payments to the Payee continue during the lifetime of the surviving joint Annuitant
at 2/3 or the original amount. If both Annuitants die shortly after the Annuity Date, the Payee may receive less than your investment in the Contract.
Under Annuity Options B, F and G, if all
Annuitants die on or after the Annuity Date and before we send the first Annuity Payment, we will cancel Annuity Payments and upon receipt of a Valid Claim we will pay the greater of Contract Value or Cash Value determined on the Annuity Date
to surviving individual Owner, or the Beneficiary(s) if there is no surviving Owner. If the Owner is a non-individual, we pay the Owner.
After the Annuitant’s death under Annuity Options
A and C, we make Annuity Payments during the remaining guaranteed period in the following order based on who is still alive: the Payee, any surviving original Owner, the last surviving Owner’s Beneficiaries, or to the last surviving Owner’s
estate if there are no remaining or named Beneficiaries.
Annuity Payments are usually lower if you select
an Annuity Option that requires us to make more frequent Annuity Payments or to make payments over a longer period of time. If you choose life contingent Annuity Payments, payout rates for a younger Annuitant are lower than the payout rates for
an older Annuitant and payout rates for life with a guaranteed period are typically lower than life only payments. Monthly payout rates are lower than annual payout rates, payout rates for a 10-year guaranteed period are less than payout rates
for a 5-year guaranteed period, and payout rates for a 50-year-old Annuitant are less than payout rates for a 70-year-old Annuitant.
If you do not choose an Annuity Option before the Annuity Date, we make Annuity Payments to the Payee under Annuity Option C with ten years of guaranteed monthly
payments.
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When Annuity Payments Begin
Annuity Payments must begin on the maximum
Annuity Date stated in your Contract, which is the Index Anniversary that occurs on or immediately after the Annuitant reaches age 100. An earlier Annuity Date or a withdrawal may be required to satisfy minimum required distribution rules under
certain Qualified Contracts. You can make an authorized request for an earlier Annuity Date after the Issue Date, but any such request is subject to applicable law and our approval. Your
Annuity Date must be at least two years after the Issue Date and must occur on an Index Anniversary.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
• If Annuity Payments
would be less than $100, we reserve the right to require you to take a full withdrawal and your Contract will then terminate.
|
• If
on the maximum Annuity Date your Contract Value is greater than zero, you must annuitize the Contract. We notify you of your available options in writing 60 days in advance. If
on your maximum Annuity Date you have not selected an Annuity Option, we make payments under Annuity Option C with ten years of guaranteed monthly payments. Upon annuitization you no longer have Contract Value or a death
benefit, and you cannot receive any other periodic withdrawals or payments other than Annuity Payments.
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• For
Contracts in the Income Period: We will convert your Income Payments to Annuity Payments if your Contract Value is greater than zero and you take Annuity Payments under Annuity Option B or F as follows.
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For single Income Payments, if you choose Annuity Option B (Life) the sole Covered Person becomes the sole Annuitant and your Annuity Payments are equal to the greater of:
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– annual Annuity Payments under Annuity Option B based on the greater of Contract Value or Cash Value; or
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– the current annual maximum Income Payment available to you.
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For joint Income Payments, if you choose Annuity Option F (Joint and Survivor) the joint Covered Persons become the joint Annuitants and your Annuity Payments are equal to the greater
of:
|
– annual Annuity Payments under Annuity Option F based on the greater of Contract Value or Cash Value; or
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– the current annual maximum Income Payment available to you.
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If you select Annuity Option A, C, or G, we do not convert your Income Payments to Annuity Payments. This means you may receive less as Annuity Payments than you would have received as Income Payments. You should consult with your Financial Professional before requesting Annuity Payments. On request we
provide illustrations showing you the amount of Annuity Payments you could receive.
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If we convert your Income Payments to Annuity Payments:
|
– On the Annuity Date we establish a “remaining value” equal to your Contract Value. Each Annuity Payment reduces the remaining value by the dollar amount paid. Upon the death of the
last surviving Annuitant, we will pay any remaining value to the named Beneficiary(s).
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– If you selected the Increasing Income payment option, your Annuity Payments will increase on each Index Anniversary if your selected Index Options receive a DPSC or Protection
Credit, or by the Daily Adjustment if you exercise a Performance Lock, as described in section 9.
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– If you have a Non-Qualified Contract, these Annuity Payments will receive the benefit of the exclusion ratio, which causes a portion of each Annuity Payment to
be non-taxable as described in section 11, Taxes – Taxation of Annuity Contracts.
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9. Income
Benefit
The Income Benefit is automatically included in
your Contract at issue and you cannot remove it. It provides guaranteed lifetime Income Payments based on a percentage of your Contract Value until annuitization. Once the Income Payment waiting period has expired, Income Payments can begin as
early as age 50 or as late as age 100. Unlike Annuity Payments, the Income Benefit allows access to your Contract Value and death benefit for a period of time after Income Payments begin. However, once Income Payments begin only the Index
Options with the Index Protection Strategy with DPSC and Index Protection Strategy with Cap are available to you. The Income Benefit has a rider fee as discussed in the Fee Tables, and section 6, Expenses. The Income Benefit also includes the
Income Multiplier Benefit for no additional charge, which can increase the annual maximum Income Payment after the required wait period to help pay for care if you should need it.
Requesting Income Payments
You request Income Payments by completing a
payment election form. We must receive your Income Payment election form in Good Order at our Service Center no later than five Business Days before the Income Benefit Date. At least one Eligible Person must remain in the Contract and be alive
on the Income Benefit Date in order for Income Payments to begin. Joint payments are only available if there are two Eligible Persons on the Income Benefit Date. If you have Contract Value in any of the Index Options with the Index Precision
Strategy, Index Guard Strategy, or Index Performance Strategy, you must transfer this Contract Value to the Index Options with the Index Protection Strategy with DPSC or Index Protection Strategy with Cap when you request Income Payments. In
addition, your Income Benefit Date must be on an Index Anniversary. lf you have Contract Value in a 3-year or 6-year Term Index Option and the Income Benefit Date is not
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
also a Term End Date for that Index Option, we will execute a
Performance Lock for that Index Option if it is not locked and then immediately calculate and begin your Income Payments.
We will send you a notice letter at least 30 days
before:
•
|
the Index Anniversary that Income Payments can begin once the Eligible Person(s) reaches age 50,
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•
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the last Index Anniversary that joint Income Payments will be available because the older Eligible Person is reaching age 100 if there are two Eligible Persons, and
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•
|
the last Index Anniversary that Income Payments will be available because the younger Eligible Person is reaching age 100.
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• If
Income Payments do not begin by the Index Anniversary upon which the younger Eligible Person reaches age 100, the Income Benefit ends.
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• If the Income Benefit ends before Income Payments begin, you will have paid for the benefit without receiving any of its advantages.
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Calculating Your Income Payments
The annual maximum Income Payment is the amount
you are entitled to receive each Income Benefit Year. On the Income Benefit Date, if you select the Level Income payment option and all Covered Persons are age 80 or younger (and were age 75 or younger on the Issue Date) your initial annual
maximum Income Payment is the greater of the following:
•
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The Level Income Guarantee Payment Percentage based on the Covered Person’s current age (or the younger Covered Person’s current age for joint payments) multiplied by total Purchase Payments reduced for withdrawals you
took. Withdrawals reduce total Purchase Payments by the percentage of Contract Value withdrawn (including any MVA), determined at the end of each Business Day. All withdrawals you take
reduce your total Purchase Payments, even MVA-Free Withdrawals. However, we do not reduce your total Purchase Payments for deductions we make for Contract fees, expenses, and investment advisory fees that you authorize your Financial
Professional’s firm to receive from the Contract.
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•
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The Lifetime Income Percentage for the payment type you select multiplied by the Contract Value determined at the end of the Business Day after we deduct the product fee, rider fee, and contract
maintenance charge and apply any Credits, but before we make any Income Payments or Excess Withdrawals, or we deduct any investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract.
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If the Covered Persons do not meet these age
requirements (age 80 or younger on the Income Benefit Date, and age 75 or younger on the Issue Date), or if you select the Increasing Income payment option, we instead calculate your initial annual maximum Income Payment as stated in the second
bullet above (the Lifetime Income Percentage for the payment type you select multiplied by the Contract Value determined at the end of the Business Day after we deduct the product fee, rider fee, and contract maintenance charge and apply any
Credits, but before we make any Income Payments or deduct Excess Withdrawals).
• If
you have Contract Value in a 3-year or 6-year Term Index Option and the Income Benefit Date is not a Term End Date, we will execute a Performance Lock for that Index Option if it is not locked and then immediately calculate and begin
your Income Payments. This means you may not receive the full benefit of the Credit that you would have received if you had waited until the Term End Date to begin Income
Payments.
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• We use Contract Value to calculate your initial annual maximum Income Payment, and Income Payment increases under the Level Income payment option. Negative Index Option performance,
withdrawals you take, and deductions we make for Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract decrease the Contract Value, which reduces the
initial annual maximum Income Payment available to you, and the likelihood you will receive Income Payment increases if you select the Level Income payment option.
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Level Income Guarantee Payment Percentage Table
Covered Person’s age
(or younger Covered Person’s age for joint payments)
on the Income Benefit Date
|
Level Income Guarantee
Payment Percentage
|
50
|
2.23%
|
51
|
2.28%
|
52
|
2.33%
|
53
|
2.39%
|
54
|
2.44%
|
55
|
2.50%
|
56
|
2.57%
|
57
|
2.64%
|
58
|
2.71%
|
59
|
2.78%
|
60
|
2.86%
|
61
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2.95%
|
62
|
3.04%
|
63
|
3.13%
|
64
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3.23%
|
65
|
3.34%
|
66
|
3.45%
|
67
|
3.58%
|
68
|
3.71%
|
69
|
3.85%
|
70
|
4.00%
|
71
|
4.17%
|
72
|
4.35%
|
73
|
4.55%
|
74
|
4.77%
|
75
|
5.00%
|
76
|
5.27%
|
77
|
5.56%
|
78
|
5.89%
|
79
|
6.25%
|
80
|
6.67%
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On the Income Benefit Date, if your initial annual
maximum Income Payment is less than $100, the Income Benefit ends and you will have paid for the benefit without receiving any of its advantages. For example, assuming a 4% Lifetime Income Percentage and
Contract Value less than $2,500, this would result in an initial annual maximum Income Payment of less than $100.
You can receive Income Payments monthly,
quarterly, semi-annually, or annually. If the scheduled payment date does not fall on a Business Day, we make the payment on the next Business Day.
You can change your payment frequency once each
Income Benefit Year while your Contract Value is positive. We must receive your request to change your Income Payment frequency in Good Order at our Service Center no later than five Business Days before the Income Benefit Anniversary. If the
change is available, we implement it on the Income Benefit Anniversary and it remains in effect until the benefit ends or you request another change. We do not accept payment frequency changes that would cause us to make payments of $0.01 to
$99.99.
The annual maximum Income Payment is the amount
you are entitled to, but you can choose to take less. The annual actual Income Payment is the total amount you choose to receive each year. Each scheduled Income Payment you receive is equal to the annual actual Income Payment divided by the
number of payments you chose to receive during the Income Benefit Year. Each scheduled Income Payment must either be zero, or $100 or more. For example, you cannot request a scheduled payment of $50.
Any part of your annual maximum payment that you
do not withdraw in a given Income Benefit Year is not added to the annual maximum payment available next year. However, if your actual Income Payment is less than your annual maximum payment, you can withdraw the difference and we consider that
withdrawal to be an additional actual Income Payment, and
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
not an Excess Withdrawal and not subject to a MVA. We do not
consider a withdrawal to be an Excess Withdrawal until you have withdrawn the available annual maximum Income Payment amount. In addition, once we have paid out your annual maximum Income Payment we will not make any further scheduled Income
Payments for the rest of the Income Benefit Year. For example, assume your annual maximum Income Payment is $2,000 and you take scheduled semi-annual Income Payments of $500. Within an Income Benefit Year, you can take an additional withdrawal
of up to $1,000 and we consider that to be an additional scheduled Income Payment. If instead you withdraw $1,200 after receiving the first $500 payment, we consider that withdrawal to be an additional scheduled Income Payment. On the date of
the next scheduled Income Payment we will send you only $300 because that is the amount remaining from your $2,000 annual maximum. If you then took an additional withdrawal of $200 in that Income Benefit Year, we consider that $200 to be an
Excess Withdrawal subject to an MVA.
If you would like to take less than the maximum
available payment, you can change your payment amount once each Income Benefit Year while your Contract Value is positive. We must receive your request to change your Income Payment amount in Good Order at our Service Center no later than five
Business Days before the Income Benefit Anniversary. If the change is available, we implement it on the Income Benefit Anniversary and it remains in effect until the Income Benefit ends or you request another change.
If on a Business Day that we are deducting an
Income Payment your Contract Value is less than the payment amount, we will add the difference between these amounts to your Contract Value and then deduct the Income Payment which will reduce your Contract Value to zero. If your Contract Value
reduces to zero during the Income Period for any reason other than an Excess Withdrawal or annuitization that does not convert your Income Payments to Annuity Payments, you will continue to receive your maximum available Income Payment at the
previous selected payment frequency until the earlier of the death of the Owner or last surviving Covered Person. If you select Increasing Income you can continue to receive payment increases based on Index Option performance. However, if you
select Level Income your Income Payments will no longer increase.
We deduct each Income Payment, Excess Withdrawal,
and any additional payment resulting from a required minimum distribution, proportionately from the Index Options. You can continue to make transfers between the Index Options on Term End Dates while your benefit is in effect and the Contract
Value is positive. If you select Increasing Income you can continue to change your Index Option allocations after the Contract Value reduces to zero as long as the Income Benefit is in effect.
• For
Qualified Contracts: If we calculate a required minimum distribution (RMD) based on this Contract, after making all Income Payments for the calendar year we determine whether this calendar year’s total RMD has been satisfied by
these payments and any Excess Withdrawals. If the RMD amount for this Contract has not been satisfied, we send you this remaining amount as one RMD payment by the end of the calendar year. We consider this payment to be a withdrawal,
but it is not an Excess Withdrawal and it is not subject to an MVA.
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• For annuitization: If on the Annuity Date you are receiving Income Payments and your Contract Value is positive, we will convert your Income Payments to Annuity Payments if you take Annuity
Payments under Annuity Option B or F. If you select any other Annuity Option, we will not convert your Income Payments to Annuity Payments. This means that if you annuitize your Contract you may receive
less as Annuity Payments than you would have received as Income Payments. For more information, see section 8, The Annuity Phase – When Annuity Payments Begin.
|
Lifetime Income Percentage Calculation Example
Assume you are the sole Owner, you are not
married, and your initial Purchase Payment is $20,000. You only select 1-year Term Index Options. You are not married so you are also the only Eligible Person. The Income Payment waiting period is one Index Year. On the Index Effective Date you
are age 54, your Income Percentage Increase is 0.25%, and your initial Lifetime Income Percentages are equal to the Income Percentages for single payments, which are 4.20% for Level Income, and 3.20% for Increasing Income. You take no
withdrawals before requesting Income Payments.
On the first Index Anniversary we apply your
first Income Percentage Increase. Your new Lifetime Income Percentages for single payments are 4.45% (4.20% + 0.25%) for Level Income and 3.45% (3.20% + 0.25%) for Increasing Income.
Assume you make an additional Purchase Payment of
$2,000 in the fourth Index Year. On the fourth Index Anniversary:
•
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you are age 58 and the Income Percentages are 4.60% for Level Income, and 3.60% for Increasing Income,
|
•
|
the Variable Account Value for the additional Purchase Payment is now $2,002.50, and
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
•
|
the Contract Value after application of the additional Purchase Payment, Credits and before deducting all Contract fees and expenses is $25,000.
|
We calculate your new Lifetime Income Percentages
for single payments on the fourth Index Anniversary as follows.
•
|
Lifetime Income Percentages for the initial Purchase Payment are now 5.20% (4.20% + (0.25% x 4)) for Level Income and 4.20% (3.20% + (0.25% x 4)) for Increasing Income.
|
•
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Lifetime Income Percentages for the additional Purchase Payment are 4.60% for Level Income and 3.60% for Increasing Income.
|
•
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The Variable Account Value’s percentage of total Contract Value is 8.01% ($2,002.50 ÷ $25,000), which means the initial Purchase Payment is 91.99% of total Contract Value (100% - 8.01%).
|
The final Lifetime Income Percentages on the
fourth Index Anniversary are then:
–
|
for Level Income: (5.20% x 91.99%) + (4.60% x 8.01%) = 4.78% + 0.37% = 5.15%
|
–
|
for Increasing Income: (4.20% x 91.99%) + (3.60% x 8.01%) = 3.86% + 0.29% = 4.15%
|
If you begin Income Payments on the fourth Index
Anniversary we calculate the annual maximum Income Payment as follows.
If you select Level Income, you receive the greater of….
|
If you select Increasing Income, you receive…
|
• Level Income Guarantee Payment Percentage multiplied by total Purchase Payments reduced
proportionately for withdrawals you took, or: (2.71% x $22,000) = $596.20
• Lifetime Income Percentage multiplied by the Contract Value, or: (5.15% x $25,000) = $1,287.50
|
• Lifetime Income Percentage multiplied by the Contract Value, or: (4.15% x $25,000) = $1,037.50
|
We apply the Level Income Guarantee Payment
Percentage in this calculation because you were 75 or younger when you purchased the Contract and are age 80 or younger on the Income Benefit Date. On the Income Benefit Date your Level Income Guarantee Payment Percentage based on your current
age of 58 is 2.71%, and your total Purchase Payments reduced proportionately for withdrawals is $22,000 (your $20,000 initial payment plus the $2,000 we received in the fourth Index Year). The annual maximum Income Payment calculation and Level
Income Guarantee Payment Percentage are discussed in “Calculating Your Income Payments” next in this section.
If you had not made the additional Purchase
Payment your Lifetime Income Percentages would have been higher (5.20% compared to 5.15% for Level Income, and 4.20% compared to 4.15% for Increasing Income), but the available annual maximum Income Payment would be lower because the Contract
Value would not include the increase from the additional Purchase Payment. If you had not made the additional Purchase in the fourth Index Year your Contract Value would have been $22,997.50 ($25,000 - $2,002.50) and we calculate your annual
maximum Income Payment as follows.
If you select Level Income, you receive the greater of….
|
If you select Increasing Income, you receive…
|
• Level Income Guarantee Payment Percentage multiplied by total Purchase Payments reduced
proportionately for withdrawals you took, or: (2.71% x $20,000) = $542.00
• Lifetime Income Percentage multiplied by the Contract Value, or: (5.20% x $22,997.50) = $1,195.87
|
• Lifetime Income Percentage multiplied by the Contract Value, or: (4.20% x $22,997.50) = $965.90
|
Example of when the Level Income Guarantee Payment
Percentage may increase the initial Income Payment
Assume you are the sole Owner, you are not
married, and your initial Purchase Payment is $100,000. You are age 65 on the Index Effective Date and your initial Income Percentage under Level Income is 5.70% with a 0.40% Income Percentage Increase. You take no withdrawals before requesting
Income Payments. You begin Income Payments on the
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
fifth Index Anniversary and select the Level Income payment
option. On the Income Benefit Date you are age 70, your Lifetime Income Percentage is 7.70% and your Level Income Guarantee Payment Percentage is 4.00%.
When it increases the initial Income Payment
|
When it does not increase the initial Income Payment
|
• Assume your Contract Value decreases to $50,000 due to negative performance. You would
receive the greater of:
– Level Income Guarantee Payment Percentage multiplied by total Purchase Payments reduced proportionately for withdrawals you took, or: (4.00% x $100,000) = $4,000.00
– Lifetime Income Percentage multiplied by the Contract Value, or: (7.70% x $50,000) = $3,850
|
• Assume your Contract Value decreases to $70,000 due to negative performance. You would receive the greater of:
– Level Income Guarantee Payment Percentage multiplied by total Purchase Payments reduced proportionately for withdrawals you took, or: (4.00% x $100,000) = $4,000.00
– Lifetime Income Percentage multiplied by the Contract Value, or: (7.70% x $70,000) = $5,390
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Please note that these examples may differ from
your actual results due to rounding.
Excess Withdrawals
Excess Withdrawals do not include RMD payments,
or deductions we make for Contract fees, expenses, or investment advisory fees you authorize your Financial Professional’s firm to receive from the Contract. Excess Withdrawals are subject to an MVA. Any partial Excess Withdrawal must be for at
least $100, and after the partial Excess Withdrawal the Contract Value must be at least $2,000. If your Contract Value is less than $2,000, you can only take a full Excess Withdrawal, which
will cause Income Payments to stop and the Contract to end. Also, if at the end of the Business Day that we process your Excess Withdrawal your Contract Value is less than $2,000, take a full Excess Withdrawal, which will cause Income Payments to stop and the Contract to end.
Excess Withdrawals reduce your annual maximum
Income Payment on the next Income Benefit Anniversary after the withdrawal. For each Excess Withdrawal, we reduce your annual maximum payment by the same percentage that we reduced the Contract Value. If partial
Excess Withdrawals reduce your annual maximum Income Payment to less than $100, we send you the Cash Value, which will cause Income Payments to stop and the Contract to end.
Excess Withdrawal Example
These calculations show the effects of an Excess
Withdrawal on the Contract Value, Cash Value, available Guaranteed Death Benefit Value, and Income Payments. Partial Excess Withdrawals (including any MVA, but not deductions we make for Contract fees, expenses, or investment advisory fees you
authorize your Financial Professional’s firm to receive from the Contract) immediately reduce the Contract Value and Cash Value on a dollar for dollar basis, and reduce the Guaranteed Death Benefit Value by the percentage of Contract Value
withdrawn. Partial Excess Withdrawals also reduce the annual maximum Income Payment on the next Income Benefit Anniversary.
The example assumes you do not authorize your
Financial Professional’s firm to receive investment advisory fees deducted from your Contract, and instead take a $1,500 Excess Withdrawal and use that money to pay investment advisory fees to your Financial Professional when the Contract Value
is $100,000, the Cash Value is $97,000, and the Guaranteed Death Benefit Value under the Traditional Death Benefit is $90,000, or $105,000 under the Maximum Anniversary Value Death Benefit. It also assumes the $1,500 Excess Withdrawal is
subject to an MVA of -$100. Cash Value reflects the MVA we apply on a full withdrawal. Therefore the Cash Value in this example is only reduced for the $1,500 Excess Withdrawal because the -$100 MVA is already reflected in the $97,000 Cash
Value. All fractional numbers in these examples have been rounded up to the next whole number.
Excess
Withdrawal
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Contract
Value
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Cash
Value
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Guaranteed Death Benefit
Value for a Contract with the
Traditional Death Benefit
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Guaranteed Death Benefit Value
for a Contract with the
Maximum Anniversary Value
Death Benefit
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Next anniversary’s
annual maximum
Income Payment
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Prior to withdrawal
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$ 100,000
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$ 97,000
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$ 90,000
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$ 105,000
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$ 4,800
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$1,500 withdrawal
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– $1,500
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– $1,500
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– [($1,500 ÷ 100,000)
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– [($1,500 ÷ 100,000)
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– [($1,500 ÷ 100,000)
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x 90,000)] = $1,350
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x 105,000)] = $1,575
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x 4,800)] = $72
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-$100 MVA
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– $100
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– [($100 ÷ 100,000)
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– [($100 ÷ 100,000)
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– [($100 ÷ 100,000)
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x 90,000)] = $90
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x 105,000)] = $105
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x 4,800)] = $5
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– $1,600
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– $1,500
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= – $1,440
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= – $1,680
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= – $77
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Excess
Withdrawal
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Contract
Value
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Cash
Value
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Guaranteed Death Benefit
Value for a Contract with the
Traditional Death Benefit
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Guaranteed Death Benefit Value
for a Contract with the
Maximum Anniversary Value
Death Benefit
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Next anniversary’s
annual maximum
Income Payment
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After withdrawal
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$ 98,400
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$ 95,500
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$ 88,560
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$ 103,320
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$ 4,723
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Automatic Annual Income Payment Increases
If you select Level Income, the available annual
maximum Income Payment will increase only if your Contract Value increases from one Income Benefit Anniversary (or the Income Benefit Date if this is the first Income Benefit Anniversary) to the next and you took the maximum permitted payment
during the prior Income Benefit Year. This increase is equal to the percentage of growth between these two Contract Values. For example, if the Contract Value increased by 1.5%, we also increase your annual maximum Income Payment by 1.5%. When
calculating this payment increase we use the Contract Value determined at the end of the Business Day after and apply any Credits and we deduct Contract fees, expenses, and investment advisory fees that you authorize your Financial
Professional’s firm to receive from the Contract, but before we make any Income Payments or deduct Excess Withdrawals taken on this Index Anniversary. If the Income Benefit Date or an Income Benefit Anniversary does not occur on a Business Day,
we use Contract Values from the next Business Day.
Lifetime Income Percentages on the Income Benefit
Date are generally higher under Level Income compared to Increasing Income. However, payment increases are not likely under this payment option, especially in later Income Benefit Years, because only the Index Protection Strategy with DPSC and
Index Protection Strategy with Cap are available (which have the lowest return potential) and your performance has to be greater than the deductions taken in the prior Index Year for Income Payments and Excess Withdrawals, and deductions we
make for Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract both in the prior Index Year and on the current Index Anniversary. For example, if you receive
Credits of 2.5% on an Index Anniversary, but the deductions for Income Payments and Excess Withdrawals taken during the prior Index Year, and deductions we make for Contract fees, expenses, and investment advisory fees that you authorize your
Financial Professional’s firm to receive from the Contract both in the prior Index Year and on the current Index Anniversary reduce your Contract Value by -6.8% you will not receive a payment increase.
If we increase the Contract Value to equal the death benefit due to a spousal continuation of the Contract during the last Income Benefit Year, we also subtract
the amount of this increase from the Contract Value on the next Income Benefit Anniversary when determining annual payment increases under the Level Income option.
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If you select Increasing Income, the available
annual maximum Income Payments will increase on each Income Benefit Anniversary if your selected Index Option(s) receives a DPSC or Protection Credit, or you exercise a Performance Lock on an increased Index Option Value at any time during the
prior Income Benefit Year.
•
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If you select multiple Index Options, we take the weighted average of all DPSCs, Protection Credits, and locked increased Index Option Values based on the percentage of Contract Value in each of your selected Index
Options to determine your payment increase as indicated in the example below.
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•
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When calculating this payment increase we use the Contract Value determined at the end of the Business Day before we apply any Credits, or we deduct any Income
Payment, Excess Withdrawal, Contract fees or expenses, or investment advisory fees you authorize your Financial Professional’s firm to receive from the Contract. If the Income Benefit Date or an Income Benefit Anniversary does not occur
on a Business Day, we use Contract Values from the next Business Day.
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Payment increases can continue even if your
Contract Value reduces to zero, or if you convert Income Payments to Annuity Payments as described in section 8, The Annuity Phase – When Annuity Payments Begin.
•
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If you selected multiple Index Options, we determine your weighted average of all DPSCs, Protection Credits, and locked Daily Adjustments using the percentage of Contract Value in each Index Option either at the end of
the prior Business Day before your Contract Value reduced to zero, or at the end of the Business Day on the Annuity Date if you convert Income Payments to Annuity Payments.
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
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We determine this Contract Value after we apply any Daily Adjustments (if this day is not an Index Anniversary) or
Credits (if this day is an Index Anniversary), and after we deduct any Income Payment, Excess Withdrawal, Contract fees and
expenses, or investment advisory fees you authorize your Financial Professional’s firm to receive from the Contract.
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•
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You can change the proportions that we use to calculate this weighted average by submitting an authorized request to our Service Center.
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Example
Assume you allocate 20% to the Index Protection
Strategy with the DPSC using the S&P 500® Index and 80% to the Index Protection Strategy with the Cap using the EURO STOXX 50® on the Income Benefit Date.
On the second Income Benefit Anniversary, the
Index Protection Strategy with the DPSC Index Option receives a 3.5% DPSC and the Index Protection Strategy with the Cap Index Option receives a 4.2% Protection Credit. On this anniversary, before we deduct Contract fees and expenses, apply
Credits or make Income Payments, 21.5% of your total Contract Value is in Index Protection Strategy with the DPSC Index Option, and 78.5% of your Contract Value is in Index Protection Strategy with the Cap Index Option.
Your annual maximum Income Payment on the second
Income Benefit Anniversary will increase by 4.05% ((3.5% x 21.5%) + (4.2% x 78.5%)).
Income Multiplier Benefit
The Income Multiplier Benefit can increase the
annual maximum Income Payment if you:
•
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have to stay in an eligible facility (a hospital, nursing facility, or assisted living facility) for at least 90 days in a consecutive 120-day period, or
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•
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are unable to perform at least two of six activities of daily living (ADLs) for at least 90 consecutive days. ADLs include bathing, dressing, toileting, continence, eating, and transferring (moving into
or out of a bed, chair, or wheelchair).
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We must receive proof of staying in an eligible
facility or ADL eligibility before we multiply your annual maximum Income Payment by the income multiplier factor stated in the Income Benefit Supplement. For ADL eligibility we may require, at our expense, an examination or tests by a
physician of our choice. To continue receiving this increase each Income Benefit Year you must reestablish eligibility.
The Income Multiplier Benefit is not available
before the Income Benefit Date, or before expiration of the income multiplier benefit wait period stated in the Income Benefit Supplement. In addition, a Covered Person cannot establish eligibility for this benefit more than one Index Year
before the Income Benefit Date. Increased Income Payments based on staying in an eligible facility are not available before the first Contract Anniversary. To qualify for a payment increase based on performance of ADLs, a Covered Person must
have been able to perform each of these six ADLs without substantial assistance on the Issue Date. If you chose to take less than the annual maximum Income Payment and then qualify for a payment increase under the Income Multiplier Benefit, we
will increase your Income Payments to the available annual maximum before applying the payment increase.
Example
Assume you elect to receive the maximum available
payment under the Level Income option, your annual maximum Income Payment is $10,000, the income multiplier factor is 2, and the income multiplier benefit wait period is five Contract Years. After the fifth Contract Anniversary you suffer an
illness and can’t perform two of the six ADLs. At the time of your illness, your annual maximum Income Payment is still $10,000 and your Contract Value is positive. After we confirm your benefit eligibility with your physician, we increase your
annual maximum Income Payment as follows:
(income multiplier factor) x (annual maximum
Income Payment) = 2 x $10,000 = $20,000
This increase will allow you to receive up to
$20,000 as an Income Payment for this Income Benefit Year, and the next Income Benefit Year. However, in the next Income Benefit Year your health improves and you are not able to reestablish benefit eligibility for the following Income Benefit
Year. So on the second Income Benefit Anniversary after we increased your payment, we decrease your annual maximum Income Payment as follows:
(annual maximum Income Payment) ÷ (income
multiplier factor) = $20,000 ÷ 2 = $10,000
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
When the Income Multiplier Benefit Ends
The Income Multiplier Benefit ends on the earliest
of the following.
•
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The Annuity Date.
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•
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The Income Benefit Anniversary that occurs on or immediately after the date the Contract Value is reduced to zero.
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•
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The Business Day the Income Benefit ends.
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•
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The Business Day the Contract ends.
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Taxation of Income Payments
We treat Income Payments as withdrawals for tax
purposes while your Contract Value is positive, and once your Contract Value is reduced to zero we intend to treat Income Payments as Annuity Payments for tax purposes. For more information, see section 11, Taxes – Taxation of Income Payments.
When the Income Period Ends
The Income Period ends on the earlier of the last
Business Day before the Annuity Date, or the date the Income Benefit ends. Income Payments can continue for the life of the Covered Person(s) if you do not take more than your allowed annual maximum payment.
When the Income Benefit Ends
The Income Benefit ends on the earliest of the
following.
•
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The Business Day all Eligible Persons or Covered Persons are removed from the Contract because they no longer meet the requirements (Owner, Annuitant or sole Beneficiary) stated in section 3. If this occurs after the
Income Benefit Date, Income Payments stop when the last Covered Person is removed from the Contract.
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•
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The Index Anniversary upon which the younger Eligible Person reaches age 100 if it occurs before the Income Benefit Date.
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•
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The Business Day we process your request for a full withdrawal, other than a full withdrawal caused by an Income Payment.
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•
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The Income Benefit Date or an Income Benefit Anniversary if the annual maximum Income Payment is less than $100.
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•
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Upon the death of an Owner (or Annuitant if the Owner is a non-individual), the end of the Business Day we first receive a Valid Claim from any one Beneficiary. However, if a federally recognized spouse is an Eligible
Person or Covered Person and continues this Contract, the Income Benefit also continues.
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•
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During the Accumulation Phase and before the Income Benefit Date, the Income Benefit ends on the date of death of the last surviving Eligible Person.
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•
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During the Income Period, the Income Benefit ends on the date of death of the last surviving Covered Person.
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•
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The Business Day the Contract ends.
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If we receive notice of death of a Covered Person during the Income Period we will suspend Income Payments and the Income Benefit will end as described above.
However, if a federally recognized spouse who is also a joint Covered Person continues this Contract, we will resume Income Payments and add any Income Payments that we would have paid between the time we suspended Income Payments and
when they resume to future Income Payments.
|
10. Death
Benefit
“You” in this section refers to the Owner, or the
Annuitant if the Contract is owned by a non-individual.
The Contract provides the Traditional Death
Benefit. If available, you can instead select the Maximum Anniversary Value Death Benefit at Contract issue for an additional rider fee if all Owners and the Annuitant are age 75 or younger. The Maximum Anniversary Value Death Benefit can only
be added to a Contract at issue. The Maximum Anniversary Value Death Benefit cannot be less than the Traditional Death Benefit, but they may be equal. Please discuss this benefit’s appropriateness with your
Financial Professional.
The death benefit is only available during the
Accumulation Phase (and Income Period, if applicable). If you or the Determining Life (Lives) die during the Accumulation Phase, we process the death benefit using prices determined after
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
we receive the required information, which is either a Valid
Claim or due proof of death as stated here. (For information on due proof of death see the Glossary – Valid Claim). If we receive this information at or after the end of the current Business Day, we use the next Business Day’s prices.
If there are multiple Beneficiaries, each
Beneficiary receives the portion of the death benefit he or she is entitled to when we receive his or her Valid Claim. If a Beneficiary dies before you or the Designated Life, that Beneficiary’s interest in this Contract ends unless your
Beneficiary designation specifies otherwise. If there are no remaining Beneficiaries, or no named Beneficiaries, we pay the death benefit to your estate, or if the Owner is a non-individual, to the Owner. Unless you instruct us to pay
Beneficiaries a specific percentage of the death benefit, each Beneficiary receives an equal share.
Each Beneficiary’s portion of the death benefit
remains in the Index Options based on the allocation instructions that were in effect on the date of death until we receive his or her Valid Claim and we either pay the claim or the Beneficiary provides alternate allocation instructions. If
there is Variable Account Value in the AZL Government Money Market Fund on the date of death, it remains there until the earlier of the next Index Anniversary, or the date we receive a Valid Claim. If an Index Anniversary occurs before we
receive a Valid Claim, we will transfer that Beneficiary’s portion of the Variable Account Value to the Index Options based on the allocation instructions that were in effect on the date of death.
From the time we determine the death benefit
until we make a complete distribution, any amount in the Index Options and the AZL Government Money Market Fund continues to be subject to investment risk that is borne by the recipient(s). Once we receive notification of death, we may no
longer accept or process transfer requests. After we receive the first Valid Claim from any Beneficiary we also will not accept additional Purchase Payments or allow any partial or full withdrawals unless the withdrawal is required to comply
with federal tax law.
On the first death of a Determining Life during
the Accumulation Phase, if your selected death benefit is in effect your Beneficiary(s) will receive the greater of the Contract Value, Cash Value, or Guaranteed Death Benefit Value. The Guaranteed Death Benefit Value is either:
•
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total Purchase Payments reduced for withdrawals you take if you select the Traditional Death Benefit, or
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•
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the Maximum Anniversary Value if you select the Maximum Anniversary Value Death Benefit.
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If the date we are determining the death benefit
is not the Term End Date, the Contract Value reflects the Daily Adjustment. Withdrawals you take reduce your Guaranteed Death Benefit Value by the percentage of Contract Value withdrawn (including any MVA), determined at the end of each
Business Day. All withdrawals you take reduce the Guaranteed Death Benefit Value, even MVA-Free Withdrawals. However, we do not reduce the Guaranteed Death Benefit Value for deductions
we make for Contract fees, expenses, and investment advisory fees that you authorize your Financial Professional’s firm to receive from the Contract. These deductions will, however, decrease the
Contract Value and Cash Value by the dollar amount withdrawn and reduce the likelihood of receiving increases to the Maximum Anniversary Value. In addition, because the death benefit is based on the greater of Contract Value, Cash Value or
the Guaranteed Death Benefit Value, deductions we make for Contract fees, expenses, or authorized investment advisory fees reduce the death benefit available to your Beneficiaries.
Maximum Anniversary Value
The Maximum Anniversary Value is initially equal
to the Purchase Payment received on the Issue Date. At the end of each Business Day, we adjust the Maximum Anniversary Value as follows.
•
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We increase it by the dollar amount of any additional Purchase Payments.
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•
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We reduce it by the percentage of any Contract Value you withdraw (including any MVA).
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If the Index Effective Date occurs after the
Issue Date, the Maximum Anniversary Value on the Index Effective Date is calculated in the same way as on an Index Anniversary.
On each Index Anniversary before the end date (or
on the next Business Day if the Index Anniversary is not on a Business Day) the Maximum Anniversary Value is equal to the greater of:
•
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its current value after processing any additional Purchase Payments, or withdrawals you take (including any MVA), or
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
•
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the Contract Value determined at the end of the Business Day after we process all daily transactions including Credits, any additional Purchase Payments, withdrawals you take including any MVA, and deductions we make for
Contract fees, expenses, and investment advisory fees you authorize your Financial Professional’s firm to receive from the Contract. Contract Value reflects the Daily Adjustment if you select a 3-year or 6-year Term Index Option and
this anniversary is not a Term End Date. Negative Index Option performance, withdrawals you take, and deductions we make for Contract fees, expenses, and investment advisory fees you
authorize your Financial Professional’s firm to receive from the Contract decrease the Contract Value and reduce the likelihood of receiving increases to the Maximum Anniversary Value.
|
On and after the end date, we no longer make this
comparison and we no longer capture any annual investment gains in the Maximum Anniversary Value.
The end date occurs on the earliest of:
•
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the older Determining Life’s 91st birthday, or
|
•
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the end of the Business Day we receive the first Valid Claim from any one Beneficiary.
|
During the Income Period:
|
• You cannot make additional
Purchase Payments. If your Contract includes the Traditional Death Benefit this means the Guaranteed Death Benefit Value no longer increases.
|
• Index Precision Strategy, Index
Performance Strategy, and Index Guard Strategy are no longer available. This may limit your Contract’s performance potential and the Guaranteed Death Benefit Value if your Contract includes the Maximum Anniversary Value Death Benefit.
Income Payments and Excess Withdrawals also decrease your Contract Value, which also reduces the likelihood of locking in investment gains to the Guaranteed Death Benefit Value if your Contract includes the Maximum Anniversary Value
Death Benefit.
|
• Each Income Payment and any Excess Withdrawal reduces the Guaranteed Death Benefit Value by the percentage of Contract Value withdrawn (including any MVA), which means this value
may be reduced by more than the amount withdrawn. Taking Excess Withdrawals may also cause your selected death benefit to end prematurely.
|
What Happens Upon Death?
If you are the Determining Life, or if you and
the Determining Life (Lives) are different individuals and die within 120 hours of each other, we determine the Guaranteed Death Benefit Value at the end of the Business Day we receive a Valid Claim. For multiple Beneficiaries, each surviving
Beneficiary receives the greater of their portion of the:
•
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Guaranteed Death Benefit Value determined at the end of the Business Day we receive the first Valid Claim from any one Beneficiary,
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•
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Contract Value determined at the end of the Business Day during which we receive his or her Valid Claim, or
|
•
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Cash Value determined at the end of the Business Day during which we receive his or her Valid Claim.
|
If you and the Determining Life (Lives) are
different individuals and do not die within 120 hours of each other, the death benefit is as follows. This can only occur if you change the Owner after the Issue Date.
•
|
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 if the Traditional Death Benefit or Maximum Anniversary Value Death Benefit are still in
effect. At the end of the Business Day we receive due proof of a Determining Life’s death if the Contract Value is less than the Cash Value or Guaranteed Death Benefit Value, we increase the Contract
Value to equal the the greatest of these amounts, and your selected death benefit ends. We allocate any Contract Value increase to the AZL Government
Money Market Fund. Then on the next Index Anniversary we transfer the Variable Account Value to the Index Options according to your allocation instructions.
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•
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Upon your death your Beneficiary(s) receive the the greater of Contract Value or Cash Value determined at the end of the Business Day during which we receive each Beneficiary’s Valid Claim.
|
The Traditional Death Benefit and Maximum
Anniversary Value Death Benefit end upon the earliest of the following.
•
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The Business Day before the Annuity Date.
|
•
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The Business Day that the Guaranteed Death Benefit Value and Contract Value are both zero.
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
•
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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 within 120 hours of each other.
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•
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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 within 120 hours of
each other.
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•
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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.
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•
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The Business Day the Contract ends.
|
We base the Guaranteed Death Benefit Value on the first death of a Determining Life (or Lives). This means that upon the death of an Owner (or Annuitant if the Owner is a
non-individual), if a surviving spouse continues the Contract:
|
• the Guaranteed Death Benefit
Value is no longer available, and
|
• if you selected the Maximum
Anniversary Value Death Benefit, we no longer assess its 0.20% rider fee.
|
Also, if you and the Determining Life (Lives) are different individuals and you die first, the Guaranteed Death Benefit Value is not available to your
Beneficiary(s).
|
Death of the Owner and/or Annuitant
The Appendix A to the Form N-4 SAI includes
tables that are intended to help you better understand what happens upon the death of any Owner and/or Annuitant under the different portions of the Contract.
Death Benefit Payment Options During the
Accumulation Phase
Each Beneficiary must select one of the death
benefit payment options listed below.
If a Beneficiary requests a lump sum payment
under Option A, we pay that Beneficiary within seven days of receipt of his or her Valid Claim, unless the suspension of payments or transfers provision is in effect. Payment of the death benefit may be delayed, pending receipt of any state
forms.
Spousal Continuation: If the Beneficiary is the deceased Owner’s spouse, he or she can choose to continue the Contract with the portion of the death benefit the spouse is entitled to in his or her own name. For an IRA, Roth IRA, or SEP
IRA Contract, spousal continuation can only occur if the surviving spouse is the Contract’s sole primary Beneficiary. For non-individually owned Contracts, spousal continuation is only available to Qualified Contracts through a direct
rollover to an IRA. Spouses must qualify as such under federal law to continue the Contract. Individuals who have entered into a registered domestic partnership, civil union, or other similar
relationship that is not considered to be a marriage under state law are also not considered to be married under federal law. An election by the spouse to continue the Contract must be made on the death claim form before we pay the death
benefit. If the deceased Owner was a Determining Life and the surviving spouse Beneficiary continues the Contract, at the end of the Business Day we receive his or her Valid Claim if the Contract Value is less than the Cash Value or
Guaranteed Death Benefit Value (if available), we increase the Contract Value to equal the greatest of these amounts, and your selected death benefit ends. We allocate any Contract Value increase to the AZL Government Money Market Fund. Then
on the next Index Anniversary we transfer it to the Index Options according to allocation instructions. If the surviving spouse continues the Contract:
•
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he or she becomes the new Owner and may exercise all of the Owner’s rights, including naming a new Beneficiary or Beneficiaries;
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•
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he or she is subject to any remaining MVA; and
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•
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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.
|
Death Benefit Payment Options
Option A: Lump
sum payment of the death benefit.
Option B: Payment
of the entire death benefit within five years of the date of any Owner’s death. The Beneficiary can continue to make transfers between Index Options and is subject to the product fee.
Option C: If the
Beneficiary is an individual, payment of the death benefit as Annuity Payments under Annuity Options A, B, or C. If you take the death benefit as Annuity Payments we do not require that the Annuity Date occur on an Index Anniversary. In
addition, if the Annuity Date is not a Term End Date, we will execute a Performance Lock before before
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
we make Annuity Payments. With our written consent other options
may be available for payment over a period not extending beyond the Beneficiary’s life expectancy under which the Beneficiary can continue to make transfers between Index Options and is subject to the product fee. Option C may not be available on a Qualified Contract.
Distribution from Non-Qualified Contracts must
begin within one year of the date of the Owner’s death. Any portion of the death benefit from Non-Qualified Contracts not applied to Annuity Payments within one year of the date of the Owner’s death must be distributed within five years of the
date of death.
If a Non-Qualified Contract is owned by a
non-individual, then we treat the death of an Annuitant as the death of an Owner for purposes of the Code’s distribution at death rules, which are set forth in Section 72(s) of the Code.
In all events, notwithstanding any provision to
the contrary in the Contract or this prospectus, a Non-Qualified Contract is interpreted and administered in accordance with Section 72(s) of the Code.
Other rules may apply to Qualified Contracts,
such as all distributions must be made to Beneficiaries by the end of the tenth year after the Owner's death, except for distributions made to certain eligible designated Beneficiaries. The available options for certain Beneficiaries of
Qualified Contracts have changed due to the enactment of the SECURE Act at the end of 2019.
11. Taxes
This section provides a summary explanation of
the tax ramifications of purchasing a Contract. More detailed information about product taxation is contained in the Statement of Additional Information, which is available by calling the toll-free telephone number at the back of this
prospectus. We do not provide individual tax advice. You should contact your tax adviser to discuss this Contract’s effects on your personal tax situation.
Qualified and Non-Qualified Contracts
You can purchase either a Qualified Contract or a
Non-Qualified Contract. A Qualified Contract is purchased pursuant to a specialized provision of the Code. For example, a Contract may be purchased pursuant to Section 408 of the Code as an IRA.
Qualified Contracts are subject to certain
restrictions, including restrictions on the amount of annual contributions, restrictions on how much you can earn and still be able to contribute to a Qualified Contract, and specialized restrictions on withdrawals. Qualified Contracts must be
purchased from earned income from the relevant year or years, or from a rollover or transfer from a qualified contract. An IRA to IRA indirect rollover can occur only once in any twelve-month period from all of the IRAs you currently own.
Currently, we offer the following types of
Qualified Contracts.
Type of Contract
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Persons and Entities that can buy the Contract
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IRA
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Must have the same individual as Owner and Annuitant.
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Roth IRA
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Must have the same individual as Owner and Annuitant.
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Simplified Employee Pension (SEP) IRA
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Must have the same individual as Owner and Annuitant.
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Certain Code Section 401 Plans
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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.
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If you purchase a Qualified Contract, you already
receive the benefit of tax deferral through the qualified plan, and so you should purchase this Contract for purposes other than tax deferral.
You can instead purchase a Non-Qualified
Contract, which is not qualified pursuant to a specialized provision of the Code. There are no Code restrictions on annual contributions to a Non-Qualified Contract or how much you can earn and still contribute to a Contract.
Taxation of Annuity Contracts
The Contract has the following tax
characteristics.
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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.
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
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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.
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Taxable distributions are subject to an ordinary income tax rate, rather than a capital gains rate.
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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 adviser
for more information.
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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.
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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.
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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.
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Requests to have us pay investment advisory fees from this Contract to your Financial Professional's firm will not be treated as taxable distributions if the requirements discussed in section 1 - Investment Advisory Fees,
are satisfied. If the requirements stated in section 1 are not met, deduction of these investment advisory fees may result in a taxable distribution. You should consult a tax adviser regarding the tax treatment of the payment of investment advisory fees from your Contract since federal and/or state taxing authorities could determine that
such fees should be treated as taxable distributions.
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Income Payments are taxed as partial withdrawals before the Contract Value is reduced to zero.
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If you take out earnings before age 59 1⁄2, 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. If the Contract
is jointly owned, we send each Joint Owner a check for half of the withdrawal amount and tax that Joint Owner individually. This can create a discrepancy in taxation if only one Joint
Owner is under age 59 1⁄2 because that Joint Owner will be subject to the 10% additional federal tax.
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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.
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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.
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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.
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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.
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When you take money out of a Contract, we may deduct premium tax that we pay on your Contract. This tax varies from 0% to 3.5%, depending on your state. Currently, we pay this tax and do not pass it on
to you.
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Taxation of Income Payments
We treat Income Payments as withdrawals for tax
purposes while your Contract Value is positive. This means that, for Non-Qualified Contracts, gains from the entire Contract are considered to be distributed first and are subject to ordinary income tax.
Purchase Payments are distributed after gains have been paid out and are generally considered to be a return of your investment and are not subject to income tax. While tax law is not entirely clear as to the proper tax treatment, once your
Contract Value is reduced to zero we intend to treat Income Payments as Annuity Payments for tax purposes. For Qualified Contracts, the total Income Payment is most likely subject to ordinary income tax. If you are taking withdrawals from the
Contract to satisfy the requirements for substantially equal periodic payments under Section 72(t) or 72(q) of the Code and you begin Income Payments before the required series of withdrawals is complete, you may incur additional penalties,
including a 10% additional federal tax. If you begin Income Payments before age 59 1⁄2
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
the payments will generally be subject to a 10% additional
federal tax. In addition, if the Contract is jointly owned, we tax each Joint Owner individually which can create a discrepancy in taxation if only one Joint Owner is under age 59 1⁄2
because that Joint Owner will be subject to the 10% additional federal tax.
Tax-Free Section 1035 Exchanges
Subject to certain restrictions, you can make a
“tax-free” exchange under Section 1035 of the Code for all or a portion of one non-qualified annuity contract for another, or all of a life insurance policy for a non-qualified annuity contract. Before making an exchange, you should compare
both contracts carefully. Remember that if you exchange a life insurance policy or annuity contract for the Contract described in this prospectus:
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you might have to pay a withdrawal charge on your previous contract,
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you are subject to an MVA for this Contract, which can be negative,
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other fees and expenses under this Contract may be higher (or lower),
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the benefits may be different, and
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you no longer have access to any benefits from your previous contract.
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If the exchange does not qualify for Section 1035
treatment, you also may have to pay federal income tax, including a possible additional federal tax, on the exchange. You should not exchange an existing life insurance policy or another annuity contract for this Contract unless you determine
the exchange is in your best interest and not just better for the person selling you the Contract. You should consult a tax adviser to discuss the potential tax effects before making a 1035 exchange.
12. Other
Information
The Registered Separate Account
We established Allianz Life Variable Account B
(the Separate Account) as a separate account under Minnesota insurance law on May 31, 1985. The Separate Account is registered with the SEC as a unit investment trust under the Investment Company Act of 1940. The SEC does not supervise our
management of the Separate Account.
The Separate Account holds the AZL Government
Money Market Fund's shares that have been purchased with Contract assets. We keep the Separate Account assets separate from the assets of our general account and other separate accounts, including the non-unitized separate accounts we
established in connection with the Index Options. The Separate Account is divided into subaccounts, each of which invests exclusively in a variable investment option. The only currently available variable investment option is the AZL Government
Money Market Fund.
We own the assets of the Separate Account. We
credit gains to or charge losses against the Separate Account, whether or not realized, without regard to the performance of other investment accounts. The Separate Account’s assets are insulated, so that the assets cannot be used to pay any of
our liabilities, other than those arising from the investment of Contract assets in the AZL Government Money Market Fund.
If the Separate Account’s assets exceed the
required reserves and other liabilities, we may transfer the excess to our general account, to the extent of seed money invested by us or earned fees and expenses. The obligations under the Contracts are obligations of Allianz Life.
Our General Account
Our general account holds all our assets other
than assets in our separate accounts. We own our general account assets, and, subject to applicable law, have sole investment discretion over them. The assets are subject to our general business operation liabilities and claims of our creditors
and may lose value. We have not registered our general account as an investment company under the Investment Company Act of 1940.
Our general account assets fund guarantees
provided in the Contracts, including obligations associated with Income Payments and the death benefit. Contract Value that you apply to Annuity Payments becomes part of our general account.
Our Unregistered Separate Account
We hold the assets you allocate to the Index
Options in Separate Account IANA, which we established under Minnesota Insurance Law for the purpose of supporting our obligations to pay Credits. We invest the assets in Separate Account IANA in hedging instruments, including derivative
hedging instruments such as put and call options, as well as cash and fixed income securities. Like our general account, the assets in Separate Account IANA are subject to our general business
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
operation liabilities and the claims of our creditors. An Owner
who allocates Contract Value to an Index Option does not have any interest in or claim on the assets in Separate Account IANA. In addition, neither the Owner nor these Index Options participate in any way in the performance of assets held in
Separate Account IANA.
Distribution
Allianz Life Financial Services, LLC (ALFS), a
wholly owned subsidiary of Allianz Life Insurance Company of North America, serves as principal underwriter for the Contracts. ALFS is a limited liability company organized in Minnesota, and is located at 5701 Golden Hills Drive, Minneapolis,
MN 55416. ALFS is registered as a broker-dealer with the SEC under the Securities Exchange Act of 1934, as well as with the securities commissions in the states in which it operates, and is a member of the Financial Industry Regulatory
Authority (FINRA). ALFS is not a member of Securities Investors Protection Corporation. More information about ALFS is available at www.finra.org or by calling 1-800-289-9999. You also can obtain an investor brochure from FINRA describing its
Public Disclosure Program.
We have entered into a distribution agreement
with ALFS for the distribution of the Contracts. ALFS also may perform various administrative services on our behalf.
We may fund ALFS operating and other expenses,
including:
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overhead,
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legal fees,
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accounting fees,
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Financial Professional training,
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compensation for the ALFS management team, and
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other expenses associated with the Contracts.
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Financial Professionals and their managers may
also be eligible for various benefits, such as production incentive bonuses, insurance benefits, and non-cash compensation items that we may provide jointly with ALFS. Non-cash items include conferences, seminars and trips (including travel,
lodging and meals in connection therewith), entertainment, awards, merchandise and other similar items.
ALFS does not itself sell the Contracts to
customers. Rather, customers typically are working with a Financial Professional who is registered as an investment adviser, or is an investment advisory representative of a registered investment adviser, and who is offering advisory services
for a fee. A Financial Professional may also be a registered representative of a broker-dealer.
We do not pay sales commissions in connection
with sales of the Contracts. Rather, you pay an investment advisory fee to your Financial Professional. We do not set your investment advisory fee or receive any part of it. You should ask your Financial Professional about compensation they
receive in connection with this Contract.
The AZL Government Money Market Fund assesses a
Rule 12b-1 fee of 0.25% of the fund’s average daily net assets for the most recent calendar year. This fee is paid to ALFS as consideration for providing distribution and certain other services and incurring certain expenses permitted under the
fund’s plan.
In certain instances, an investment adviser
and/or subadviser (and/or their affiliates) of an Investment Option may make payments for administrative services to ALFS or its affiliates.
Broker-dealers and investment advisers involved
in sales of the Contracts may receive payments from us for administrative and other services that do not directly involve the sale of the Contracts, including payments made for recordkeeping, the recruitment and training of personnel,
production of promotional literature and similar services.
We and/or ALFS may pay certain selling firms
additional marketing support allowances for:
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marketing services and increased access to their Financial Professionals;
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sales promotions relating to the Contracts;
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costs associated with sales conferences and educational seminars;
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the cost of client meetings and presentations; and
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other sales expenses incurred by them.
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We retain substantial discretion in determining
whether to grant a marketing support payment to a particular broker-dealer firm and the amount of any such payment.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
We may also make payments for marketing and
wholesaling support to broker-dealer affiliates of variable investment options that are available through the variable annuities we offer.
Additional information regarding marketing
support payments can be found in the Distributor section of the Statement of Additional Information.
A portion of the payments made to broker-dealer
and investment advisory firms may be passed on to their Financial Professionals. Financial Professionals may receive cash and non-cash compensation and other benefits. Ask your Financial Professional for further information about what they and
their firm may receive in connection with your purchase of a Contract.
We offer the Contracts to the public on a
continuous basis. We anticipate continuing to offer the Contracts but reserve the right to discontinue the offering.
Additional Credits for Certain Groups
We may credit additional amounts to a Contract
instead of modifying charges because of special circumstances that result in lower sales or administrative expenses or better than expected mortality or persistency experience.
Administration/Allianz Service Center
The Allianz Service Center performs certain
administrative services regarding the Contracts and is located at 5701 Golden Hills Drive, Minneapolis, Minnesota. The Service Center mailing address and telephone number are listed at the back of this prospectus. The administrative and routine
customer services performed by our Service Center include processing and mailing of account statements and other mailings to Owners, responding to Owner correspondence and inquiries. Allianz Life also contracts with Tata Consultancy Services
(Tata) located at #42(P) & 45(P), Think Campus, Electronic City, Phase II, Bangalore, Karnataka 560100, India, to perform certain administrative services including:
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issuance and maintenance of the Contracts,
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maintenance of Owner records, and
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routine customer service including:
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processing of Contract changes,
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processing withdrawal requests (both partial and total), and
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processing requests for fixed annuity payments.
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Services performed by Tata are overseen and
quality control checked by our Service Center.
To reduce expenses, only one copy of most
financial reports and prospectuses, including reports and prospectus for the AZL Government Money Market Fund, may be mailed to your household, even if you or other persons in your household have more than one contract issued by us or our
affiliate. Call our Service Center at the toll-free telephone number listed at the back of this prospectus if you need additional copies of financial reports, prospectuses, or annual and semiannual reports, or if you would like to receive one
copy for each contract in future mailings.
Legal Proceedings
We and our subsidiaries, like other life
insurance companies, from time to time are involved in legal proceedings of various kinds, including regulatory proceedings and individual and class action lawsuits. In some legal proceedings involving insurers, substantial damages have been
sought and/or material settlement payments have been made. Although the outcome of any such proceedings cannot be predicted with certainty, we believe that, at the present time, there are no pending or threatened legal proceedings to which we,
the Separate Account, or ALFS is a party that are reasonably likely to materially affect the Separate Account, our ability to meet our obligations under the Contracts, or ALFS ability to perform its obligations.
Status Pursuant to Securities Exchange Act of
1934
Allianz Life hereby relies on the exemption
provided by Rule 12h-7 under the Securities Exchange Act of 1934 from the requirement to file reports pursuant to Section 15(d) of that Act.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
13. Information
on Allianz Life
Allianz Life is a stock life insurance company
organized under the laws of the State of Minnesota in 1896. Our address is 5701 Golden Hills Drive, Minneapolis, MN 55416. We are a wholly owned subsidiary of Allianz of America, Inc. (AZOA), a financial holding company. AZOA is a wholly owned
subsidiary of Allianz Europe, B.V., which in turn is a wholly owned subsidiary of Allianz SE, which is registered in Munich, Germany. We currently offer fixed index annuities, individual life insurance, and registered index-linked annuities. We
are licensed to do direct business in 49 states and the District of Columbia.
Directors, Executive Officers and Corporate
Governance
BOARD OF DIRECTORS
The Board currently consists of seven members,
including our Chair, our President and Chief Executive Officer, our Chief Financial Officer and Treasurer, three independent outside board members, and one non-independent board member. Age and positions are provided as of December 31, 2020,
except as otherwise noted.
The Board holds regular quarterly meetings,
generally in February, April/May, July/August, and October/November of each year, and holds special meetings or takes action by unanimous written consent as circumstances warrant. The Board has standing Executive, Audit, and Nomination,
Evaluation and Compensation Committees, each of which is described in further detail below. In 2020, the Board acted four times by unanimous written action.
The current members of our Board are as follows.
Jacqueline Hunt
Director and Chair of the Board
Jacqueline Hunt, age 52, currently serves as the
Chair of Allianz Life’s Board of Directors and as the Chair of its Executive Committee since July 22, 2016. Ms. Hunt also serves as the Chair of the Board of Management of Allianz Asset Management GmbH, and is a member of the Board of
Management of Allianz SE, Asset Management, US Life Insurance, respectively. Ms. Hunt also serves as the Chair and the President of Allianz Foundation for North America. Ms. Hunt also serves as a member of the Board of Trustees of the American
Institute for Contemporary German Studies since June 2017. Previously, Ms. Hunt served as the Executive Director of Prudential plc and the Chief Executive of Prudential UK, Europe and Africa from 2013 to 2016.
Ms. Hunt brings to the Board extensive experience
in the financial services and insurance industries, as well as extensive experience in investments and asset management, including serving as a Member of the Board of Management of Allianz SE, Asset Management, US Life Insurance.
Walter R. White
Director, President, and Chief Executive Officer
Walter R. White, age 64, joined Allianz Life in
2009, and currently serves as the President and Chief Executive Officer, as a member of the Board of Directors and as a member of its Executive Committee since January 1, 2012. Mr. White also serves as the Chair of the Board and the Chief
Executive Officer of Allianz Life Insurance Company of New York (Allianz Life of New York) and as Chair of its Conflict of Interest and Executive Committees. Mr. White also serves as a Director and President of AZOA Services Corporation and as
the Chair of its Shared Plans Management Committee. Mr. White also serves as a Governor of Allianz Individual Insurance Group, LLC, Allianz Investment Management U.S. LLC and TruChoice Financial Group, LLC, respectively. In addition, Mr. White
serves as a Director of Questar Capital Corporation, and Questar Agency, Inc., respectively. Mr. White is responsible for leading and overseeing Allianz Life and Allianz Life of New York and providing strategic management and direction. Mr.
White previously served as the Chair, Chief Executive Officer and President of Allianz Life and Annuity Company from 2012 to 2017 and as a Governor of Allianz Investment Management LLC from 2017 to 2020.
Mr. White brings to the Board extensive financial
services and brokerage experience as well as key strategic planning and leadership skills developed as the Chief Executive Officer of Allianz Life and the former President of Woodbury Financial.
Mr. White shared his plans to retire as of
December 31, 2021. Mr. White will be stepping down as President and Chief Executive Officer of Allianz Life as well as Chair and member of the Board, and Chief Executive Officer of Allianz Life of New York on September 1, 2021, and will be
replaced by Jasmine M. Jirele, Senior Vice President, Chief Growth Officer of Allianz Life, subject to standard regulatory filings. After his retirement, Mr. White will be nominated to continue to serve as a member of the Allianz Life Board of
Directors.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
William E. Gaumond
Director, Senior Vice President, Chief Financial Officer and Treasurer
William E. Gaumond, age 47, joined Allianz Life
in 2004 and currently serves as Senior Vice President, Chief Financial Officer and Treasurer, and as a member of the Board of Directors since January 1, 2016. Mr. Gaumond also serves as a Director, the Chief Financial Officer and Treasurer and
as a member of the Executive Committee and Chair of the Finance Committee of Allianz Life of New York. Mr. Gaumond also serves as the Chief Financial Officer and Treasurer of Allianz Foundation for North America, and as a Governor of TruChoice
Financial Group, LLC, Allianz Life Financial Services, LLC and Allianz Investment Management U.S. LLC, respectively. Mr. Gaumond also serves as a Director and President of Allianz Fund Investments, Inc., AZL PF Investments, Inc., Dresdner
Kleinwort Pfandbriefe Investments II, Inc. and PFP Holdings, Inc., respectively. Mr. Gaumond is also a Director of Questar Agency, Inc., Questar Asset Management, Inc., Questar Capital Corporation, Yorktown Financial Companies, Inc., Allianz of
America, Inc., Allianz Real Estate of America LLC, and Allianz Technology of America, Inc., respectively. Mr. Gaumond is also a Director and the Senior Vice President of AZOA Services Corporation. Mr. Gaumond also serves as a Director and the
Chief Financial Officer and Treasurer of Allianz Finance Corporation. Mr. Gaumond is responsible for all finance and risk management functions, with oversight of the controller, financial planning, treasury, and corporate risk management areas.
Prior to his current roles, Mr. Gaumond spent 12 years in a number of finance and investment-related positions at Allianz Life and its affiliates in various executive capacities.
Mr. Gaumond brings to the Board extensive
financial services, investment, and insurance industry experience, including serving as Chief Financial Officer and Treasurer of Allianz Life and Allianz Life of New York.
Howard E. Woolley
Director
Howard E. Woolley, age 63, joined Allianz Life’s
Board of Directors on May 1, 2020. Mr. Woolley is a member of Allianz Life’s Nomination, Evaluation and Compensation Committee and its Audit Committee. Mr. Woolley also serves on the Board of Trustees for Johns Hopkins Medicine and Syracuse
University, is co-chair of the Johns Hopkins University & Medicine External Affairs Committee, and serves on the Syracuse University Audit and Academic Affairs Committees. Mr. Woolley also serves as Chair of the Nominations and Governance
Committee and is a member of the Audit Committee for telecommunications company SOMOS Inc. Mr. Woolley is an NACD Governance Fellow and an international member of the Australian Institute of Company Directors. In 2015, Mr. Woolley formed Howard
Woolley Group LLC, a strategic business and public policy firm serving leading technology and wireless industry clients, and serves as its President, Principal. Prior to that, Mr. Woolley was Senior Vice President for Verizon Communications
from 1993 to 2013 and served as public policy advisor to CEOs of Verizon Wireless from 2000 to 2013.
Mr. Woolley brings to the Board more than 20
years of extensive board experience and brings a wealth of experience and insights in several areas, including risk management.
Udo Frank
Director
Udo Frank, age 61, joined Allianz Life’s Board of
Directors on May 1, 2015 and also serves as the Chair of its Audit Committee and as a member of its Nomination, Evaluation and Compensation Committee and its Executive Committee. Mr. Frank has over 30 years of experience in the financial
services and insurance industries. Mr. Frank worked for various Allianz SE investment and asset management affiliates from 1994 to 2014, including serving in numerous executive positions. In 2001, Mr. Frank was appointed as the Global Chief
Executive Officer of RCM Capital Management, LLC. In 2012, he was appointed the Head of Product Management and Chief Marketing Officer of Allianz Global Investors – U.S.
Mr. Frank brings to the Board extensive
experience in the financial services and insurance industries, as well as extensive experience in investments and asset management.
Kevin E. Walker
Director
Kevin E. Walker, age 58, joined Allianz Life’s
Board of Directors on May 23, 2017, and also serves as the Chair of its Nomination, Evaluation and Compensation Committee and as a member of its Audit Committee. Mr. Walker also serves as a member of the Board of Directors of Allianz Life of
New York since October 1, 2018, and is a member of its Audit and Evaluation Committee and its Executive Committee. Mr. Walker serves as the Chair and Director of Allianz Reinsurance America, Inc., and is a member of its Audit Committee since
January 1, 2017. Mr. Walker has over 30 years of insurance and financial services experience. Mr. Walker previously served at various Allianz affiliates throughout his career, most
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
recently as the President and Chief Executive Officer of Allianz
Reinsurance America, Inc. from 2015 to 2016. Mr. Walker has also served as a director and officer for several other Allianz affiliates.
Mr. Walker brings to the Board extensive
experience in the insurance industry, as well as extensive experience in finance and operations.
Anna Sophie Herken
Director
Anna Sophie Herken, age 49, joined Allianz Life’s
Board of Directors on October 1, 2019. Ms. Herken also serves as the Business Division Head of Allianz Asset Management GmbH since April of 2018. Ms. Herken also serves as a board member of CPIC Fund Management Ltd. since July 2019. Prior to
that, Ms. Herken was Chief Financial Officer and Chief Operating Officer of Hasso Plattner Capital Germany from 2016 to 2018 and Managing Director of Hertie School of Governance GmbH from 2011 to 2016. Ms. Herken holds a MBA from the
University of Cambridge, Law and Judge Degrees.
Ms. Herken brings to the Board extensive
experience in the financial service industry, as well as extensive experience in working for international financial organizations with a focus on finance and asset management.
EXECUTIVE OFFICERS
The current executive officers (other than
Messrs. White and Gaumond) are as follows. Age and positions are provided as of December 31, 2020, except as otherwise noted.
Eric J. Thomes
Senior Vice President, Chief Distribution Officer
Eric J. Thomes, age 48, joined Allianz Life in
1995 and currently serves as the Senior Vice President, Chief Distribution Officer of Allianz Life since April 1, 2019. Mr. Thomes also serves as the President and a Director of Allianz Life of New York. Mr. Thomes also serves as a Governor,
and as the Chief Executive Officer and Chief Manager of Allianz Life Financial Services, LLC. Mr. Thomes also serves as a Governor of Allianz Individual Insurance Group, LLC, and TruChoice Financial Group, LLC, respectively. He also serves as
the Chair and as a Director of Yorktown Financial Companies, Inc., Questar Agency, Inc., Questar Asset Management, Inc., and Questar Capital Corporation, respectively. Mr. Thomes is responsible for the development, design and implementation of
Allianz Life’s and Allianz Life of New York’s sales and distribution strategies. Prior to his current roles, Mr. Thomes served as the Field Senior Vice President, FMO Sales from 2009 to 2019. Mr. Thomes also served as the President of Allianz
Individual Insurance Group, LLC from 2005 to 2018.
Gretchen Cepek
Senior Vice President, General Counsel and Secretary
Gretchen Cepek, age 52, joined Allianz Life in
2009 and currently serves as Senior Vice President, General Counsel and Secretary since February 17, 2012. In this role, Ms. Cepek is responsible for the legal, ethics and compliance departments as well as government relations and the special
investigations unit. Ms. Cepek also serves as the Chief Legal Officer and Secretary and as a member of the Conflict of Interest Committee of Allianz Life of New York, and General Counsel and Secretary of AZOA Services Corporation. Previously,
Ms. Cepek served as the Secretary for Allianz Life and Annuity Company from 2012 to 2017. Ms. Cepek received her J.D. from Valparaiso University School of Law in 1993.
Jasmine M. Jirele
Senior Vice President, Chief Growth Officer
Jasmine M. Jirele, age 43, joined Allianz Life in
2018 and currently serves as the Senior Vice President, Chief Growth Officer of Allianz Life since October 1, 2018. Ms. Jirele leads strategy, new markets, global business development, product innovation, marketing, digital and experience
management, Allianz Ventures, strategic communication and sponsorships, and enterprise agile for Allianz Life. Previously, Ms. Jirele was an executive vice president within Wells Fargo's Consumer Bank division, and was previously a senior vice
president in Wells Fargo's Wealth and Investment Management division. Prior to that, Ms. Jirele spent nine years at Allianz Life as the Senior Vice President of Enterprise Operations from 2012 to 2015, Vice President of Market Management and
Product Innovation from 2009 to 2012, Director of Executive Projects from 2007 to 2009, and Director of Marketing/Communications from 2006 to 2007, respectively.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
On September 1, 2021, Ms. Jirele will be a member
of the Board, and President and Chief Executive Officer of Allianz Life as well as Chair and member of the Board, and Chief Executive Officer of Allianz Life of New York, subject to standard regulatory filings.
Catherine A. Mahone
Senior Vice President, Chief Administrative Officer
Catherine A. Mahone, age 56, joined Allianz Life
in 2008 and currently serves as the Senior Vice President, Chief Administrative Officer since January 16, 2012. Ms. Mahone is also the Chief Administrative Officer of Allianz Life of New York, and serves as a Governor of Allianz Life Financial
Services, LLC. Ms. Mahone is responsible for the oversight of enterprise operations, information technology, and other strategic business initiatives. Previously, Ms. Mahone served as the Senior Vice President, Enterprise Operations from 2008
to 2012, and as a Director of Allianz Technology of America, Inc. from 2013 to 2015.
Neil H. McKay
Senior Vice President, Chief Actuary
Neil H. McKay, age 59, joined Allianz Life in
1999 and currently serves as the Senior Vice President, Chief Actuary of Allianz Life since May 15, 2000. Mr. McKay also currently serves as the Chief Actuary of Allianz Life of New York since April 8, 2014. Mr. McKay served as a Director and
the Chief Actuary of Allianz Life and Annuity Company from 2007 to 2017. Mr. McKay is responsible for all of the actuarial functions of Allianz Life and Allianz Life of New York, including the actuarial assumptions underlying its products and
the rate setting associated with existing and new products.
Todd M. Hedtke
Senior Vice President, Chief Investment Officer
Todd M. Hedtke, age 48, joined Allianz Life in
2000 and currently serves as the Senior Vice President, Chief Investment Officer since August 21, 2015. He also currently serves as the Chief Investment Officer of Allianz Life of New York. Mr. Hedtke also serves as a Governor and Chief
Executive Officer of Allianz Investment Management LLC and Allianz Investment Management U.S. LLC, and the Chief Investment Officer of Allianz Life Insurance Company of Missouri, respectively. Mr. Hedtke is a Director and President of Allianz
Finance Corporation, and a Director, Vice President and Treasurer of Allianz Fund Investments Inc., AZL PF Investments Inc., and Dresdner Kleinwort Pfandbriefe Investments II Inc., respectively. Mr. Hedtke also serves as Chair of the Benefit
Plans Investment Committee for AZOA Services Corporation. Mr. Hedtke leads the investment management, liquidity planning, hedging, and trading functions at Allianz Life. Mr. Hedtke is also a member of the global Allianz Investment Management
Board, which serves the Allianz Group of insurance companies. Prior to his current roles, Mr. Hedtke spent 15 years in a number of investment-related positions at Allianz Life and its affiliates, including as a Director and the Chief Investment
Officer of Allianz Life and Annuity Company from 2015 to 2017 and as the Chief Investment Officer of Allianz Annuity Company of Missouri from 2015 to 2019, respectively.
Jenny L. Guldseth
Senior Vice President, Chief Human Resources Officer
Jenny L. Guldseth, age 45, joined Allianz Life in
2005 and currently serves as the Senior Vice President, Human Resources Officer since January 1, 2019. In this position, Ms. Guldseth is responsible for setting strategy and leading the Human Resources and Facilities departments to improve
business results and increase employee engagement. Ms. Guldseth is also a Director of the Allianz Foundation for North America. Ms. Guldseth also serves as the Chief Human Resources Officer of AZOA Services Corporation and is the Chair of its
Employee Benefits Administration Committee and a member of its Benefit Plans Investment Committee and its Shared Plans Management Committee, respectively. Ms. Guldseth has over ten years of experience at Allianz Life, including having served as
the Vice President, Rewards and Performance from 2017 to 2018, the Assistant Vice President of Rewards and Performance from 2013 to 2017, and Manager, Human Resource Business Partner from 2010 to 2013. In these positions, she was responsible
for the Performance and Compensation functions for Allianz Life and the benefits functions for multiple U.S.-based affiliate companies.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
CORPORATE GOVERNANCE
Committees of the Board
The Executive Committee of the Board (“Executive
Committee”) is currently composed of Ms. Hunt (Chair) and Messrs. White and Frank (who replaced Mr. Clark as a member as of May 1, 2020). The function of the Executive Committee is to exercise the authority of the Board between meetings of the
Board, with the exceptions set forth in Allianz Life’s By-Laws. The Executive Committee did not meet in 2020.
The Audit Committee of the Board is currently
composed of Messrs. Frank (Chair), Walker and Woolley (who replaced Mr. Clark as a member as of May 1, 2020). The Audit Committee is responsible for overseeing Allianz Life’s accounting and financial reporting and control processes on behalf of
the Board, which includes assisting with Board oversight of (1) quality and integrity of Allianz Life’s financial statements, (2) Allianz Life's compliance with legal and regulatory requirements, (3) the qualifications, independence and fees of
the independent-auditors, (4) Allianz Life’s system of internal controls and (5) the performance of Allianz Life's internal audit function. The Board has determined that each member of the Audit Committee is financially literate. The Audit
Committee met four times in 2020.
The Nomination, Evaluation and Compensation
Committee (NEC Committee) is currently composed of Messrs. Walker (Chair) (who replaced Mr. Clark as Chair as of May 1, 2020), Frank and Woolley (who was appointed as a member as of May 1, 2020). The NEC Committee’s purpose is to (1) nominate
candidates for director for election, (2) evaluate the performance of officers deemed to be “principal officers,” and (3) recommend to the Board the selection and compensation of the “principal officers.” The NEC Committee met once in 2020.
Independence of Certain Directors
Allianz Life is not subject to the independence
standards of the New York Stock Exchange or any other national securities exchange, but is subject to the independence standards required under the Model Audit Rule. Applying the independence standards of the Model Audit Rule to the current
members of the Board, the Board has determined that (1) Messrs. Frank, Walker and Woolley are “independent” under the Model Audit Rule, and (2) Mr. Clark was “independent” under those standards through his resignation date of April 30, 2020.
Code of Ethics
All of our officers and employees, including our
Chief Executive Officer, Chief Financial Officer and Controller, are subject to Allianz Life’s Code of Ethics.
Executive Compensation
Compensation
Discussion and Analysis
In this section, we provide an overview of the
goals and principal components of our executive compensation program and describe how we determine the compensation of our “Named Executive Officers” or “NEOs.” For 2020, our NEOs were:
•
|
Walter R. White, President and Chief Executive Officer
|
•
|
William E. Gaumond, Senior Vice President, Chief Financial Officer and Treasurer
|
•
|
Eric J. Thomes, Senior Vice President, Chief Distribution Officer
|
•
|
Jasmine M. Jirele, Senior Vice President, Chief Growth Officer
|
•
|
Neil H. McKay, Senior Vice President, Chief Actuary
|
The details of each NEO’s compensation may be
found in the Summary Compensation Table and other compensation tables included in this Executive Compensation section.
Executive
Summary
Allianz Life’s compensation programs are intended
to align our NEOs’ interests with those of our ultimate stockholder, Allianz SE, the ultimate parent company of Allianz Life. Allianz Life's compensation programs are designed to reward performance that meets or exceeds the goals established by
the Compensation Committee, a management committee of Allianz Life. Allianz Life is tasked with establishing the executive compensation philosophy. In line with Allianz Life’s compensation philosophy described below, the total compensation
received by our NEOs will vary based on individual and corporate performance in light of annual and long-term performance goals. Our NEOs’ total compensation is composed of a mix of annual base salary, annual cash awards based on corporate
objectives and executive performance factors and long-term equity incentive awards in the form of restricted stock units of the equity securities of Allianz SE.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Compensation
Philosophy and Strategy
Overview
The overriding goal of Allianz Life’s executive
compensation programs is to attract, retain and motivate top-performing executive officers who will dedicate themselves to long-term financial and operational success. To this end, Allianz Life has structured the executive compensation programs
to foster a pay-for-performance management culture by:
•
|
providing total compensation opportunities that are competitive with the levels of total compensation available at the large diversified financial services companies with which Allianz Life most directly competes in the
marketplace;
|
•
|
setting performance metrics and objectives for variable compensation arrangements that reward executives for attaining both annual targets and 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 Components
To support this pay-for-performance strategy,
Allianz Life’s total compensation program provides a mix of compensation components that bases the majority of each executive’s compensation on their success and on an assessment of each executive’s overall contribution to that success.
Compensation Element
|
Description
|
Objective
|
Base Salary
|
Fixed rate of pay that compensates employees for fulfilling their basic job responsibilities. For NEOs, increases are
generally provided in the case of a significant increase in responsibilities or a significant discrepancy versus the market.
|
Attract and retain high-caliber leadership.
|
Annual Incentive Plan
|
Incentive compensation that promotes and rewards the achievement of annual performance objectives through awards under the
Allianz Life Annual Incentive Plan (“AIP”).
|
• Link compensation to annual performance results.
• Attract and motivate high-caliber leadership.
• Align the interests of NEOs and our stockholder.
|
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 long term performance objectives.
|
• Retain high-caliber leadership with multi-year vesting.
• Align the interests of NEOs and our stockholder.
|
Severance Arrangements
|
Severance payments to employees, including NEOs, under certain company-initiated termination events.
|
Compensate employees for situations where the employee’s employment is involuntarily terminated in a qualifying termination of employment.
|
Perquisites-Benefits
|
Perquisites provided to our NEOs include employer matching contributions to the NEOs’ accounts in the 401(k)
plan and may also include the payment of life insurance premiums, relocation reimbursements, and reimbursements for financial planning, tax preparation services, and spousal travel expenses.
|
Provide market competitive total compensation package.
|
In addition, Allianz Life offers all employees,
including our NEOs, broad-based benefits, including comprehensive medical, dental and vision insurance, group term life insurance and participation in a 401(k) plan.
How
Compensation Decisions Are Made
Role of the Board of Directors and Compensation
Committee
The framework governing the executive
compensation policies for Allianz Life, except as such policies relate to the compensation for the Chief Executive Officer, is set through the Compensation Committee of Allianz Life. Decisions affecting the compensation of the Chief Executive
Officer are outside the scope of the Allianz Life Compensation
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Committee. Any such decisions are made by Allianz SE, subject to
review by the NEC Committee, and final approval by Allianz Life’s Board of Directors. With respect to the compensation of other “principal officers” selected by the Board for purposes of the duties of the NEC Committee under Minn. Stat. §
60D.20, subd. 3(d), the Compensation Committee’s decisions are similarly subject to review by the NEC Committee and final approval by Allianz Life’s Board. The “principal officers” include the Chief Executive Officer, Chief Financial Officer,
and General Counsel. Allianz Life’s Board has delegated the following responsibilities to the Compensation Committee:
•
|
In general, establish the compensation philosophy and strategy of Allianz Life and oversee the development and implementation of compensation, benefit, and perquisite programs for corporate executives consistent with the
principles of ensuring that leadership is compensated effectively in a manner consistent with the stated compensation strategy, internal equity considerations, competitive practices, shareholder interests, and the requirements of any
applicable regulatory bodies in order to attract and retain high-quality leadership. This responsibility includes periodic review of Allianz Life’s compensation programs to pursue certain goals, with the expectation that changes will be
made periodically to ensure these goals are attained.
|
•
|
Review and approve the establishment of, or material modification to, any executive incentive compensation plans or programs for Allianz Life.
|
•
|
Review and approve any special benefits or perquisites in effect for, or offered to, any prospective, current or former Allianz Life employee, regardless of the employee’s level or assignment within Allianz Life. Such
benefits and perquisites are those that are unusual or different from the benefits offered to all similarly-situated employees.
|
•
|
Review and approve any employment agreements proposed to be made with any prospective or current employee of Allianz Life.
|
•
|
Review and approve any individual severance agreement with any Allianz Life officer. This does not include an arrangement where the employee receives severance or incentive payments under existing terms of a broad-based
benefit or compensation plan.
|
•
|
Oversee Allianz Life’s compliance with regulations with respect to compensation matters and adopt and monitor adherence to global and local process requirements and timelines, including those required
under the Corporate Rules (as defined under the Allianz Life Standard for Corporate Rules) mandated by Allianz SE.
|
The Compensation Committee will at all times be
composed of at least three members who are appointed by the full Board of Directors of Allianz Life. The Compensation Committee currently consists of the following members: the Chair of the Board, the Chief Executive Officer, and the Chief
Human Resources Officer. The Compensation Committee also utilizes internal personnel to provide advice to the Compensation Committee regarding market trends in compensation policies at competing companies and on a more macro level.
Following its review and decision, the
Compensation Committee produces and submits a report on executive compensation to Allianz Life’s Board of Directors at its request. With respect to the compensation of “principal officers” selected by Allianz Life’s Board for purposes of the
duties of the NEC Committee under Minnesota Statutes § 60D.20, subd. 3(d), the Compensation Committee produces and submits a report on executive compensation proposed for the designated “principal officers” to the NEC Committee for its review
and recommendation to Allianz Life’s Board for final approval.
Role of the Chief Executive Officer
Our Chief Executive Officer assists the
Compensation Committee in its review of the total compensation of all the NEOs except himself. He provides the Compensation Committee with his assessment of their performances relative to the corporate and individual goals and other
expectations set for them for the preceding year. He then provides his recommendations for each NEO’s total compensation and the appropriate goals for each in the year to come. However, the Compensation Committee is not bound by his
recommendations.
Role of Allianz Life’s Human Resources
Allianz Life’s Human Resources supports the
Compensation Committee on executive compensation matters by being responsible for many of the organizational and administrative tasks that underlie the compensation review and determination process and making presentations on various topics.
Allianz Life’s Human Resources efforts include, among other things:
•
|
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;
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
•
|
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.
|
Allianz Life’s Human Resources officers also
coordinate and share information with their counterparts at Allianz SE.
Use of
Competitive Compensation Data
Because Allianz Life competes most directly for
executive talent with other large diversified financial services companies, Allianz Life regards it as essential to regularly review the competitiveness of the total compensation programs for executives to ensure that Allianz Life provides
compensation opportunities that compare favorably with the levels of total compensation offered to similarly situated executives by other companies that participate in the compensation surveys in which Allianz Life participates. Allianz Life
relies primarily on external market surveys of corporate compensation and benefits published by various national compensation consulting firms, especially salary surveys focusing on insurance companies. In addition, other factors taken into
account include the average revenues and number of employees of companies that participate in such surveys.
All these information sources are employed to
measure and compare actual pay levels not only on an aggregate, total compensation basis, but also to break down the total compensation program component by component to review and compare specific compensation elements as well as the
particular mixes of fixed versus variable, short-term versus long-term, and cash versus equity-based compensation at the surveyed companies. This information, as collected and reviewed by Allianz Life’s Human Resources, is submitted to the
Compensation Committee for review and discussion.
Internal Pay Equity Analysis
Allianz Life’s compensation programs are designed
with the goal of providing compensation to our NEOs that is fair, reasonable, and competitive. To achieve this goal, Allianz Life believes it is important to compare compensation paid to each NEO not only with compensation paid by the surveyed
companies, as discussed above, but also with compensation paid to each of our other NEOs. Such an internal comparison is important to ensure that compensation is equitable among our NEOs.
Components
of Total Compensation For Our NEOs
Allianz Life provides total compensation to our
NEOs that consists of several components. These components include the three components of the total compensation program (i.e., base salary, annual incentives, and equity) as well as: (i) retirement, health, and other benefit programs; (ii)
severance benefits; and (iii) perquisites.
Base Salary
Allianz Life’s philosophy is to make base salary
a relatively small portion of the overall compensation package for our NEOs, which Allianz Life believes is common in the industry in which we operate. The amount of the base salary awarded to NEOs is based on the position held, the NEO’s
tenure, the scope of the position’s responsibilities, and the NEO’s own performance, all of which are reviewed with the aid of market survey data. Using this data, Allianz Life maintains a 50th percentile pricing philosophy, comparing base
salaries against the median for comparable salaries at surveyed companies, unless exceptional conditions require otherwise.
With respect to the base salary of our Chief
Executive Officer, the Chair of the Board considered the Chief Executive Officer’s experience, performance, and contribution to overall corporate performance when determining his base salary for 2020 for recommendation to the NEC Committee.
Base salaries for our other NEOs for 2020 were also set by the Compensation Committee based upon each NEO’s individual experience and contribution to the overall performance of Allianz Life, and subject to Allianz SE Compensation Committee
reviews and, with respect to the base salaries of “principal officers” selected by Allianz Life’s Board of Directors for purposes of the duties of the NEC Committee under Minnesota Statutes § 60D.20, subd. 3(d), subject to NEC Committee review
and recommendation to Allianz Life’s Board for final approval.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
AIP
Allianz Life offers annual cash bonuses to
certain executive officers under the AIP. The AIP is designed to improve performance and profitability by motivating employees to accomplish organizational objectives and financial goals. Bonus awards that may be paid pursuant to the AIP are
within the sole discretion of the Compensation Committee, and with respect to our CEO, the Chair of the Board, and are intended to:
•
|
reward the performance of participants who have made significant contributions to the achievement of annual goals and objectives;
|
•
|
provide an incentive that will encourage future superior individual performance; and
|
•
|
encourage the retention of employees who have demonstrated exceptional performance and/or are anticipated to significantly contribute to the long-term success of Allianz Life.
|
Following the performance year, the Compensation
Committee approved a specific amount of cash awards to be made pursuant to the AIP to executive officers, including our NEOs, for the 2020 performance year. The amount determined to be available for such awards was at the discretion of the
Compensation Committee and was dependent upon many factors as outlined previously, including, but not limited to, current financial performance and contributions of our NEOs in achieving performance objectives, and with respect to the awards to
the “principal officers” selected by Allianz Life’s Board for purposes of the duties of the NEC Committee under Minnesota Statutes § 60D.20, subd. 3(d), subject to NEC Committee review and recommendation to Allianz Life’s Board for final
approval.
AEI
The AEI is (a) one part of the variable
compensation component for certain individuals within designated classes of employees at Allianz Life or (b) offered by Allianz Life to select senior employees as an additional part of their variable compensation on a case by case basis. The
AEI is granted in the form of restricted stock units of Allianz SE (“RSUs”). The award of RSU’s are intended to:
•
|
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 Allianz.
|
Awards made pursuant to the AEI are based upon
both the performance of Allianz Life and Allianz Life of New York and the performance of the NEO. The Compensation Committee (and, with respect to those NEOs that are “principal officers” for purposes of the NEC Committee’s duties, the NEC
Committee with final approval of Allianz Life’s Board of Directors) reviewed the performance of our NEOs following the end of our 2020 fiscal year relative to the AEI allocation amount.
Benefit Perquisites
Allianz Life provides our NEOs with certain
limited perquisites. All of our employees, including our NEOs, may participate in the qualified 401(k) plan. Allianz Life and Allianz Life of New York generally provide our executive officers, including our NEOs, with a matching contribution up
to $21,375 annually. In addition, Allianz Life and Allianz Life of New York provide excess liability insurance coverage to all of our NEOs and provide financial planning and tax preparation services, relocation reimbursements, and
reimbursements of spousal travel expenses to certain of our NEOs. The incremental costs of perquisites for the NEOs during 2020 are included in the column entitled “All Other Compensation” in the Summary Compensation Table included in this
section.
Certain Retention Arrangements
Allianz Life’s offer letter to our Senior Vice
President, Chief Growth Officer, Jasmine M. Jirele included a retention bonus arrangement related to her onboarding. The retention bonus payments will be paid through 2022 so long as she remains employed with Allianz Life, and the arrangement
requires repayment of certain amounts if Ms. Jirele voluntarily terminates her employment within a certain period.
Severance Arrangements
Allianz Life has entered into an Executive
Severance Agreement with our Director, President, and Chief Executive Officer, Walter R. White, which is described in the “Allianz Life Executive Severance Agreement” discussion later in this section. We have not entered into any other specific
severance agreements with any of our NEOs.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
The remainder of our NEOs are eligible for
severance payments under the Executive Severance Plan if they experience a qualifying termination of employment and otherwise satisfy the conditions set forth in the plan.
Other than the Executive Severance Plan, which is
described later in this section, our NEOs (except for Walter R. White) are not eligible for severance payments. Certain of our executive officers receive offer letters which set forth the terms relating to base salary, sign-on incentives, and
equity compensation. However, Allianz Life does not view these offer letters as employment agreements as each offer letter states that employment with Allianz Life is “at will.”
Other
Compensation Policies
Tax and Accounting Implications
Stock-Based
Compensation. Stock-based compensation, comprised of Allianz SE restricted stock units (RSUs) granted pursuant to the AEI, are accounted for in accordance with the requirements of Financial Accounting Standards Board Accounting
Standards Codification (“FASB ASC”) Topic 718. The fair value of the RSUs at grant is the arithmetic average of the closing prices of an Allianz SE share in the electronic cash market trading system Xetra (or any successor system) on that day
and the nine immediately preceding trading days, less the present value of dividends expected to be paid on one Allianz SE share over the vesting period, and less the fair value of payout restrictions deriving from the vesting period and the
payout cap.
Recently Discontinued Compensation Programs
The purpose of the ALTPUP was to advance the
interests of Allianz Life, including Allianz Life of New York, and our indirect stockholder. The ALTPUP sought to accomplish this purpose by providing an incentive in addition to current compensation to certain individuals within designated
classes of employees of Allianz Life who contribute significantly to their company’s long-term performance. Such incentive was in the form of Long-Term Performance Units ("ALTPUP Units"), which were contingent awards, subject to the terms,
conditions, and restrictions described in the ALTPUP and the Award Agreement under which such awards were made, by which participants in the ALTPUP may have become entitled to receive cash on the payment date for redemption of the ALTPUP Units
valued on the valuation date. The award of ALTPUP Units was discretionary. In March 2020, the Group Compensation Committee determined all Allianz entities would move forward with the Allianz SE long term incentive program or AEI. As a result,
the ALTPUP program has been discontinued and provided a final grant in March 2020 for 2019 performance.
Our Chief Executive Officer received cash awards
pursuant to the terms of the Allianz SE Mid-Term Bonus Plan instead of the ALTPUP. Like the ALTPUP, the Mid-Term Bonus Plan has been discontinued, so the award with respect to 2019 performance was the final award made under the Mid-Term Bonus
Plan.
Summary
Compensation Table
The following table sets forth the compensation
paid by Allianz Life for the year ended December 31, 2020 to our NEOs. The executive compensation information in this prospectus is shown for a one-year period, in accordance with Regulation S-K Item 402, Instruction 1 to Item 402(c).
Name and Principal
Position
(a)
|
Year
(b)
|
Salary
(c)
|
Bonus
(d)
|
Stock
Awards
(e)(2)
|
Non-Equity
Incentive Plan Compensation
(g)
|
All Other
Compensation
(i)(3)
|
Total
(j)
|
Walter R. White
President and Chief Executive Officer
|
2020
|
$865,100
|
N/A
|
$1,593,774
|
$1,062,516
|
$27,721
|
$3,549,111
|
William E. Gaumond
Senior Vice President, Chief Financial Officer and Treasurer
|
2020
|
$468,885
|
N/A
|
$482,241
|
$321,494
|
$26,300
|
$1,298,920
|
Eric J. Thomes
Senior Vice President, Chief Distribution Officer
|
2020
|
$525,000
|
N/A
|
$699,679
|
$333,119
|
$30,427
|
$1,588,225
|
Jasmine M. Jirele
Senior Vice President, Chief Growth Officer
|
2020
|
$458,380
|
$200,000(1)
|
$471,436
|
$314,291
|
$22,787
|
$1,466,894
|
Neil H. McKay
Senior Vice President, Chief Actuary
|
2020
|
$510,000
|
N/A
|
$490,212
|
$326,808
|
$27,538
|
$1,354,558
|
(1)
|
A retention bonus of $800,000 will be paid over four years in increments of $200,000 with the first payment paid in March 2019 and the final payment in 2022 so long as Ms. Jirele remains employed by Allianz Life.
|
(2)
|
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 2021 for the 2020 performance year have a March 2025 exercise date.
The grant price of the RSUs was the arithmetic average of the closing prices of an
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
|
Allianz SE share in the electronic cash market trading system Xetra (or any successor system) on the date of grant and the nine immediately preceding trading days, less the present value of dividends expected to be paid
on one Allianz SE share over the vesting period, and less the fair value of the payout restrictions deriving from the vesting period and the payout cap. 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.
|
(3)
|
The following table provides additional details regarding compensation found in the “All Other Compensation” column.
|
|
|
Name
|
Year
|
Spousal
Travel(4)
|
Milestone/
Anniversary/
Recognition(5)
|
Life Insurance
Premiums
|
Employer Match
to 401(k) Plan
|
ASAAP
Contribution(6)
|
Total
|
Walter R. White
|
2020
|
$5,431
|
--
|
$915
|
$21,375
|
--
|
$27,721
|
William E. Gaumond
|
2020
|
$4,257
|
--
|
$668
|
$19,500
|
$1,875
|
$26,300
|
Eric J. Thomes
|
2020
|
$6,445
|
$1,800
|
$807
|
$19,500
|
$1,875
|
$30,427
|
Jasmine M. Jirele
|
2020
|
--
|
$1,000
|
$412
|
$19,500
|
$1,875
|
$22,787
|
Neil H. McKay
|
2020
|
$5,431
|
--
|
$732
|
$21,375
|
--
|
$27,538
|
(4)
|
Represents reimbursement or payments made to defray the costs of a spouse’s travel.
|
(5)
|
Represents Milestone Anniversary Program, which pays a bonus at three and five year anniversaries, and then every five years thereafter.
|
(6)
|
Represents company matching contribution to the Allianz Supplemental Asset Accumulation Plan for deferrals in excess of IRS compensation limit.
|
Performance-Based
Incentive Compensation Plans
AIP
The AIP is intended to provide an incentive that
will encourage superior individual performance and encourage retention of employees who have demonstrated exceptional performance or who are anticipated to significantly contribute to the long-term success of Allianz Life. The AIP seeks to
accomplish this purpose by providing a bonus opportunity to eligible employees who have made significant contributions during the plan year to the achievement of annual goals and objectives. The guidelines for target awards are meant to be
illustrative of competitive market bonuses for similar job levels in the marketplace. While the target awards may be used for illustrative, budget planning, or distribution scenarios, all bonus awards are discretionary and are in no way
guaranteed.
The Compensation Committee or other duly
authorized committee determines allocation of bonus awards to employees. With respect to “principal officers” for purposes of the NEC Committee’s duties, the NEC Committee recommends to Allianz Life’s Board of Directors awards for final
approval.
AEI
The AEI is designed to recognize the
participant’s continuous employment with Allianz Life over the relevant period and shall be an incentive to continue employment. Grants under the AEI will generally only be made if the participant is employed with Allianz Life at the date of
grant. Payments will be made only if the participant remains employed with Allianz Life during the vesting period of the RSU, or leaves employment under circumstances set out in the AEI, including after retirement or early retirement
eligibility, disability, or under certain other circumstances. The securities issuable under the AEI are RSUs. An RSU constitutes the right to receipt of the market value of Allianz SE common stock at the time of exercise. This amount will be
paid in cash. RSUs are subject to a four-year vesting period. At the end of the four-year vesting period, the RSUs are exercised uniformly for all participants, provided they remain employed by Allianz Life, terminate after retirement or early
retirement eligibility, or under certain other circumstances. Vesting and exercise may accelerate if a participant leaves employment under other “good leaver” circumstances set forth in the AEI. The grant at fair value cannot be greater than
165% of a participant’s target amount. The maximum value of an exercise is an increase of 200% over the grant value (i.e., 300% of the grant value).
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Grants of
Plan-Based Awards
The following table provides additional
information about plan-based compensation disclosed in the Summary Compensation Table. This table includes both equity and non-equity awards granted for the year ended December 31, 2020.
Name
(a)
|
Grant Date
(b)
|
Estimated Future Payouts Under Non-Equity Incentive Plan Awards(1),(2)
|
Estimated Future Payouts Under Equity Incentive Plan Awards(3)
|
Threshold ($)
(c)
|
Target ($)
(d)
|
Maximum ($)
(e)
|
Threshold ($)
(f)
|
Target ($)
(g)
|
Maximum ($)
(h)
|
Walter R. White
|
3/5/2021
|
|
|
|
|
|
|
RSUs (under AEI)
|
|
|
|
|
$0
|
$1,557,180
|
$7,708,041
|
AIP Award
|
|
$0
|
$1,038,120
|
$1,712,898
|
|
|
|
William E. Gaumond
|
3/5/2021
|
|
|
|
|
|
|
RSUs (under AEI)
|
|
|
|
|
$0
|
$506,396
|
$2,506,659
|
AIP Award
|
|
$0
|
$337,597
|
$675,194
|
|
|
|
Eric J. Thomes
|
3/5/2021
|
|
|
|
|
|
|
RSUs (under AEI)
|
|
|
|
|
$0
|
$567,000
|
$2,806,650
|
AIP Award
|
|
$0
|
$378,000
|
$756,000
|
|
|
|
Jasmine M. Jirele
|
3/5/2021
|
|
|
|
|
|
|
RSUs (under AEI)
|
|
|
|
|
$0
|
$495,050
|
$2,450,499
|
AIP Award
|
|
$0
|
$330,034
|
$660,067
|
|
|
|
Neil H. McKay
|
3/5/2021
|
|
|
|
|
|
|
RSUs (under AEI)
|
|
|
|
|
$0
|
$550,800
|
$2,726,460
|
AIP Award
|
|
$0
|
$367,200
|
$734,400
|
|
|
|
(1)
|
The target and maximum columns show the target award and maximum award for 2020 for each NEO under the AIP. There is no threshold amount for any participant in the AIP. The actual 2020 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)
|
RSUs have a vesting schedule as disclosed in the footnotes to the Summary Compensation Table. See “Outstanding Equity Awards at December 31, 2020” for disclosure regarding the number of RSUs that are unvested as of
December 31, 2020.
|
(3)
|
The target and maximum columns show the target award and maximum award for 2020 for each NEO under the AEI. There is no threshold amount for any participant in the AEI. The actual 2020 awards granted to
the NEOs are listed in the Stock Awards column of the Summary Compensation Table.
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Outstanding
Equity Awards at December 31, 2020
The following table sets forth the outstanding
equity awards at the December 31, 2020 fiscal year-end. The table shows RSUs granted pursuant to the AEI.
Name
(a)
|
RSUs
|
Number of RSUs
That Have Not
Vested
(g)(1),(2)
|
Market Value of
RSUs That Have
Not Vested
(h)(3)
|
Walter R. White
|
|
|
|
8,161
|
$1,985,898
|
|
7,030
|
$1,710,680
|
|
5,239
|
$1,274,858
|
|
6,097
|
$1,483,644
|
William E. Gaumond
|
|
|
|
1,452
|
$353,330
|
|
2,039
|
$496,170
|
|
1,538
|
$374,257
|
|
1,948
|
$474,026
|
Eric J. Thomes
|
|
|
|
617
|
$150,141
|
|
492
|
$119,723
|
|
457
|
$111,206
|
|
1,474
|
$358,683
|
Jasmine M. Jirele
|
|
|
|
0
|
$0
|
|
0
|
$0
|
|
1,467
|
$356,980
|
|
1,886
|
$458,939
|
Neil H. McKay
|
|
|
|
2,550
|
$620,517
|
|
2,203
|
$536,078
|
|
1,731
|
$421,222
|
|
2,123
|
$516,611
|
(1)
|
Represents unvested RSUs issued pursuant to the AEI. RSUs issued under the AEI during 2020 are subject to a four-year vesting period from the grant date. At the end of the respective vesting period, the RSUs are exercised
uniformly for all participants, provided they remain employed by Allianz Life or terminate after retirement or early retirement eligibility, or under certain other circumstances. Vesting and exercise may accelerate if a participant
leaves employment under other “good leaver” circumstances set forth in the AEI.
|
(2)
|
For each of the NEOs, the number of RSUs listed on the first line were exercised in 2021, the RSUs listed on the second line will exercise in 2022, the RSUs listed on the third line will exercise in 2023, and the RSUs
listed on the fourth line will exercise in 2024.
|
(3)
|
Based on an assumed stock price of $243.34 per share, which was the arithmetic average of the closing prices of an Allianz SE share in the electronic cash market trading system Xetra (or any successor
system) on December 30, 2020 and the nine immediately preceding trading days, converted from Euros into U.S. dollars.
|
Allianz SE
Option Exercises and Stock Grants Vested in 2020
The following table summarizes the value received
from Allianz SE stock grants vested during the year ended December 31, 2020.
Name
|
Stock Awards
|
Number of
Shares
Acquired
on Vesting (#)
|
Value Realized
on Vesting ($)(1)
|
Walter R. White
|
10,097
|
$2,259,088
|
William E. Gaumond
|
721
|
$161,315
|
Eric J. Thomes
|
732
|
$163,777
|
Jasmine M. Jirele
|
-
|
$0
|
Neil H. McKay
|
3,536
|
$791,140
|
(1)
|
Represents Allianz SE RSUs that were exercised during 2020 pursuant to the AEI. Amounts realized were paid in cash.
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Allianz
Life Executive Severance Agreement
Allianz Life has entered into an Executive
Severance Agreement with our Chief Executive Officer, Walter R. White, with an expiration date of December 31, 2021. The severance arrangements for Mr. White are prescribed by the Executive Severance Agreement.
Pursuant to the Executive Severance Agreement,
Mr. White is entitled to a lump sum cash payment of $1,730,200 upon separation in the event he is terminated without “cause”, which is defined as engaging in conduct detrimental to the best interests of the Company (including, but not limited
to, certain specified acts such as commission of a felony, theft, dishonesty, fraud or embezzlement) in the Executive Severance Agreement. In addition, pursuant to the Executive Severance Agreement, Mr. White is also bound by other restrictive
covenants, including covenants relating to confidentiality and non-disparagement. Mr. White would also be entitled to continuation of medical and dental coverage at the employee premium rates for a period of 18 months following termination if
Mr. White timely elects continuation and pays the required premiums.
The remainder of our NEOs are eligible for
severance payments under the Executive Severance Plan if they experience a qualifying termination of employment and otherwise satisfy the conditions set forth in the applicable plan. The terms of this plan are set forth below.
Executive
Severance Plan
Executive officers who have the title of Senior
Vice President or above and report directly to a senior executive officer at a specific level are eligible to receive severance benefits under the Executive Severance Plan if they experience a qualifying termination of employment, meaning an
involuntary termination for any reason other than for “cause” with no offer of an equivalent position, and otherwise satisfy the conditions set forth in the plan. The purpose of the Executive Severance Plan is to provide severance benefits to
executive officers whose employment is involuntarily terminated in a qualifying termination of employment in order to assist with job transition. Pursuant to the Executive Severance Plan, eligible executive officers who are involuntarily
terminated in a qualifying termination of employment will receive a lump sum cash payment equal to one and one-half times their “annual base pay” in effect at the time of termination. Annual base pay, for purposes of this agreement, equals base
salary and excludes special payments, such as bonuses, expense reimbursements, living, or other allowances. Eligible executive officers would also be entitled to continuation of medical and dental coverage at employee premium rates for a period
of 18 months following termination, if the executive officer timely elects continuation coverage and pays the required premiums.
The following table shows the lump sum payments
that would have been payable to each of our NEOs had they been terminated on December 31, 2020 and been eligible for severance payments pursuant to the Executive Severance Plan.
NEOs
|
Lump Sum Payment
|
Walter R. White
|
$1,730,200
|
William E. Gaumond
|
$703,328
|
Eric J. Thomes
|
$787,500
|
Jasmine M. Jirele
|
$687,570
|
Neil H. McKay
|
$765,000
|
(1)
|
Mr. White is not eligible to receive payments pursuant to the Executive Severance Plan. See “Allianz Life Executive Severance Agreement” for information regarding severance payments that Mr. White is eligible to receive
upon termination of service.
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Director
Compensation
The following table provides information on
compensation paid to the directors of Allianz Life for the year ended December 31, 2020.
Name
|
Fees Earned
or Paid in
Cash
($)(1)
|
Total
($)
|
(a)
|
(b)
|
(h)
|
Jacqueline Hunt(2)
Chair of the Board
|
N/A
|
N/A
|
Walter R. White(3)
President and Chief Executive Officer
|
N/A
|
N/A
|
William E. Gaumond(3)
Senior Vice President, Chief Financial Officer and Treasurer
|
N/A
|
N/A
|
Anna Sophie Herken(3)
Non-Independent Director
|
N/A
|
N/A
|
Ronald M. Clark
Independent Director
|
$10,000
|
$10,000
|
Howard E. Woolley
Independent Director
|
$40,000
|
$40,000
|
Kevin E. Walker
Independent Director
|
$50,000
|
$50,000
|
Udo Frank
Independent Director
|
$75,000
|
$75,000
|
(1)
|
Represents cash compensation provided to our independent directors that is formalized in the Non-Employee Director Compensation Plan for the year ended December 31, 2020.
|
(2)
|
Mses. Hunt and Herken did not receive any compensation for their services as directors since they are employed by one of our affiliates.
|
(3)
|
As employee directors, Messrs. White and Gaumond do not receive any compensation for their service as directors. The compensation Messrs. White and Gaumond received as executive officers of Allianz Life
is disclosed in the Summary Compensation Table as set forth herein.
|
Security Ownership of Certain Beneficial Owners
and Management
We are an indirect wholly owned subsidiary of
Allianz SE. Allianz SE’s principal executive offices are located at Königinstrasse 28, 80802 Munich, Germany. As of March 31, 2021, the directors and executive officers of Allianz Life held less than 1% of Allianz SE’s ordinary shares issued
and outstanding.
Transactions with Related Persons, Promoters and
Certain Control Persons
We are a wholly owned subsidiary of AZOA, which
is a wholly owned subsidiary of Allianz Europe B.V. Allianz Europe B.V. is a wholly owned subsidiary of Allianz SE, our ultimate parent, which is registered in Munich, Germany.
Business and Operational Risks Relevant to the
Contract
As an insurance company, a number of risks may
affect our business. However, because the Contract (and any other insurance contract that we offer) is a regulated insurance product, as opposed to an investment in our business, many of the risks that may be relevant to an investor in our
business are unlikely to be relevant to you. The risks described below are only those business and operational risks that are likely to be relevant to you as a purchaser of the Contract.
Risks
Primarily Related to Our Financial Strength and Claims-Paying Ability
We make Annuity Payments and apply Credits for
this Contract from our general account. We also pay benefits for other insurance contracts from our general account, and our general account is subject to claims by our creditors. Our ability to make payments from our general account is subject
to our financial strength and claims-paying ability. The following risks relate to circumstances and events that may negatively affect our general account and, in turn, our financial strength and claims-paying ability.
Financial losses may threaten our financial
strength and claims-paying ability.
As an Owner of the Contract, you do not share in
the profits and losses generated by our business. However, if we were to experience significant losses, we might not have sufficient assets in our general account to satisfy all of our financial obligations under the Contract. Circumstances and
events that may result in financial losses include, but are not necessarily
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
limited to, the circumstances and events listed below. We cannot
predict what specific impact that any of these circumstances or events may ultimately have on our financial strength or claims-paying ability.
•
|
Difficult Economic Conditions. Our financial condition is materially affected by conditions in the global capital markets and the economy generally. During an economic downturn, the demand
for our financial insurance products and services could be adversely affected. In addition, an economic downturn could cause the number and amount of full and partial withdrawals under our insurance products to increase significantly,
and owners of our insurance products may choose to defer making purchase payments or paying insurance premiums or stop them altogether.
|
•
|
Unfavorable Interest Rate Environments. During periods of declining interest rates, we may experience financial losses as the spread between interest rates that we credit to customers
under our insurance products and returns on our investments tighten. The ongoing low interest rate environment presents challenges for us and other life insurance companies, as it has generally reduced investment returns, raised the
value of future obligations, and challenged asset-liability matching. During periods of increasing interest rates, we may experience financial losses due to increases in full and partial withdrawals under our insurance products as our
customers choose to forgo insurance protection in favor of potentially higher returns. Although we take measures to manage economic risks associated with different interest rate environments, we may not be able to fully mitigate those
risks.
|
•
|
Losses on Fixed Maturity Investments. Our fixed maturity investments are subject to interest rate risk and credit risk. Interest rate risk refers to how the values of our fixed maturity
investments fluctuate in response to changes in market interest rates. Increases and decreases in prevailing interest rates generally result in decreases and increases, respectively, in the values of our fixed maturity investments.
Credit risk refers to the risk that a counterparty will default on its commitments to us under a fixed maturity investment. See “Defaults by Counterparties” below.
|
•
|
Losses on Equity Investments. Our equity investments are generally valued based on quoted market prices and are subject to market risk. Market risk refers to how market prices for equity
investments are subject to fluctuation. A downward fluctuation in the market price for an equity investment could result in losses upon the sale of that investment. Fluctuations in market prices may result from, among other things,
actual or perceived changes in the attractiveness of specific investments or in general market conditions.
|
•
|
Losses on Real Estate Investments. A portion of our investment portfolio consists of mortgage loans and mortgage-backed securities related to commercial, agricultural and residential real
estate. The value of our real estate investments may be negatively impacted by general economic conditions in the real estate sector, including supply and demand, market volatility, and interest rate fluctuations, as well as the
creditworthiness of obligors.
|
•
|
Losses upon the Sale of Illiquid Investments. We hold certain investments that may lack liquidity, such as privately placed fixed maturity investments, mortgage loans, collateralized debt
obligations, commercial mortgage-backed securities, equity real estate and limited partnership interests. Although we seek to minimize the likelihood that we would need to sell illiquid investments, if we were required to liquidate
these investments on short notice, we may have difficulty doing so and may be forced to sell them for less than their fair value.
|
•
|
Loss of Market Share to Competitors. There is strong competition among insurers, banks, brokerage firms and other financial institutions and providers seeking clients for the types of
products and services that we provide. A loss of market share to our competitors could result in financial losses to our business. Our ability to successfully compete is dependent on numerous factors, some of which include the
successful implementation of our business strategy, our financial strength, the attractiveness of our products and services, our relationships with distributors, and our reputation. Our ability to compete may also be hindered if our
competitors obtain or seek to enforce intellectual property rights against us, or if we are otherwise precluded from offering products or services that are in demand. Our ability to compete may also be hindered if we are not able to
protect or enforce our own intellectual property rights.
|
•
|
Defaults by Counterparties. Third-parties that owe us money, securities, or other assets may not fulfill their obligations to us. These parties may include issuers of investments that we
may hold, borrowers under loans that we may hold or extend, counterparties under swap and other derivative contracts and other third-parties (e.g., customers, trading counterparties, brokers, dealers, banks, investment funds, clearing
agents, exchanges and clearing houses). In addition, with respect to secured transactions, the risk of default may be exacerbated when the collateral held by us cannot be liquidated or is liquidated at a price that is not sufficient
to cover the full amount owed to us. A party may default on its obligations for a variety of reasons, including bankruptcy, lack of liquidity, downturns in the economy or real estate market and operational failure. General economic
conditions and trends may also result in increased defaults.
|
•
|
Impairments of Other Financial Institutions. We routinely execute transactions with counterparties in the financial services industry, including brokers, dealers,
commercial banks, investment banks, insurers, reinsurers and other investment and financial institutions. A disruption to, or decline in the financial condition of, such financial institutions may expose us to financial losses.
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
•
|
Payments through Guaranty Associations. When an insurance company becomes insolvent, state insurance guaranty associations have the right to assess other insurance companies doing business
in their state for funds to pay obligations to policyholders of the insolvent company, up to the state-specified limit of coverage. The future failure of a large life, health or annuity insurer could trigger assessments which we would
be obligated to pay. Further, amounts for historical insolvencies may be assessed over many years, and there can be significant uncertainty around the total obligation for a given insolvency.
|
•
|
Ineffectiveness of Risk Management Policies. Our risk management policies and procedures intended to identify, monitor and manage economic risks may not be fully
effective at mitigating our risk exposure in all market environments or against all types of risk. This could cause us to incur investment losses or cause our hedging and other risk management strategies to be ineffective.
|
Changes in applicable law may negatively affect
our financial strength and claims-paying ability.
We are subject to detailed and comprehensive
regulation and supervision in all the jurisdictions in which we operate. Our operations, products and services are subject to varying state and federal laws. In addition, our operations, products and services are regulated by various regulatory
authorities and self-regulatory authorities including state insurance departments, state securities administrators, state banking authorities, the Securities and Exchange Commission, the Financial Industry Regulatory Authority, the Internal
Revenue Service, the Department of Labor, and the U.S. Commodity Futures Trading Commission.
Changes to federal and state laws and regulations
may materially affect the way in which we conduct our business. We are faced with significant challenges due to the fact that our regulatory environment is evolving rapidly. Federal and state governments, including federal and state regulatory
authorities, have become increasingly active in the regulation of the businesses in which we engage. In addition, federal and state regulatory authorities are assuming active, and in some cases increasingly aggressive, roles in interpreting and
enforcing laws and regulations related to our business. We cannot predict the potential effects that any new laws or regulations, changes in existing laws or regulations, or the interpretation or enforcement of laws or regulations may have on
our business, but such changes may negatively affect our financial strength and claims-paying ability.
The Securities and Exchange Commission has
recently adopted new rules (i) imposing a “best interest” standard of care on broker-dealers making recommendations to their customers and (ii) requiring broker-dealers and investment advisers to provide a written summary of the relationship
between a broker-dealer or investment adviser, as applicable, and its customer. These new rules became effective on June 30, 2020. It remains unclear whether or to what extent these rules could ultimately affect broker-dealers’ willingness to
recommend our registered annuity products. These rules could increase, and to some extent have increased, our overall compliance costs and could also increase our exposure to legal claims in certain circumstances, including an increased risk of
regulatory enforcement actions or potentially private claims.
Various states have also adopted laws raising the
standard of care owed by broker-dealers, investment advisers, or insurance agents to their customers. For example, several states have adopted the National Association of Insurance Commissioners (“NAIC”) has been working towards the adoption of
revisions to the NAIC’s revised Suitability in Annuity Transactions Model Regulation, which imposes a requirement that any recommendation of an annuity product be in the consumer’s best interest. Some states have adopted laws that differ from
the NAIC’s Suitability in Annuity Transactions Model Regulation but impose similar obligations. As changes are adopted by our state regulator(s) and made applicable to us or the third-party firms that distribute our products, they could have an
adverse impact on our business. In states that have adopted these increased standards with respect to annuity recommendations, this may lead to an increased risk of regulatory enforcement actions or potentially private claims.
Our reserves could be inadequate due to differences
between our actual experience and management’s estimates and assumptions.
We establish and carry reserves to pay future
benefits and claims of policyholders. Our reserve are calculated based on a number of estimates and assumptions, including estimates and assumptions related to future mortality, morbidity, interest rates, future equity performance, reinvestment
rates, persistency, claims experience, and policyholder elections (i.e., the exercise or non-exercise of policy benefits). The assumptions and estimates used in connection with the reserve estimation process are inherently uncertain, involve
the exercise of significant judgment and reflect evolving information. For example, the current rates of mortality and morbidity may continue to improve in the future due to medical and technological advancements that result in policyholders
living longer than anticipated. We periodically review the adequacy of reserves and the underlying assumptions and make adjustments when appropriate. We cannot, however, determine with precision the amounts that we will pay for, or the timing
of payment of, actual benefits and claims or
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
whether the assets supporting the policy liabilities will grow
to the level assumed prior to payment of benefits or claims. If actual results differ significantly from our estimates and assumptions, our claim costs could increase significantly and our reserves could be inadequate. If so, we will be
required to increase reserves or accelerate amortization of deferred acquisition costs. However, we cannot be certain that our reserves will ultimately be sufficient to pay future benefits and claims of policyholders.
The amount of statutory capital that we must hold
to meet our statutory capital requirements can vary significantly from time to time.
Statutory accounting standards and capital and
reserve requirements are prescribed by the applicable state insurance regulators and the NAIC. State insurance regulators have established regulations that govern reserving requirements and provide minimum capitalization requirements based on
risk-based capital (“RBC”) ratios for life insurance companies. In any particular year, statutory surplus amounts and RBC ratios may increase or decrease depending on a variety of factors, including but not limited to, the amount of statutory
income or losses that we generate, changes in reserves, the amount of additional capital that we must hold to support business growth, changes in equity market levels, the value of certain fixed-income and equity securities in our investment
portfolio, changes in interest rates, and changes to existing RBC formulas. Additionally, state insurance regulators have significant leeway in interpreting existing regulations, which could further impact the amount of statutory capital or
reserves that we must maintain. There can be no assurance that we will be able to maintain our current RBC ratio in the future or that our RBC ratio will not fall to a level that could have a material adverse effect on our business. If we are
unable to maintain minimum capitalization requirements, our business may be subject to significant increases in supervision and control by state insurance regulators.
Litigation and regulatory proceedings may
negatively affect our financial strength and claims-paying ability.
We have been named as defendants in lawsuits
(both class actions and individual lawsuits) and have been involved in various regulatory investigations and examinations, and we may be involved in more in the future. These actions arise in various contexts, including in connection with our
activities as an insurer, securities issuer, employer, investor, and taxpayer. Lawsuits and regulatory proceedings may involve significant amounts of damages (including punitive damages) or fines that we must pay, and certain regulatory
authorities involved in regulatory proceedings have substantial power over our business operations. An adverse outcome in any lawsuit or regulatory proceeding that results in significant financial losses or operational burdens may negatively
affect our financial strength and claims-paying ability.
Reinsurance may not be available or affordable, or
may not be adequate to protect against harm to our financial strength and claims-paying ability.
As part of our overall risk management strategy,
we purchase reinsurance for certain risks underwritten by our various business segments. While reinsurance agreements generally bind the reinsurer for the life of the business reinsured at generally fixed pricing, market conditions beyond our
control can determine the availability and cost of the reinsurance protection for new business. If we are unable to purchase the desired amount of reinsurance protection on acceptable terms, our risk of loss may increase. As our risk of loss
increases, so does the risk that we may not be able to meet our financial obligations.
Our hedging programs may be inadequate to protect
against harm to our financial strength and claims-paying ability.
Certain types of insurance and investment
products that we offer expose us to risks associated with fluctuations in financial markets. Although we use hedging techniques to manage risks associated with our insurance guarantees, increased volatility in the financial markets and
unanticipated policyholder behavior may increase the cost of these hedges and/or negatively affect our ability to hedge certain risks. We may lose money on the derivatives that we hold as part of our hedging programs or otherwise. Ultimately,
our hedging programs may be inadequate to protect us against the full extent of the exposure or losses we seek to mitigate, which in turn may negatively impact our financial strength and claims-paying ability.
Downgrades and potential downgrades to our
claims-paying and financial strength ratings may signal a higher risk that we may be unable to meet our financial obligations, and may themselves negatively affect our financial strength and claims-paying ability.
Our claims-paying and financial strength ratings,
which various ratings organizations publish as measures of an insurance company's ability to meet policyholder obligations, are important to maintaining public confidence in Allianz Life and our products, and the ability to market our products
and services. A downgrade or an announced potential downgrade in our claims-paying and financial strength ratings may reflect an increased risk that we may not be able to meet our financial
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
obligations. Any such downgrade or potential downgrade may
itself harm our financial strength and claims-paying ability by causing financial losses to our business. Such losses may be the result of:
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reductions in new sales of insurance products, annuities and other investment products;
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increases in our cost of capital or limitations on our access to sources of capital;
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harm to our relationships with distributors and sales specialists;
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material increases in the number or amount of full and partial withdrawals under our insurance products;
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pressure on us to reduce prices or increase crediting rates for many of our insurance products; and
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harm to our ability to obtain reinsurance or obtain reasonable pricing for reinsurance.
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Similarly, downgrades or announced potential
downgrades in the financial strength ratings of the financial institutions with which we do business may adversely impact our business operations and may cause financial losses to our business.
Risks
Primarily Related to Our Business Operations
Breaches of security, or interference with our
technology infrastructure, could harm our business.
Our business relies on technology systems and
networks, including systems and networks managed by third parties to process, transmit and store information, and to conduct business activities and transactions with clients, distributors, vendors, and other third parties. We are also subject
to certain federal and state regulations that require us to establish and maintain policies and procedures designed to protect sensitive client information. Maintaining the integrity of our systems is critical to the success of our business
operations, including the retention of clients, and to the protection of our clients’ personal information. To date, we have not identified any material breaches or interference with our systems and networks; however, we routinely encounter and
address such threats, including an increasing frequency of phishing scams, introductions of malware and unauthorized payment requests. Any such breaches or interference by third parties or by our employees that may in the future occur could
have a material adverse impact on our business operations and our financial condition.
We have implemented and maintain security
measures designed to protect against breaches of security and other interference with systems and networks resulting from attacks by third parties, including hackers, and from employee error or malfeasance. We also require third party vendors
who, in the provision of services to us, are provided with or process information pertaining to our business or our clients to meet certain information security standards. Changes in our technology platforms, such as an evolution to accommodate
mobile computing, may also require corresponding changes in our systems, networks and data security measures. In addition, the increasing reliance on technology systems and networks and the occurrence and potential adverse impact of attacks on
such systems and networks, both generally and in the financial services industry, have enhanced government and regulatory scrutiny of the measures taken by companies to protect against cyber-security threats. As these threats, and government
and regulatory oversight of associated risks, continue to evolve, we may be required to expend additional resources to enhance or expand upon the security measures we currently maintain.
Despite the measures we have taken and may in the
future take to address and mitigate these risks, we cannot ensure that our systems and networks will not be subject to breaches or interference. Any such event may result in operational disruptions as well as unauthorized access to or the
disclosure or loss of our proprietary information or our clients’ personal information, which in turn may result in legal claims, regulatory scrutiny and liability, reputational damage, the incurrence of costs to eliminate or mitigate further
exposure, the loss of clients or other damage to our business. Any such event may interfere with, impede or cause delays in our calculation of values, processing of transactions and making of payments under the Contract. In addition, the trend
toward broad consumer and general public notification of such incidents could exacerbate the harm to our business operations and our financial condition. Even if we successfully protected our technology infrastructure and the confidentiality of
sensitive data, we may incur significant expenses in responding to any such attacks as well as the adoption and maintenance of appropriate security measures. We could also suffer harm to our business and reputation if attempted security
breaches are publicized. We cannot be certain that advances in criminal capabilities, discovery of new vulnerabilities, attempts to exploit vulnerabilities in our systems, data thefts, physical system or network break-ins or inappropriate
access, or other developments will not compromise or breach the technology or other security measures protecting our networks and systems used in connection with our products and services.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
The failure to protect our clients’ confidential
information and privacy could adversely affect our business.
A number of our businesses are subject to privacy
regulations and confidentiality obligations, including the Gramm-Leach-Bliley Act and state privacy laws and regulations. We also have contractual obligations to protect certain confidential information we obtain from our existing vendors and
clients. These obligations generally include protecting such confidential information in the same manner and to the same extent as we protect our own confidential information. The actions we take to protect confidential information vary by
business segment and may include, among other things:
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training and educating our employees regarding our obligations relating to confidential information;
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monitoring changes in state or federal privacy and compliance requirements;
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drafting appropriate contractual provisions into any contract that raises proprietary and confidentiality issues;
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maintaining secure storage facilities for tangible records;
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limiting access to electronic information; and
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in the event of a security breach, providing credit monitoring or other services to affected customers.
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In addition, we must develop, implement and
maintain a comprehensive written information security program with appropriate administrative, technical and physical safeguards to protect such confidential information. If we do not properly comply with privacy regulations and protect
confidential information, we could experience adverse consequences, including regulatory sanctions, such as penalties, fines and loss of license, as well as loss of reputation and possible litigation. This could have an adverse impact on our
Company’s reputation and business results.
Protection from system interruptions and operating
errors is important to our business. If we were to experience a sustained interruption to our telecommunications or data processing systems or other failure in operational execution could harm our business operations and our business results.
Operating errors and system or network
interruptions could delay and disrupt our ability to develop, deliver or maintain our products and services, causing harm to our business and reputation and resulting in loss of customers or revenue. Operating errors and system or network
interruptions may also interfere with, impede or cause delays in our calculation of values, processing of transactions and making of payments under the Contract. Interruptions could be caused by operational failures arising from employee error
or malfeasance, interference by third parties (including hackers and other cyber-attacks), implementation of new technology, and maintenance of existing technology. Our financial, accounting, data processing or other operating systems and
facilities may fail to operate or report data properly, experience connectivity disruptions or otherwise become disabled as a result of events that are wholly or partially beyond our control, adversely affecting our ability to process
transactions or provide products and services to customers. The cause of these interruptions can include fires, floods, earthquakes and other natural disasters, power losses, equipment failures, attacks by third parties, failures of internal or
vendor software or systems and other events beyond our control.
In addition, we rely on third party service
providers and vendors for certain communications, technology and business functions and face the risk of operational failure (including, without limitation, failure caused by an inaccuracy, untimeliness or other deficiency in data reporting),
termination or capacity constraints of any of the clearing agents, exchanges, clearing houses or other third party service providers that we use to facilitate or are component providers to our transactions and other product manufacturing and
distribution activities. These risks are heightened by the evolution in the financial markets of increasingly sophisticated products, by business-driven hedging, by compliance issues and by other risk management or investment or by financial
management strategies. Any such failure, termination or constraint could adversely impact our ability to implement transactions, service our clients, manage our exposure to risk or otherwise achieve desired outcomes.
The occurrence of natural or man-made disasters and
catastrophes could adversely affect our business operations and our business results.
The occurrence of natural or man-made disasters
and catastrophes, including acts of terrorism, public health crises (e.g. COVID-19), industrial accident, blackout, cyber-attack, computer virus, insider threat, insurrections and military actions, unanticipated problems with our disaster
recovery systems, or a support failure from external providers, could adversely affect our business operations and our business results, particularly if those events affect our computer-based data processing, transmission, storage, and
retrieval systems or destroy data. Such disasters and catastrophes may damage our facilities, preventing our employees from performing their roles or otherwise disturbing our ordinary business operations, and by impacting claims. Such disasters
and catastrophes may also impact us indirectly by changing the condition and behaviors of our customers, business counterparties and regulators, as well as by causing declines or volatility in the economic and financial markets.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Inadequate or failed processes or systems, human
factors or external events may adversely affect our profitability, reputation or operational effectiveness.
Operational risk is inherent in our business and
can manifest itself in various ways, including business interruption, poor vendor performance, information systems malfunctions or failures, regulatory breaches, human errors, employee misconduct, and external fraud. These events can
potentially result in financial loss, harm to our reputation and/or hinder our operational effectiveness. Management attempts to control these risks and keep operational risk at low levels by maintaining a sound and well controlled environment
in light of the characteristics of our business, markets and regulatory environment in which we operate. Notwithstanding these measures, operational risk is part of the business environment in which we operate, and we may experience operational
disruptions and incur losses from time to time due to these types or risks.
Risks Related to the COVID-19 Pandemic
We continue to closely monitor developments
related to the COVID-19 pandemic and its impact on our business and operations. The economic conditions and uncertainties during the pandemic have at times negatively impacted our net income, surplus, and capital and liquidity positions. To
date, however, we do not believe that these economic conditions and uncertainties have negatively impacted our overall financial strength and claims-paying ability in a significant manner. Nor do we believe that our administration of the
Contract and our other insurance contracts has been disrupted in a significant manner, even as many of our employees and the employees of our third-party service providers continue to work remotely.
The extent to which the pandemic will impact our
business and operations in the future will depend on future developments, which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties
in response to the pandemic. The pandemic could have a material adverse effect on our financial condition and operations.
The pandemic-related risks that we face include
(but are not necessarily limited to) the following:
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Economic conditions and uncertainties may negatively impact the value, cash flow, and liquidity of our general account investments due to, e.g., market volatility, reduced
liquidity, changes in interest rates, economic shutdowns or slowdowns, government regulations, and counterparty defaults.
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Voluntary or government mandated hardship assistance that we provide to our customers in the form of, e.g., grace periods for failure to make timely payments, may reduce our net
income and surplus.
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Reductions in new sales of our financial products or reductions in fees collected by us, or increases in full withdrawals, cancellations, or defaults with respect to our customers’ existing financial products, as a result
of economic conditions and uncertainties may reduce our net income and surplus.
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Economic conditions and uncertainties may limit our access to sources of capital and our ability to obtain reinsurance.
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Voluntary and government mandated pandemic mitigation efforts, such as prolonged remote working arrangements and economic shutdowns, and employees’ ability or
willingness to fulfill their responsibilities during the pandemic, may disrupt our ability to administer our insurance contracts (including our ability to timely process applications, transactions, and payments and to calculate values)
and may disrupt the services provided by third-parties upon which we rely to administer our insurance contracts.
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In addition to the risks listed above, to the
extent that the pandemic impacts our business and operations, it may also have the effect of heightening the other risks described in this section of the prospectus.
14. Financial
Statements
The statutory financial statements of Allianz
Life Insurance Company of North America as of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020 included in Appendix F of this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, an independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
The unaudited statutory financial statements of
Allianz Life Insurance Company of North America as of March 31, 2021 and audited statutory statements of admitted assets, liabilities, and capital and surplus as of December 31, 2020, as well as the related unaudited statutory statements of
operations, capital and surplus and cash flow for the three month periods ended March 31, 2021 and March 31, 2020 are included in Appendix E.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
The financial statements of the subaccounts of
Allianz Life Variable Account B of Allianz Life Insurance Company of North America (“Variable Account B”) as of December 31, 2020 and 2019 and for each of the two years in the period ended December 31, 2020 included in Appendix B of the SAI,
which is incorporated in this prospectus by reference to Pre-Effective Amendment No. 1 to Variable Account B’s Form N-4 filed with the SEC (File No. 333-255394), have been so included in reliance on the report of PricewaterhouseCoopers LLP, an
independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
15. Privacy
Notice
Allianz Life Insurance Company of North America
PO Box 1344
Minneapolis, MN 55440-1344
800.328.5600
Your privacy is a high priority for Allianz Life
Insurance Company of North America (Allianz) (“we” or “our”). This Privacy Notice outlines our principles for collecting, using and protecting information that we maintain about you. This Privacy Notice is also displayed on our website at
www.allianzlife.com.
Information about you that Allianz collects
We collect information about you so that we can
process the insurance transactions you request and administer or service your policy. We also collect information to inform you of new products and services and to engage in studies or research relating to our business. We limit the information
collected to what is needed for our business purposes. We may collect your information from the following sources.
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From you, either directly or through our financial professionals. This may include information provided on your insurance application or other forms you may complete. The information we collect includes, but is not
limited to, your name, Social Security number, address, telephone number, mobile phone number, and email address.
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From others, through the process of issuing a policy or handling a claim. This may include information from consumer reporting agencies and medical or accident reports.
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From your doctor or during a home visit by a health care professional. This may include your health records gathered with your written consent.
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From your relationship with us. For example, this may include the number of years you have been a customer or the types of products you have purchased.
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From data brokers that collect publicly available information about you. This includes household information, financial transactions, and social media activity.
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Information about you that Allianz shares
We do not share information about current or
former customers with anyone, except as allowed by law. “Allowed by law” means that we may share the information we collect about you as follows.
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With people and entities when we have your consent to share your information.
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With our affiliates and other third parties in order to process your application, or administer or service your policy.
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With consumer reporting agencies to obtain a medical report, credit report, or motor vehicle report. These reports are used to decide eligibility for a policy or to process transactions you request.
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With our financial professionals so that they can service your policy. They may also inform you of other Allianz products and services that may be of interest to you.
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With health care providers in order to process your claim.
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As required or otherwise permitted by law. This may include sharing information with state insurance agencies, law enforcement, and other government officials. We may also share your information to respond to subpoenas,
court orders, and other legal requests.
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With research groups to conduct studies on our business to improve the products and services we offer.
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To inform you of products and services that may be of interest to you. These communications may be made by us, our financial professionals, or through third parties.
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With our affiliates so they can market their products and services to you. State insurance laws do not allow you to restrict this disclosure.
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Allianz does not sell your information to anyone
We do not sell your information to anyone for
their own marketing purposes. For this reason, we are not required to obtain your “opt in election,” “opt out election,” or authorization.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Allianz policies and practices regarding security of
your information
We limit access to your information to those
employees, affiliates, and service providers who need it for our business purposes. We protect your information using safeguards that comply with applicable federal and state law. This includes measures that are administrative, physical, and
technical in nature. We use reasonable measures to secure our websites and protect the information that may be shared over these sites.
Your ability to access and correct your information
You have the right to access and obtain a copy of
your information. This does not include the right to access and copy your information related to a claim or civil or criminal proceeding. You may also write to us and ask about disclosure(s) of your information made within the last two (2)
years. If you wish to review your information, please write us at:
Allianz Life Insurance Company of North America
Attn: Privacy Office
PO Box 1344
Minneapolis, MN 55440-1344
Please provide your full name, address, and
policy number(s) in your written request. For your protection, please have your request notarized. We reserve the right to ask for additional verification of your identity.
Within 30 working days of our receipt of your
written request, you may see and get a copy of your information in person. If you prefer, we will send you a copy of your information. If medical information is contained in your file, we may request that you name a medical professional to whom
we will send your information.
If you believe any of your information is
incorrect, you may write to us at the address above. Within 30 working days, we will let you know if our review has resulted in a correction of your information. If we do not agree there is an error, you may file a statement disputing our
finding. We will attach the statement to your file. We will send any corrections we make, or your statement, to anyone we shared your information with over the past two years, and to anyone who may receive your information from us in the
future. We do not control the information about you obtained from a consumer reporting agency or a Department of Motor Vehicles. We will provide you with the names and addresses of these agencies so you can contact them directly.
Notification of change
Your trust is one of our most important assets.
If we revise our privacy practices in the future, we will notify you prior to implementing any changes.
For more information or if you have questions
If you have any questions or concerns about our
privacy practices, please call the Corporate Compliance Privacy Office at 800.328.5600, contact us via the secured website, or write us at:
Allianz Life Insurance Company of North America
Attn: Privacy Office
PO Box 1344
Minneapolis, MN 55440-1344
This Privacy Notice is being provided on behalf
of the following companies:
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Allianz Life Insurance Company of North America
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Allianz Life Financial Services, LLC
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M40018 (R-08/2020)
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
16. Table of
Contents of the Form N-4 SAI
Allianz Life as Custodian
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3
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Legal Opinions
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3
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Distributor
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3
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Administrative Service Fees
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3
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Federal Tax Status
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3
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Annuity Contracts in General
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4
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Taxation of Annuities in General
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4
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Qualified Contracts
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4
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Purchasing a Qualified Contract
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5
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Distributions-Qualified Contracts
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6
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Distributions-Non-Qualified Contracts
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7
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Required Distributions
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8
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Diversification
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8
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Owner Control
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8
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Contracts Owned by Non-Individuals
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8
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Annuity Purchases by Nonresident Aliens and Foreign Corporations
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9
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Income Tax Withholding
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9
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Multiple Contracts
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9
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Partial 1035 Exchanges
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9
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Assignments, Pledges and Gratuitous Transfers
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9
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Death Benefits
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10
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Spousal Continuation and the Federal Defense of Marriage Act (DOMA)
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10
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Federal Estate Taxes
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10
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Generation-Skipping Transfer Tax
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10
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Foreign Tax Credits
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10
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Possible Tax Law Changes
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10
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Annuity Payments
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11
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Annuity Payment Options
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11
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Appendix A – Death of the Owner and/or Annuitant
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12
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Appendix B – Allianz Life Variable Account B Financial Statements
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15
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Appendix A – Available Indexes
S&P 500® Index
The S&P 500® Index is comprised of 500 stocks representing major U.S. industrial sectors.
S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“S&P”). This trademark has been licensed for use by S&P Dow Jones
Indices LLC. S&P marks are trademarks of S&P. These trademarks have been sublicensed for certain purposes by Allianz Life Insurance Company of North America (“Allianz”). The S&P 500® Index (“the Index”) is a product of S&P Dow Jones Indices LLC and/or its affiliates and have been licensed for use by Allianz.
Allianz products are not sponsored, endorsed,
sold, or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, or any of their respective affiliates (collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices make no representation or warranty, express or implied, to the
owners of the Allianz products or any member of the public regarding the advisability of investments generally or in Allianz products particularly or the ability of the Index and Average to track general market performance. S&P Dow Jones
Indices’ only relationship to Allianz with respect to the Index and Average is the licensing of the Index and Average and certain trademarks, service marks, and/or trade names of S&P Dow Jones Indices and/or its third-party licensors. The
Index and Average are determined, composed, and calculated by S&P Dow Jones Indices without regard to Allianz or the products. S&P Dow Jones Indices have no obligation to take the needs of Allianz or the owners of the products into
consideration in determining, composing, or calculating the Index and Average. S&P Dow Jones Indices are not responsible for and have not participated in the design, development, pricing, and operation of the products, including the
calculation of any interest payments or any other values credited to the products. S&P Dow Jones Indices have no obligation or liability in connection with the administration, marketing, or trading of products. There is no assurance that
investment products based on the Index and Average will accurately track index performance or provide positive investment returns. S&P Dow Jones Indices LLC and its subsidiaries are not investment advisors. Inclusion of a security or
futures contract within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such security or futures contract, nor is it considered to be investment advice. Notwithstanding the foregoing, CME Group Inc. and its
affiliates may independently issue and/or sponsor financial products unrelated to products currently being issued by Allianz, but which may be similar to and competitive with Allianz products. In addition, CME Group Inc., an indirect minority
owner of S&P Dow Jones Indices LLC, and its affiliates may trade financial products which are linked to the performance of the Index and Average. It is possible that this trading activity will affect the value of the products.
S&P DOW JONES INDICES DO NOT GUARANTEE THE
ADEQUACY, ACCURACY, TIMELINESS, AND/OR THE COMPLETENESS OF THE INDEX AND AVERAGE OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT
THERETO. S&P DOW JONES INDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES, OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY ALLIANZ, OWNERS OF THE PRODUCTS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX AND AVERAGE OR WITH RESPECT TO ANY DATA RELATED THERETO.
WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P DOW JONES INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES,
LOST TIME, OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD-PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS BETWEEN S&P DOW
JONES INDICES AND ALLIANZ OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES.
Russell 2000® Index
The Russell 2000® Index is an equity index that measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which is made up of 3,000 of the biggest U.S. stocks. The Russell 2000® Index is constructed to provide a comprehensive and unbiased small-cap barometer and is completely reconstituted annually to ensure larger stocks do
not affect the performance and characteristics of the true small-cap index.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Appendix A
The Russell 2000® Index (the “Index”) is a trademark of Frank Russell Company (“Russell”) and has been licensed for use by Allianz Life Insurance Company of North
America (“Allianz”). Allianz products are not in any way sponsored, endorsed, sold or promoted by Russell or the London Stock Exchange Group companies (“LSEG”) (together the “Licensor Parties”) and none of the Licensor Parties make any claim,
prediction, warranty or representation whatsoever, expressly or impliedly, either as to (i) the results to be obtained from the use of the Index (upon which the Allianz product is based), (ii) the figure at which the Index is said to stand at
any particular time on any particular day or otherwise, or (iii) the suitability of the Index for the purpose to which it is being put in connection with the Allianz product. None of the Licensor Parties have provided or will provide any
financial or investment advice or recommendation in relation to the Index to Allianz or to its clients. The Index is calculated by Russell or its agent. None of the Licensor Parties shall be (a) liable (whether in negligence or otherwise) to
any person for any error in the Index or (b) under any obligation to advise any person of any error therein.
Nasdaq-100® Index
The NASDAQ-100 Index® includes 100 of the largest domestic and international non-financial securities listed on The NASDAQ Stock Market® based on market capitalization.
The Product(s) is not sponsored, endorsed, sold
or promoted by Nasdaq, Inc. or its affiliates (Nasdaq, with its affiliates, are referred to as the “Corporations”). The Corporations have not passed on the legality or suitability of, or the accuracy or adequacy of descriptions and disclosures
relating to, the Product(s). The Corporations make no representation or warranty, express or implied to the owners of the Product(s) or any member of the public regarding the advisability of investing in securities generally or in the
Product(s) particularly, or the ability of the Nasdaq-100 Index® to track general stock market performance. The Corporations' only relationship to
Allianz Life Insurance Company of North America (“Licensee”) is in the licensing of the NASDAQ®, and Nasdaq-100 Index® registered trademarks, and certain trade names of the Corporations and the use of the Nasdaq-100 Index® which is determined, composed and calculated by NASDAQ without regard to Licensee or the Product(s). Nasdaq has no obligation to take the needs of
the Licensee or the owners of the Product(s) into consideration in determining, composing or calculating the Nasdaq-100 Index®. The Corporations are
not responsible for and have not participated in the determination of the timing of, prices of, or quantities of the Product(s) to be issued or in the determination or calculation of the equation by which the Product(s) is to be converted into
cash. The Corporations have no liability in connection with the administration, marketing or trading of the Product(s).
THE CORPORATIONS DO NOT GUARANTEE THE ACCURACY
AND/OR UNINTERRUPTED CALCULATION OF THE NASDAQ-100 INDEX® OR ANY DATA INCLUDED THEREIN. THE CORPORATIONS MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE PRODUCT(S), OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE NASDAQ-100 INDEX® OR ANY DATA
INCLUDED THEREIN. THE CORPORATIONS MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE NASDAQ-100 INDEX® OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE CORPORATIONS HAVE ANY LIABILITY FOR ANY LOST PROFITS OR
SPECIAL, INCIDENTAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES, EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.
EURO STOXX 50®
The EURO STOXX 50®, Europe's leading blue-chip index for the Eurozone, provides a blue-chip representation of supersector leaders in the Eurozone. The index covers 50
stocks from 11 Eurozone countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. STOXX Limited, Deutsche Börse Group and their licensors, research partners or data providers have no
relationship to Allianz Life Insurance Company of North America (“Allianz”), other than the licensing of the EURO STOXX 50® and the related
trademarks for use in connection with Allianz products.STOXX, Deutsche Börse Group and their licensors, research partners or data providers do not:
•
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sponsor, endorse, sell or promote Allianz products.
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•
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recommend that any person invest in Allianz products or any other securities.
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•
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have any responsibility or liability for or make any decisions about the timing, amount or pricing of Allianz products.
|
•
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have any responsibility or liability for the administration, management or marketing of Allianz products.
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Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Appendix A
•
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consider the needs of Allianz products or the owners of Allianz products in determining, composing or calculating the EURO STOXX 50 or have any obligation to do so.
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STOXX, Deutsche Börse Group and their licensors,
research partners or data providers give no warranty, and exclude any liability (whether in negligence or otherwise), in connection with the Allianz products or their performance.
STOXX does not assume any contractual
relationship with the purchasers of Allianz products or any other third parties.
Specifically,
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STOXX, Deutsche Börse Group and their licensors, research partners or data providers do not give any warranty, express or implied, and exclude any liability about:
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•
|
The results to be obtained by Allianz products, the owner of Allianz products or any other person in connection with the use of the EURO STOXX 50 and the data included in the EURO STOXX 50;
|
•
|
The accuracy, timeliness, and completeness of the EURO STOXX 50 and its data;
|
•
|
The merchantability and the fitness for a particular purpose or use of the EURO STOXX 50 and its data;
|
•
|
The performance of Allianz products generally.
|
•
|
STOXX, Deutsche Börse Group and their licensors, research partners or data providers give no warranty and exclude any liability, for any errors, omissions or interruptions in the EURO STOXX 50 or its data;
|
•
|
Under no circumstances will STOXX, Deutsche Börse Group or their licensors, research partners or data providers be liable (whether in negligence or otherwise) for any lost profits or indirect, punitive,
special or consequential damages or losses, arising as a result of such errors, omissions or interruptions in the EURO STOXX 50 or its data or generally in relation to Allianz products, even in circumstances where STOXX, Deutsche Börse
Group or their licensors, research partners or data providers are aware that such loss or damage may occur.
|
The licensing Agreement between Allianz and STOXX
is solely for their benefit and not for the benefit of the owners of Allianz products or any other third parties.
iShares® MSCI Emerging Markets ETF
The iShares® MSCI Emerging Markets ETF distributed by BlackRock Investments, LLC. iShares®, BLACKROCK®, and the corresponding logos are
registered trademarks of BlackRock, Inc. and its affiliates (“BlackRock”) and are used under license. These trademarks have been licensed for certain purposes by Allianz Life Insurance Company of North America ("Allianz") and its wholly-owned
subsidiaries. Products offered by Allianz or its wholly-owned subsidiaries are not sponsored, endorsed, sold or promoted by BlackRock, and purchasers of such products do not acquire any interest in the iShares® MSCI Emerging Markets ETF nor enter into any relationship of any kind with BlackRock. BlackRock makes no representations or warranties, express or
implied, to the owners of any products offered by Allianz or its wholly-owned subsidiaries, or any member of the public regarding the advisability of purchasing a product from Allianz or its wholly-owned subsidiaries. BlackRock has no
obligation or liability for any errors, omissions, interruptions or use of the iShares MSCI Emerging Markets ETF or any data related thereto, or with the operation, marketing, trading or sale of any products or services offered by Allianz.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Appendix A
Appendix B – Daily Adjustment
Generally
We designed the Daily Adjustment to provide an
Index Option Value on Business Days other than the Term Start Date or the Term End Date. The Daily Adjustment approximates the Index Option Value that will be available on the Term End Date. It is the estimated present value of the future
Credit that we will apply on the Term End Date. The Daily Adjustment takes into account:
(i)
|
any Index gains during the Term subject to the applicable DPSC, Precision Rate, Cap, and/or Participation Rate,
|
(ii)
|
either any Index losses greater than the Buffer or Index losses down to the Floor, and
|
(iii)
|
the number of days until the Term End Date.
|
The Daily Adjustment formula has two primary
components, (i) the change in Proxy Value and (ii) accumulated proxy interest, which are added together and then multiplied by the Index Option Base. We designed the Daily Adjustment to estimate the present value of positive or negative Credit
that will be available on the Term End Date taking into account any applicable Buffer, Floor, DPSC, Precision Rate, Cap, and/or Participation Rate. You should note that even if your selected Index(es) experience positive growth, the Daily
Adjustments may be negative because of other market conditions, such as the expected volatility of Index prices and interest rates. Therefore, the Daily Adjustment could result in a loss beyond the protection of the Buffer or Floor. However,
the Daily Adjustment for the Index Protection Strategy with DPSC and Index Protection Strategy with Cap cannot be negative. The Daily Adjustment for 3-year and 6-year Term Index Options may be more negatively impacted by changes in the expected
volatility of Index prices than 1-year Term Index Options due the difference in Term length. Also, the risk of a negative Daily Adjustment is greater for 3-year and 6-year Term Index Options than 1-year Term Index Options because the Buffer is
exposed to a longer time period. The impact of the Cap and Buffer on the Daily Adjustment for a 1-year Term Index Option is greater than it is for a 3-year or 6-year Term Index Option because we apply the Cap and Buffer for the entire Term
length, and the Term length is shorter for a 1-year Term.
Daily Adjustment Formula
The formula for the calculation of the Daily
Adjustment is as follows:
Daily Adjustment = [(a) change in Proxy Value +
(b) proxy interest] x Index Option Base
Where:
(a)
|
change in Proxy Value = (current Proxy Value – beginning Proxy Value)
|
(b)
|
proxy interest = beginning Proxy Value x (1 – time remaining during the Term)
|
Calculating Change in Proxy Value
The change in Proxy Value represents the current
hypothetical value of the Proxy Investment (current Proxy Value), less the cost of the Proxy Investment on the Term Start Date (beginning Proxy Value).
The current Proxy Value is the Proxy Value
calculated on the same day as the Daily Adjustment. The beginning Proxy Value is the Proxy Value calculated on the Term Start Date.
The Proxy Value is calculated differently for
each Crediting Method.
For the Index Precision Strategy, the Proxy Value involves tracking two hypothetical derivatives and is calculated using the following formula:
[Precision Rate x (at-the-money binary call)] – (out-of-the-money put)
With respect to our Proxy Value formula, we
designed the at-the-money binary call to value the potential for gains equal to the Precision Rate if on the Term End Date, the Index Value is greater than or equal to the Index Value on the Term Start Date, and the out-of-the-money put to
value the potential for Index losses greater than the Buffer for the Index Precision Strategy. It is important to note that the out-of-the-money put will almost always reduce the Daily Adjustment, even when the current Index price on a Business
Day is higher than the Index Value on the Term Start Date. This is because the risk that the Index Value could be lower on the Term End Date is present to some extent whether or not the current Index price on a Business Day is lower than the
Index Value on the Term Start Date.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Appendix B
For the Index Guard Strategy, the Proxy Value involves tracking four hypothetical derivatives and is calculated using the following formula:
Proxy Value = (at-the-money
call) – (out-of-the-money call) – (at-the-money put) + (out-of-the-money put)
With respect to our Proxy Value formula, we
designed the at-the-money call and out-of-the-money call to value the potential for Index gains up to the Cap and the at-the-money put to value the potential for Index losses, but add back the out-of-money put to mimic the protection of the
Floor for the Index Guard Strategy. It is important to note that the at-the-money put will almost always reduce the Daily Adjustment, even when the current Index price on a Business Day is higher than the Index Value on the Term Start Date. It
is also important to note that the out-of-money put will almost always reduce, and never exceed, the negative impact of the at-the-money put for the Index Guard Strategy.
For the Index Performance Strategy, the Proxy Value involves tracking three hypothetical derivatives and is calculated using the following formula:
Proxy Value = (at-the-money
call) – (out-of-the-money call) – (out-of-the-money put)
With respect to our Proxy Value formula, we
designed the at-the-money call and out-of-the-money call to value the potential for Index gains subject to any applicable Participation Rate up to the Cap, and the out-of-the-money put to value the potential for Index losses greater than the
Buffer for the Index Performance Strategy. Similar to the Index Precision Strategy, it is important to note that the out-of-the-money put will almost always reduce the Daily Adjustment, even when the current Index price on a Business Day is
higher than the Index Value on the Term Start Date. This is because the risk that the Index Value could be lower on the Term End Date is present to some extent whether or not the current Index price on a Business Day is lower than the Index
Value on the Term Start Date. For purposes of the Proxy Value formula the value of the out-of-the-money call will be zero if an Index Option is uncapped.
For the Index Protection Strategy with DPSC, the Proxy Value involves tracking one hypothetical derivative and is calculated using the following formula:
Proxy Value = DPSC x
(at-the-money binary call)
With respect to our Proxy Value formula, we
designed the at-the-money binary call to value the potential for gains equal to the DPSC if on the Term End Date, the Index Value is greater than or equal to the Index Value on the Term Start Date.
For the Index Protection Strategy with Cap, the Proxy Value involves tracking two hypothetical derivatives and is calculated using the following formula:
Proxy Value = (at-the-money
call) – (out-of-the-money call)
With respect to our Proxy Value formula, we
designed the at-the-money call and out-of-the-money call to value the potential for Index gains up to the Cap for the Index Protection Strategy with Cap.
Calculating Proxy Interest
The proxy interest is an amount of interest that
is earned to provide compensation for the cost of the Proxy Investment on the Term Start Date. The proxy interest is approximated by the value of amortizing the cost of the Proxy Investment over the Term to zero. The formula for proxy interest
involves the calculation of (i) the beginning Proxy Value (the formula for which varies depending on the Crediting Method, as previously discussed) and (ii) the time remaining during a Term. The time remaining during a Term is equal to the
number of days remaining in the Term divided by the Term length. The Term length is 365 days for a 1-year Term; 1,095 days for a 3-year Term; and 2,190 days for a 6-year Term. The proxy interest may be significantly different from current
interest rates available on interest bearing investments.
Additional Information
You can find a more detailed explanation of the
calculation of the Proxy Value, including examples, in Exhibit 99(a) of the Form S-1 Registration Statement filed with the SEC, of which this prospectus is a part. This Exhibit is incorporated by reference into this prospectus. You can obtain a
copy of Exhibit 99(a) by calling (800) 624-0197, or visiting our website at www.allianzlife.com.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Appendix B
Appendix C – Annual Contract Fees Calculation Examples
Please note that these examples may differ from
your actual results due to rounding.
Assuming You Purchase a Contract with the
Traditional Death Benefit
You purchase a Contract with the Traditional
Death Benefit and your Contract automatically includes the Income Benefit. On the Quarterly Contract Anniversary your total annual Contract fees are 0.95% (0.25% product fee and a 0.70% rider fee for the Income Benefit) and your Contract Value
and Charge Base are $100,000. This Contract Value includes any gains or losses on the AZL Government Money Market Fund (if applicable) and any Daily Adjustments or Credits on the Index Options. During the quarter you make no additional Purchase
Payments and take no withdrawals. We calculate the daily Contract fee amount for this quarter as follows:
(the Charge Base) x (total annual Contract fees ÷
365) = daily Contract fee amount, or: $100,000 x (0.95% ÷ 365) = $2.60
If there are 89 days in the current quarter
(which includes the next Quarterly Contract Anniversary), then the total quarterly Contract fees are:
(number of days in the current quarter) x (daily
Contract fee amount), or: 89 x $2.60 = $231.64
On the next Quarterly Contract Anniversary we
would deduct $231.64 from the Contract Value. We first account for any gains/losses on the AZL Government Money Market Fund (if applicable) and add any Daily Adjustments or Credits to the Index Option Values, then process any additional
Purchase Payments, withdrawals you take, and deductions we make for the total quarterly Contract fees. We then set the Charge Base equal to this new Contract Value. If the Contract Value at the end of the day on the Quarterly Contract
Anniversary after all processing is $101,250 we would begin computing the daily Contract fees for the next quarter on the next day as:
(the Charge Base) x (total annual Contract fees ÷
365) = daily Contract fee amount, or: $101,250 x (0.95% ÷ 365) = $2.64
If you make an additional Purchase Payment of
$15,000 on the 43rd day of the next quarter, your Charge Base would increase by the dollar amount of the payment to $116,250 ($101,250 + $15,000). We would then use this new Charge Base to begin computing the daily Contract fees for the
remainder of the quarter on the next day as:
(the Charge Base) x (total annual Contract fees ÷
365) = daily Contract fee amount, or: $116,250 x (0.95% ÷ 365) = $3.03
If there are 92 days in the current quarter
(which includes the next Quarterly Contract Anniversary), then the total quarterly Contract fees are:
(number of days in the current quarter) x (daily
Contract fee amount), or:
(43 x $2.64) + (49 x $3.03) = $113.32 + $148.26 =
$261.58
On the next Quarterly Contract Anniversary we
would deduct $261.58 from the Contract Value after we account for any gains/losses on the AZL Government Money Market Fund (if applicable) and add any Daily Adjustments or Credits to the Index Option Values. We would then process any additional
Purchase Payments, withdrawals you take, and deductions we make for the total quarterly Contract fees and set the Charge Base equal to this new Contract Value and begin computing the daily Contract fees for the next quarter on the next day.
Assuming You Purchase a Contract with the Maximum
Anniversary Value Death Benefit
You purchase a Contract with the Maximum
Anniversary Value Death Benefit and your Contract automatically includes the Income Benefit. On the Quarterly Contract Anniversary your total annual Contract fees are 1.15% (0.25% product fee, 0.70% rider fee for the Income Benefit, and a 0.20%
rider fee for the Maximum Anniversary Value Death Benefit) and your Contract Value and Charge Base are $100,000. This Contract Value includes any gains or losses on the AZL Government Money Market Fund (if applicable) and any Daily Adjustments
or Credits on the Index Options. During the quarter you make no additional Purchase Payments and take no withdrawals. We calculate the daily Contract fee amount for this quarter as follows:
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Appendix C
(the Charge Base) x (total annual Contract fees ÷
365) = daily Contract fee amount, or: $100,000 x (1.15% ÷ 365) = $3.15
If there are 89 days in the current quarter
(which includes the next Quarterly Contract Anniversary), then the total quarterly Contract fees are:
(number of days in the current quarter) x (daily
Contract fee amount), or: 89 x $3.15 = $280.41
On the next Quarterly Contract Anniversary we
would deduct $280.41 from the Contract Value. We first account for any gains/losses on the AZL Government Money Market Fund (if applicable) and add any Daily Adjustments or Credits to the Index Option Values, then process any additional
Purchase Payments, withdrawals your take, and deductions we make for the total quarterly Contract fee. We then set the Charge Base equal to this new Contract Value. If the Contract Value at the end of the day on the Quarterly Contract
Anniversary after all processing is $101,250, we would begin computing the daily Contract fees for the next quarter on the next day as:
(the Charge Base) x (total annual Contract fees ÷
365) = daily Contract fee amount, or: $101,250 x (1.15% ÷ 365) = $3.19
If you make an additional Purchase Payment of
$15,000 on the 43rd day of the next quarter, your Charge Base would increase by the dollar amount of the payment to $116,250 ($101,250 + $15,000). We would then use this new Charge Base to begin computing the daily Contract fees for the
remainder of the quarter on the next day as:
(the Charge Base) x (total annual Contract fees ÷
365) = daily Contract fee amount, or: $116,250 x (1.15% ÷ 365) = $3.66
If there are 92 days in the current quarter
(which includes the next Quarterly Contract Anniversary), then the total quarterly Contract fees are:
(number of days in the current quarter) x (daily
Contract fee amount), or:
(43 x $3.19) + (49 x $3.66) = $137.17 + $179.47 =
$316.64
On the next Quarterly Contract Anniversary we
would deduct $316.64 from the Contract Value after we account for any gains/losses on the AZL Government Money Market Fund (if applicable) and add any Daily Adjustments or Credits to the Index Option Values. We would then process any additional
Purchase Payments, withdrawals you take, and deductions we make for the total quarterly Contract fees and set the Charge Base equal to this new Contract Value and begin computing the daily Contract fees for the next quarter on the next day.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Appendix C
Appendix D – Material Contract Variations by State
Your Contract is subject to the law of the state
in which it is issued. Some of the features of your Contract may differ from the features of a Contract issued in another state because of state-specific legal requirements. In addition, not all features and benefits are approved in all states.
All material State variations in the Contract are disclosed in this Appendix. If you would like more information regarding State specific Contract provisions, you should contact your Financial Professional or contact our Service Center at the
toll-free telephone number listed at the back of this prospectus.
Material State Contract Variations
ISSUE STATE
|
FEATURE AND BENEFITS
|
VARIATION
|
Connecticut
|
Income Multiplier Benefit
See section 9
|
This benefit is not available.
|
|
Eligible Person(s) and Covered Person(s)
See section 2
|
We do not remove a person as an Eligible Person(s) or Covered Person(s) following an assignment, ownership change, or Beneficiary Change.
|
Florida
|
Assignments, Changes of Ownership and Other Transfers of Contract Rights
See section 2
|
We cannot restrict assignments or changes of ownership.
• We do not change the Determining Life (Lives) following an assignment or ownership change. If you assign the Contract and the Determining Life (Lives) are no longer an Owner (or Annuitant if the Owner
is a non-individual) the Traditional Death Benefit or Maximum Anniversary Value Death Benefit may not be available and on the Owner’s death the Beneficiary(s) will only receive the Contract Value.
|
|
Purchase Requirements
See section 3
|
We can only decline a Purchase Payment if it would cause total Purchase Payments to be more than $3 million, or if it would otherwise violate the Purchase
Payment restrictions of your Contract (for example, we do not allow additional Purchase Payments on or after the Annuity Date).
|
|
When Annuity Payments Begin
See section 8
|
The earliest acceptable Annuity Date is one year after the Issue Date.
|
Hawaii
|
Income Multiplier Benefit
See section 9
|
This benefit is not available.
|
Montana
|
Access to Your Money
See section 7
|
If you take a partial withdrawal that reduces the Contract Value below $2,000, we contact you and give you the option of modifying your withdrawal request. If we
cannot reach you within seven days of our receipt of your request in Good Order at our Service Center, we process your request as a full withdrawal.
|
New Jersey
|
Joint Owner
See section 2
|
We allow civil union partners to be Joint Owners.
|
|
Determining Life (Lives)
See section 2
|
We allow civil union partners to be joint Determining Lives.
|
|
Eligible Person(s) and Covered Person(s)
See section 2
|
We allow civil union partners to be joint Eligible Persons and joint Covered Persons. If at any time joint Eligible Persons or joint Covered
Persons are no longer civil union partners you must send us written notice. If we receive notice on or before the Income Benefit Date, joint Income Payments will not be available to you. If we receive notice after the Income Benefit
Date, we will remove one former civil union partner from the Contract as a Covered Person and also as an Owner, Joint Owner, Annuitant and/or Beneficiary.
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Appendix D
ISSUE STATE
|
FEATURE AND BENEFITS
|
VARIATION
|
New Jersey (continued)
|
Assignments, Changes of Ownership and Other Transfers of Contract Rights
See section 2
|
We cannot restrict assignments or changes of ownership.
• We do not change the Determining Life (Lives) following an assignment or ownership change. If you assign the Contract and the Determining Life (Lives) are no longer an Owner (or Annuitant if the Owner
is a non-individual) the Traditional Death Benefit or Maximum Anniversary Value Death Benefit may not be available and on the Owner’s death the Beneficiary(s) will only receive the Contract Value.
|
|
Purchase Requirements
See section 3
|
The maximum total Purchase Payments that we can accept is $3 million. We must decline a Purchase Payment if it would cause total Purchase Payments to be more
than $3 million, or if it would otherwise violate the Purchase Payment restrictions of your Contract (for example, we do not allow additional Purchase Payments on or after the Annuity Date).
|
Ohio
|
Assignments, Changes of Ownership and Other Transfers of Contract Rights
See section 2
|
We cannot restrict assignments or changes of ownership.
• We do not change the Determining Life (Lives) following an assignment or ownership change. If you assign the Contract and the Determining Life (Lives) are no longer an Owner (or Annuitant if the Owner
is a non-individual) the Traditional Death Benefit or Maximum Anniversary Value Death Benefit may not be available and on the Owner’s death the Beneficiary(s) will only receive the Contract Value.
|
Pennsylvania
|
Income Multiplier Benefit
See section 9
|
The requirement for staying in an eligible facility (a hospital, nursing facility, or assisted living facility) is at least 90 days provided each day of
confinement is no more than 6 months after the previous day of confinement.
|
Texas
|
Assignments, Changes of Ownership and Other Transfers of Contract Rights
See section 2
|
We cannot restrict assignments or changes of ownership.
• We do not change the Determining Life (Lives) following an assignment or ownership change. If you assign the Contract and the Determining Life (Lives) are no longer an Owner (or Annuitant if the Owner
is a non-individual) the Traditional Death Benefit or Maximum Anniversary Value Death Benefit may not be available and on the Owner’s death the Beneficiary(s) will only receive the Contract Value.
|
|
Access to Your Money
See section 7
|
We only treat a partial withdrawal that reduces the Contract Value below $2,000 as a full withdrawal if you have not made an additional Purchase Payment in the
past two calendar years.
|
|
Income Multiplier Benefit
See section 9
|
To qualify for a payment increase based on performance of ADLs, a Covered Person must have been able to perform each of these six ADLs on the Issue Date.
|
Wisconsin
|
Assignments, Changes of Ownership and Other Transfers of Contract Rights
See section 2
|
We cannot restrict assignments or changes of ownership.
• We do not change the Determining Life (Lives) following an assignment or ownership change. If you assign the Contract and the Determining Life (Lives) are no longer an Owner (or Annuitant if the Owner
is a non-individual) the Traditional Death Benefit or Maximum Anniversary Value Death Benefit may not be available and on the Owner’s death the Beneficiary(s) will only receive the Contract Value.
|
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Appendix D
Appendix E – Unaudited Selected Financial Data and Statutory Financial Statements
Management’s Discussion and Analysis of Financial
Condition and Results of Operations (For the 3 month period ending March 31, 2021)
The following discussion of our financial
condition and results of operations should be read in conjunction with our statutory financial statements and notes to those statements included in this Appendix. The discussion and analysis in this Appendix 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 our actual growth, results of operations, performance, financial position and business
prospects and opportunities in the remainder of 2021 and beyond to differ materially from those expressed in, or implied by, those forward-looking statements. See “Forward-Looking Statements.”
Unaudited Statutory Financial Statements
The following unaudited statutory financial
statements of Allianz Life Insurance Company of North America as of March 31, 2021 and unaudited statutory statements of admitted assets, liabilities, and capital and surplus as of December 31, 2020, as well as the related unaudited statutory
statements of operations, capital and surplus and cash flow for the three month periods ended March 31, 2021 and March 31, 2020 are included in this Appendix.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Appendix E
Item 11(f).
Selected Financial Data
(dollars in millions, unless otherwise stated)
The following table sets forth the Company’s selected historical financial
data. The selected financial data has been derived from the Statutory 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 Statutory Financial Statements.
These historical results are not necessarily indicative of results to be
expected for any future period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period ended |
Selected income data |
|
March 31, 2021 |
|
December 31, 2020 |
|
December 31, 2019 |
|
December 31, 2018 |
|
December 31, 2017 |
Premium and annuity considerations* |
|
2,823 |
|
|
$ |
10,542 |
|
|
$ |
13,029 |
|
|
$ |
12,193 |
|
|
$ |
10,231 |
|
Net investment income |
|
1,186 |
|
|
4,864 |
|
|
4,839 |
|
|
4,593 |
|
|
4,504 |
|
Ceded reinsurance reserve and expense adjustments
|
|
74 |
|
|
(45) |
|
|
329 |
|
|
245 |
|
|
612 |
|
Fees from separate accounts |
|
144 |
|
|
567 |
|
|
613 |
|
|
676 |
|
|
719 |
|
Other income |
|
(234) |
|
|
694 |
|
|
(13) |
|
|
(3) |
|
|
150 |
|
Total income |
|
3,993 |
|
|
16,622 |
|
|
18,797 |
|
|
17,704 |
|
|
16,216 |
|
Policyholder benefits and
surrenders |
|
2,803 |
|
|
10,343 |
|
|
10,368 |
|
|
9,436 |
|
|
8,649 |
|
Change in aggregate reserves |
|
(333) |
|
|
2,465 |
|
|
1,034 |
|
|
7,299 |
|
|
10,628 |
|
General and administrative and commission
|
|
460 |
|
|
1,739 |
|
|
1,878 |
|
|
1,770 |
|
|
1,616 |
|
Net transfers from separate accounts |
|
506 |
|
|
1,460 |
|
|
5,254 |
|
|
(2,009) |
|
|
(1,851) |
|
Total
benefits and other expenses |
|
3,436 |
|
|
16,007 |
|
|
18,534 |
|
|
16,496 |
|
|
19,042 |
|
Income tax expense (benefit) |
|
151 |
|
|
18 |
|
|
773 |
|
|
(51) |
|
|
24 |
|
Net realized capital gain
(loss) |
|
25 |
|
|
142 |
|
|
1,053 |
|
|
(490) |
|
|
3,655 |
|
Net income (loss) |
|
$ |
431 |
|
|
$ |
739 |
|
|
$ |
543 |
|
|
$ |
769 |
|
|
$ |
805 |
|
Capital and Surplus: |
|
|
|
|
|
|
|
|
|
|
Change in unrealized capital gain (loss) |
|
(177) |
|
|
(61) |
|
|
719 |
|
|
(230) |
|
|
(78) |
|
Dividends to parent |
|
(400) |
|
|
(750) |
|
|
(325) |
|
|
— |
|
|
(780) |
|
Other change in capital & surplus |
|
157 |
|
|
(220) |
|
|
441 |
|
|
26 |
|
|
(101) |
|
Net change in
capital & surplus |
|
$ |
11 |
|
|
(292) |
|
|
1,378 |
|
|
565 |
|
|
(154) |
|
*Includes premiums and annuity and supplementary
contract considerations. |
Selected Financial Data and Management's Discussion and Analysis
Page 1 of 21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of |
Selected balance sheet
data |
|
March 31, 2021 |
|
December 31, 2020 |
|
December 31, 2019 |
|
December 31, 2018 |
|
December 31, 2017 |
Total cash and invested assets |
|
$ |
127,073 |
|
|
$ |
125,229 |
|
|
$ |
121,870 |
|
|
$ |
117,203 |
|
|
$ |
109,328 |
|
Investment income due and
accrued |
|
1,053 |
|
|
1,040 |
|
|
1,031 |
|
|
1,047 |
|
|
1,004 |
|
Other admitted assets |
|
1,152 |
|
|
1,218 |
|
|
945 |
|
|
951 |
|
|
982 |
|
Separate account assets |
|
48,173 |
|
|
45,901 |
|
|
34,638 |
|
|
22,835 |
|
|
26,755 |
|
Total
admitted assets |
|
177,451 |
|
|
173,388 |
|
|
158,484 |
|
|
142,036 |
|
|
138,069 |
|
Total policyholder
liabilities |
|
108,678 |
|
|
109,353 |
|
|
107,098 |
|
|
107,118 |
|
|
100,433 |
|
Other liabilities |
|
12,928 |
|
|
10,473 |
|
|
8,794 |
|
|
5,507 |
|
|
4,869 |
|
Separate account liabilities |
|
48,173 |
|
|
45,901 |
|
|
34,638 |
|
|
22,835 |
|
|
26,755 |
|
Total
liabilities |
|
169,779 |
|
|
165,727 |
|
|
150,530 |
|
|
135,460 |
|
|
132,057 |
|
Total capital
and surplus |
|
$ |
7,672 |
|
|
$ |
7,661 |
|
|
$ |
7,954 |
|
|
$ |
6,576 |
|
|
$ |
6,011 |
|
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 March 31, 2021, compared with December 31, 2020, and its results of operations for the three month periods ended March 31, 2021 and 2020, respectively. The information contained herein should be read in
conjunction with the Company's 2021 unaudited interim financial statements and the financial statements, notes, exhibits and schedules in the 2020 Annual Statement and audited Statutory Financial Statements of the Company. Amounts are presented on
a non-consolidated basis in accordance with Statutory Accounting Principles (SAP).
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. The Company undertakes no obligation to update publicly or revise any forward-looking statements.
Company Overview
Allianz Life is a wholly-owned subsidiary of Allianz of America, Inc. (AZOA),
which is a wholly-owned subsidiary of Allianz Europe, B.V.. Allianz Europe, B.V. is a wholly-owned subsidiary of Allianz SE, the Company’s ultimate parent, which is incorporated in Munich, Germany. The Company is a life insurance company domiciled
in the State of Minnesota and is licensed to sell insurance products in all U.S. states, except New York, several U.S. territories, and Canada. The Company offers a portfolio of individual fixed-indexed annuities, variable-indexed annuities and
individual ordinary fixed-indexed universal life (FIUL) products. The Company’s products are either sold through licensed independent agents contracted with a field marketing organization or insurance agency, or licensed registered representatives
contracted with a broker/dealer. The Company also maintains a closed portfolio of individual and group long-term care (LTC) and group life, annuity and accident and health policies, and does not actively issue new policies related to these
products.
The Company has organized its principal operations into the following
segments: Individual Annuities, Life, and Legacy.
Selected Financial Data and Management's Discussion and Analysis
Page 2 of 21
Individual Annuities
The Individual Annuities segment provides tax-deferred investment growth and
lifetime income opportunities for our customers through fixed, fixed-indexed, variable-indexed and variable annuities. The “fixed” and “variable” classifications describe whether we or the contractholders bear the investment risk of the assets
supporting the contract. We are one of the largest sellers of fixed-indexed and variable-indexed products. Fixed and variable annuities provide for both asset accumulation and asset distribution needs. Our Individual Annuity products are sold
through both independent and wholly-owned distribution channels made up of agents and registered representatives.
Fixed and fixed-indexed annuities provide guarantees related to the
preservation of principal and interest credited. In 2021, sales of our fixed-indexed annuity products were lower than the prior year to date due to continued impacts of the low interest rate environment.
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. The Company's variable annuity sales strategy has shifted to variable-indexed annuity products, which combines a separate account option with a general account option
that is similar to a fixed-indexed annuity. In 2021, variable-indexed annuity were higher than the prior year to date due to strong sales for the Index Advantage Income® product driven by the market environment.
Life
Our life insurance products provide flexibility and control over a person's
assets, providing the assurance that the beneficiaries will be protected after the insured is gone and, in certain cases, to add cash value accumulation potential. The sales focus of our Life segment is our FIUL insurance products. Deposits are
credited to an account maintained for the policyholder. Our individual life products are sold through independent distribution channels made up of agents and registered representatives. The Life business has continued to grow for the last several
years and was driven by strong product proposition and expanded accelerated underwriting.
Legacy
The Legacy business consists of closed blocks of LTC and Special Markets
products. The Special Markets products include individual and group annuity and life products, including universal life and term life insurance. Although Legacy products are part of the total results, the Company does not allocate additional
resources to these areas other than to maintain the operational support to its current customers. The Company enters into reinsurance agreements to manage risk resulting from businesses we have chosen to exit. The performance of these product lines
is not material enough to warrant discussion as separate operating segments.
Income and Expense Allocation
We maintain segregated investment portfolios at the subsidiary level but do
not maintain segregated portfolios for each segment. All Net investment income and other Corporate income and expense activity is allocated to the segments. Assets are only monitored at the total Company level, and as such, asset disclosures by
segment are not included herein.
Income and expense related to assets backing policyholder reserves are allocated to the
segments based on policyholder statutory reserve levels. The results of our 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.
Selected Financial Data and Management's Discussion and Analysis
Page 3 of 21
Basis of Presentation
The Statutory Financial Statements have been prepared in accordance with
accounting practices prescribed or permitted by the Minnesota Department of Commerce (the Department). The Department recognizes statutory accounting practices prescribed or permitted by the state of Minnesota for determining and reporting the
financial condition and results of operations of an insurance company and its solvency under Minnesota insurance law. The state of Minnesota has adopted the National Association of Insurance Commissioners (NAIC) Accounting Practices and Procedures Manual as its prescribed basis of SAP, without significant modification. The Company has no material statutory accounting practices that differ from those of the Department or NAIC SAP. These practices differ in some respects from
accounting principles generally accepted in the United States of America (U.S. GAAP). The effects of these differences, while not quantified, are presumed to be material to the Statutory Financial Statements.
The preparation of Statutory Financial Statements in conformity with NAIC SAP requires
management to make certain estimates and assumptions that affect reported amounts of admitted assets and liabilities, including reporting or disclosure of contingent assets and liabilities as of March 31, 2021, and December 31, 2020 and the
reported amounts of revenues and expenses during the reporting period. Future events, including changes in mortality, morbidity, interest rates, capital markets, and asset valuations could cause actual results to differ from the estimates used
within the Statutory Financial Statements. Such changes in estimates are recorded in the period they are determined.
Adoption of New Financial Accounting Standards
See Note 2 – “Summary of Significant Accounting Policies” of the Company’s
unaudited Statutory Financial Statements in this prospectus for information related to recent accounting pronouncements.
Application of Critical Accounting Policies
Our accounting policies require management to make interpretative and
valuation judgments and to make estimates based upon assumptions that affect the amounts of assets, liabilities, revenues, and expenses reported in our Statutory Financial Statements. Because the use of assumptions and estimates inherently entails
uncertainty, the effects of accounting policies under different conditions could produce results that are significantly different. A discussion of the presentation of the business factors that affect critical accounting policies can be found in
Note 2 of the accompanying Statutory Financial Statements and are summarized below.
Accounting for Investments
Investment valuation and presentation are determined to be in accordance with
methods prescribed by the NAIC. See Note 3 and 4 of the unaudited Statutory Financial Statements for additional information regarding the portfolio and fair value of investments.
Derivatives
See Note 3 and 4 of the unaudited Statutory Financial Statements for
additional information regarding our derivatives and hedging instruments.
Reinsurance
See Note 6 of the unaudited Statutory Financial Statements for additional
information regarding reinsurance agreements we have entered into to manage insurance risk.
Income Taxes
See Note 5 of the unaudited Statutory Financial Statements for a reconciliation of the federal
income tax rate to the actual effective rate.
Selected Financial Data and Management's Discussion and Analysis
Page 4 of 21
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
Increase
(decrease) and % change |
|
2021 |
|
2020 |
|
2021 - 2020 |
Income: |
|
|
|
|
|
|
|
Premium and annuity considerations*
|
$ |
2,823 |
|
|
2,749 |
|
|
$ |
74 |
|
|
2.7 |
% |
Net investment income
|
1,186 |
|
|
1,189 |
|
|
(3) |
|
|
(0.3) |
|
Ceded reinsurance reserve and expense adjustments
|
74 |
|
|
55 |
|
|
19 |
|
|
34.5 |
|
Fees from separate accounts
|
144 |
|
|
146 |
|
|
(2) |
|
|
(1.4) |
|
Other income
|
(234) |
|
|
449 |
|
|
(683) |
|
|
(152.1) |
|
Total income
|
3,993 |
|
|
4,588 |
|
|
(595) |
|
|
(13.0) |
|
Benefits and other expenses:
|
|
|
|
|
|
|
|
Policyholder benefits and surrenders
|
2,803 |
|
|
2,794 |
|
|
9 |
|
|
0.3 |
|
Change in aggregate reserves
|
(333) |
|
|
1,542 |
|
|
(1,875) |
|
|
(121.6) |
|
General and administrative and commission
|
460 |
|
|
414 |
|
|
46 |
|
|
11.1 |
|
Net transfers from separate accounts
|
506 |
|
|
45 |
|
|
461 |
|
|
NM** |
Total benefits and other expenses
|
3,436 |
|
|
4,795 |
|
|
(1,359) |
|
|
(28.3) |
|
Pretax income (loss)
|
557 |
|
|
(207) |
|
|
764 |
|
|
369.1 |
|
Income tax expense (benefit)
|
151 |
|
|
(525) |
|
|
676 |
|
|
128.8 |
|
Net realized capital gain (loss)
|
25 |
|
|
28 |
|
|
(3) |
|
|
(10.7) |
|
Net income (loss)
|
$ |
431 |
|
|
346 |
|
|
$ |
85 |
|
|
24.6 |
% |
Capital and Surplus: |
|
|
|
|
|
|
|
Change in unrealized capital gain (loss)
|
$ |
(177) |
|
|
(639) |
|
|
$ |
462 |
|
|
72.3 |
|
Dividends to parent |
(400) |
|
|
(750) |
|
|
$ |
350 |
|
|
46.7 |
|
Other change in capital & surplus
|
157 |
|
|
(256) |
|
|
413 |
|
|
161.3 |
|
Net change in capital & surplus
|
$ |
11 |
|
|
(1,299) |
|
|
$ |
1,310 |
|
|
100.8 |
% |
*Includes
premiums and annuity and supplementary contract considerations.
**NM - Not meaningful.
|
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Overview
The increase in capital and surplus was primarily driven by impacts from
favorable equity markets resulting in lower net losses on derivatives hedging variable-indexed liabilities, partially offset by net gains on derivative hedging fixed-indexed and life product liabilities and lower dividend payment to the parent.
Income
•Premium and annuity considerations: Individual Annuities premiums and annuity considerations increased primarily due to higher variable-indexed annuity premium driven by competitive product features within the Individual Annuities segment. This was partially offset by lower fixed-indexed annuity sales based upon product changes made in response to the continued low interest environment. The Life segment increased as a result of an increase in renewal premiums for the majority of products as well as increase in first year premium for Life Pro Plus Advantage® due to a growing block of business.
•Net investment income: Net investment income decreased slightly primarily due to slower growth in the fixed-indexed annuity block of business and lower investments yields, partially offset by growth in variable-indexed annuity and Life segment
invested assets.
Selected Financial Data and Management's Discussion and Analysis
Page 5 of 21
•Ceded reinsurance reserve and expense adjustments: Ceded reinsurance reserve and expense adjustments increased primarily due to impacts from a new inforce reinsurance agreement in the Individual Annuities segment.
•Fees from separate accounts: Fees from separate accounts slightly decreased primarily due to lower separate account assets on the traditional variable annuity block of business.
•Other income: Other income decreased primarily due to a decrease in derivative income on interest rate swaps that hedge changes in cash flows for variable annuities with the Individual Annuity segment.
Benefits and Other Expenses
•Policyholder benefits and surrenders: Policyholder benefits and surrenders increased slightly primarily due to an increase in annuitizations within the Individual Annuity segment and increased death claims in the Life segment.
This was partially offset by lower Policyholder benefits and surrenders in the Life Segment primarily due to policyholder activity.
•Change in aggregate reserves: Change in aggregate reserves decreased primarily due to a decrease in the Individual Annuities segment driven by variable annuity reserve decreases as a results of SSAP No. 108 Hedge
Accounting offsets and lower new fixed-indexed annuity reserves established due to lower production. This was partially offset by an increase in the Life segment reserves due to higher premiums and an increase in policy charges.
•General and administrative and commission: General, administrative and commission expense increased primarily due to an increase in commissions expense as a result of higher production due to the strong product positioning in the
Individual Annuity and Life segments.
•Net transfers from separate accounts: Net transfers from separate accounts is driven by policyholder withdrawals and new premium, and increased due to increased premium from Index Advantage Income® in the Individual Annuities
segment.
•Income tax expense (benefit): There is a federal income tax expense in 2021 due to impacts from realized and unrealized gains on derivatives hedging liabilities in the Company's Individual Annuity and Life segments.
•Net realized capital gain (loss): Net realized capital gains decreased due to gains on derivatives hedging fixed-indexed annuities and life product liabilities, partially offset by losses on derivatives hedging
variable-indexed annuity product liabilities.
Capital and Surplus
•Change in unrealized capital gain (loss): Unrealized capital losses are primarily due to losses on derivatives hedging fixed-indexed annuity product liabilities in the Individual Annuities segment and Life product liabilities in the
Life segment, partially offset by gains on derivatives hedging variable and variable-indexed product liabilities in the Individual Annuities segment.
•Other change in capital and surplus: Other change in capital and surplus increased due to impacts from a new in-force reinsurance agreement which was entered in 2021 and the change in deferred income taxes as a result of
positive derivative hedging impacts within our Individual Annuities segment. There was also a change in asset valuation reserve (AVR) that decreased capital and surplus due to the growth of the Company's general account investment portfolio.
Selected Financial Data and Management's Discussion and Analysis
Page 6 of 21
Individual Annuities
Segment Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
Increase
(decrease) and % change |
|
2021 |
|
2020 |
|
2021 - 2020 |
Income: |
|
|
|
|
|
|
|
Premium and annuity considerations*
|
$ |
2,477 |
|
|
2,468 |
|
|
$ |
9 |
|
|
0.4 |
% |
Net investment income
|
1,095 |
|
|
1,111 |
|
|
(16) |
|
|
(1.4) |
|
Ceded reinsurance reserve and expense adjustments
|
81 |
|
|
50 |
|
|
31 |
|
|
62.0 |
|
Fees from separate accounts
|
144 |
|
|
146 |
|
|
(2) |
|
|
(1.4) |
|
Other income
|
(236) |
|
|
452 |
|
|
(688) |
|
|
(152.2) |
|
Total income
|
3,561 |
|
|
4,227 |
|
|
(666) |
|
|
(15.8) |
|
Benefits and other expenses:
|
|
|
|
|
|
|
|
Policyholder benefits and surrenders
|
2,738 |
|
|
2,715 |
|
|
23 |
|
|
0.8 |
|
Change in aggregate reserves
|
(595) |
|
|
1,344 |
|
|
(1,939) |
|
|
(144.3) |
|
General and administrative and commission
|
355 |
|
|
332 |
|
|
23 |
|
|
6.9 |
|
Net transfers to (from)
separate accounts |
506 |
|
|
46 |
|
|
460 |
|
|
NM** |
Total benefits and other expenses
|
3,004 |
|
|
4,437 |
|
|
(1,433) |
|
|
(32.3) |
|
Pretax income (loss)
|
557 |
|
|
(210) |
|
|
767 |
|
|
365.2 |
|
Income tax expense (benefit)
|
151 |
|
|
(536) |
|
|
687 |
|
|
128.2 |
|
Net realized capital gain (loss)
|
(30) |
|
|
64 |
|
|
(94) |
|
|
(146.9) |
|
Net income (loss)
|
$ |
376 |
|
|
390 |
|
|
$ |
(14) |
|
|
(3.6) |
% |
Capital and Surplus: |
|
|
|
|
|
|
|
Change in unrealized capital gain (loss)
|
$ |
(160) |
|
|
(504) |
|
|
$ |
344 |
|
|
68.3 |
% |
Other change in capital & surplus
|
157 |
|
|
(244) |
|
|
401 |
|
|
164.3 |
|
Net change in capital & surplus
|
$ |
373 |
|
|
(358) |
|
|
$ |
731 |
|
|
204.2 |
% |
*Includes premiums and annuity and supplementary contract considerations.
|
**NM - Not meaningful |
Selected Operating Performance Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
Increase
(decrease) and % change |
|
2021 |
|
2020 |
|
2021 - 2020 |
Individual Annuities |
|
|
|
|
|
|
|
Deposits
|
$ |
2,500 |
|
|
2,535 |
|
|
$ |
(35) |
|
|
(1.4) |
% |
Inforce
|
92,596 |
|
|
93,203 |
|
|
(607) |
|
|
(0.7) |
% |
Deposits and inforce amounts in the table above are for direct and assumed
business. Deposits reflect amounts collected on both new and renewal business. Inforce represents account values of the annuity contracts for our fixed, fixed-indexed, variable, and variable-indexed annuity contracts. In 2021, sales of our
fixed-indexed annuity products were lower than the prior period due to continuous low interest rate environment. This was partially offset by higher variable-indexed annuity sales for the Index Advantage suite of products driven by the market
environment.
Selected Financial Data and Management's Discussion and Analysis
Page 7 of 21
Change in Key Market Factors
Our Individual Annuities segment is impacted by various market impacts and
movements which are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
% change
|
|
2021 |
|
2020 |
|
2021 - 2020 |
Stock Index
|
|
|
|
|
|
S&P 500
|
5.77% |
|
(20.00)% |
|
25.77% |
NASDAQ 100
|
1.58% |
|
(10.53)% |
|
12.11% |
BUDBI
|
(0.41)% |
|
(1.17)% |
|
0.76% |
BUDBI II
|
(1.37)% |
|
0.21% |
|
(1.58)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
Basis point (bps) change
|
|
2021 |
|
2020 |
|
2021 - 2020 |
Interest Rates
|
|
|
|
|
|
Swap 10yr
|
1.78% |
|
0.73% |
|
105 bps |
Swap 20yr
|
2.16% |
|
0.88% |
|
128 bps |
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Overview
The Individual Annuities segment net increase in capital and surplus was
primarily driven by impacts from postive equity markets, a new reinsurance agreement covering certain fixed-indexed annuities, lower unrealized losses, and a decrease in reserves. This was partially offset by a decrease in derivative income on
interest rate swaps, and an increase in net transfers to the separate accounts.
Income
•Premium and annuity considerations: Premium and annuity considerations increased primarily due to higher variable-indexed annuity premium driven by competitive product features, partially offset by lower fixed-indexed annuity sales based upon product
changes made in response to the continued low interest environment.
•Net investment income: Net investment income slightly decreased primarily due to slower growth in the fixed-indexed annuity block of business and lower investments yields, partially offset by growth in variable-indexed annuity invested assets.
•Ceded reinsurance reserve and expense adjustments: Ceded reinsurance reserve and expense adjustments increased primarily due to impacts from a new inforce reinsurance agreement.
•Fees from separate accounts: Fees from separate accounts slightly decreased primarily due to lower separate account assets on the traditional variable annuity block of business.
•Other income: Other income decreased primarily driven by hedge accounting adjustments based on the change in interest rates year over year and their impact on reserves.
Benefits and Other Expenses
•Policyholder benefits and surrenders: Policyholder benefits and surrenders increased primarily due to an increase in annuitizations on both the fixed annuity and variable annuity lines of business. This was partially offset by a decrease in
surrenders on the fixed annuity line of business.
Selected Financial Data and Management's Discussion and Analysis
Page 8 of 21
•Change in aggregate reserves: Change in aggregate reserves decreased primarily due to variable annuity reserve decreases as a result of SSAP No. 108 Hedge Accounting offsets and lower new fixed-indexed annuity reserves established due to lower production.
•General and administrative and commission: General, administrative and commission expense increased primarily due to an increase in commissions expense as a result of higher premium from the sale of variable-indexed annuities.
•Net transfers to (from) separate accounts: Net transfers to (from) separate accounts is driven by policyholder withdrawals and new premium, and increased due to increased premium from Index Advantage Income®. The increase in Net
transfers to (from) separate accounts was partially offset by higher policyholder withdrawals.
•Net realized capital gain (loss): Net realized capital losses increased due to losses on derivatives used to economically hedge the Company's variable-indexed annuity product liabilities as a result of an increase in equity markets.
•Income tax expense (benefit): Income tax expense increase is driven by higher federal income tax expense due to derivatives hedging impacts.
Capital and Surplus
•Change in unrealized capital gain (loss): Unrealized capital losses are primarily due to losses on derivatives used to hedge product liabilities on fixed-indexed annuities, partially offset by gains on derivatives used to hedge
product liabilities on variable-indexed annuities.
•Other change in capital and surplus: Other change in capital and surplus increased due to the deferred gain on reinsurance. Other favorable impacts include a change in deferred income taxes as a result of positive hedging
impacts offset by a change in AVR that decreased capital and surplus as a result of the growth of our investment portfolio.
Selected Financial Data and Management's Discussion and Analysis
Page 9 of 21
Life
Segment Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
Increase
(decrease) and % change |
|
2021 |
|
2020 |
|
2021 - 2020 |
Income: |
|
|
|
|
|
|
|
Premium and annuity considerations
|
$ |
304 |
|
|
241 |
|
|
$ |
63 |
|
|
26.1 |
% |
Net investment income
|
57 |
|
|
48 |
|
|
9 |
|
|
18.8 |
|
Ceded reinsurance reserve and expense adjustments
|
(8) |
|
|
3 |
|
|
(11) |
|
|
(366.7) |
|
|
|
|
|
|
|
|
|
Other income
|
1 |
|
|
(2) |
|
|
3 |
|
|
150.0 |
|
Total income
|
354 |
|
|
290 |
|
|
64 |
|
|
22.1 |
|
Benefits and other expenses:
|
|
|
|
|
|
|
|
Policyholder benefits and surrenders
|
45 |
|
|
53 |
|
|
(8) |
|
|
(15.1) |
|
Change in aggregate reserves
|
229 |
|
|
163 |
|
|
66 |
|
|
40.5 |
|
General and administrative and commission
|
98 |
|
|
75 |
|
|
23 |
|
|
30.7 |
|
|
|
|
|
|
|
|
|
Total benefits and other expenses
|
372 |
|
|
291 |
|
|
81 |
|
|
27.8 |
|
Pretax income (loss)
|
(18) |
|
|
(1) |
|
|
(17) |
|
|
NM** |
Income tax expense (benefit)
|
(5) |
|
|
(1) |
|
|
(4) |
|
|
(400.0) |
|
Net realized capital gain (loss)
|
54 |
|
|
(34) |
|
|
88 |
|
|
258.8 |
|
Net income (loss)
|
$ |
41 |
|
|
(34) |
|
|
$ |
75 |
|
|
220.6 |
% |
Capital and Surplus: |
|
|
|
|
|
|
|
Change in unrealized capital gain (loss)
|
$ |
(12) |
|
|
(135) |
|
|
$ |
123 |
|
|
91.1 |
% |
Other change in capital & surplus
|
(1) |
|
|
(9) |
|
|
8 |
|
|
88.9 |
|
Net change in capital & surplus
|
$ |
28 |
|
|
(178) |
|
|
$ |
206 |
|
|
115.7 |
% |
**NM - Not meaningful |
|
|
|
|
|
|
|
Selected Operating Performance Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
Increase
(decrease) and % change |
|
2021 |
|
2020 |
|
2021 - 2020 |
Life |
|
|
|
|
|
|
|
First year and renewal premiums
|
$ |
319 |
|
|
253 |
|
|
$ |
66 |
|
|
26.1 |
% |
Inforce
|
53,645 |
|
|
44,154 |
|
|
9,491 |
|
|
21.5 |
% |
First year and renewal premiums and inforce amounts in the table above are
for direct and assumed business. Inforce amounts represent life insurance inforce on our FIUL business and certain universal life, and term life business. The increase in first year and renewal premiums in 2021 is a result of continued product
enhancements and overall strong product proposition. The movement of in-force, year over year, is primarily driven by policyholder activity. Increases are driven by new business, and decreases are driven by policyholder charges, surrenders, and
claims.
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Overview
The Life segment net change in capital and surplus increased primarily due to
impacts from positive equity markets, and an increase in policy charges and net investment income as a result of a growing and maturing block of business. This was
Selected Financial Data and Management's Discussion and Analysis
Page 10 of 21
partially offset by an increase in change in aggregate reserves and
commissions expense which trends in line with the growing block of business.
Income
•Premium and annuity considerations: Premiums and annuity considerations increased as a result of an increase in first year and renewal premiums on Life Pro Plus Advantage® due to a growing block of business.
•Net investment income: Net
investment income increased primarily due to an increase in Life average invested assets.
•Ceded reinsurance reserve and expense adjustments: Ceded reinsurance reserve and expense adjustments decreased as a result of modified coinsurance reserves on certain Life products.
Benefits and Other Expenses
•Policyholder benefits and surrenders: Policyholder benefits and surrenders decreased primarily due to policyholder surrender activity, partially offset by an increase in death claims.
•Change in aggregate reserves: Change in aggregate reserves increased due to higher premiums and an increase in policy charges as a result of a growing and maturing block of business and higher index credit levels as a result of the positive equity market
performance in the first quarter of 2021.
•General and administrative and commission: General and administrative and commission expense increased primarily due to an increase in first year and renewal commissions which is consistent with premium production.
•Income tax expense (benefit): Income tax expense (benefit) is driven by the pre-tax items discussed above.
•Net realized capital gain (loss): Net realized capital gain increased due to the higher gains on derivatives used to hedge Life product liabilities as a result of positive equity markets in the first quarter of 2021.
Capital and Surplus
•Change in unrealized capital gain (loss): Change in unrealized capital losses decreased due to a decrease in losses on derivatives hedging the Life product liabilities as a result of the negative equity markets in first quarter of
2020.
•Other change in capital and surplus: Other change in capital
and surplus decreased as a result of a change in net deferred income taxes as result of net losses on derivatives hedging Life product liabilities.
Selected Financial Data and Management's Discussion and Analysis
Page 11 of 21
Legacy
Segment Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
Increase
(decrease) and % change |
|
2021 |
|
2020 |
|
2021 - 2020 |
Income: |
|
|
|
|
|
|
|
Premium and annuity considerations
|
$ |
41 |
|
|
40 |
|
|
$ |
1 |
|
|
2.5 |
% |
Net investment income
|
33 |
|
|
30 |
|
|
3 |
|
|
10.0 |
|
Ceded reinsurance reserve and expense adjustments
|
2 |
|
|
2 |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
Other income
|
1 |
|
|
(1) |
|
|
2 |
|
|
200.0 |
|
Total income
|
77 |
|
|
71 |
|
|
6 |
|
|
8.5 |
|
Benefits and other expenses:
|
|
|
|
|
|
|
|
Policyholder benefits and surrenders
|
20 |
|
|
25 |
|
|
(5) |
|
|
(20.0) |
|
Change in aggregate reserves
|
33 |
|
|
34 |
|
|
(1) |
|
|
(2.9) |
|
General and administrative and commission
|
7 |
|
|
7 |
|
|
— |
|
|
— |
|
Net transfers from separate accounts
|
(1) |
|
|
— |
|
|
(1) |
|
|
NM** |
Total benefits and other expenses
|
59 |
|
|
66 |
|
|
(7) |
|
|
(10.6) |
|
Pretax income (loss)
|
18 |
|
|
5 |
|
|
13 |
|
|
260.0 |
|
Income tax expense (benefit)
|
5 |
|
|
12 |
|
|
(7) |
|
|
(58.3) |
|
Net realized capital gain (loss)
|
— |
|
|
(1) |
|
|
1 |
|
|
100.0 |
|
Net income (loss)
|
$ |
13 |
|
|
$ |
(8) |
|
|
$ |
21 |
|
|
262.5 |
% |
Capital and Surplus: |
|
|
|
|
|
|
|
Change in unrealized capital gain (loss)
|
$ |
(5) |
|
|
1 |
|
|
$ |
(6) |
|
|
(600.0) |
% |
Other change in capital & surplus
|
— |
|
|
(4) |
|
|
4 |
|
|
100.0 |
|
Net change in capital & surplus
|
$ |
8 |
|
|
(11) |
|
|
$ |
19 |
|
|
172.7 |
% |
**NM - Not meaningful |
|
|
|
|
|
|
|
Selected Operating Performance Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
Increase
(decrease) and % change |
|
2021 |
|
2020 |
|
2021 - 2020 |
Legacy Products |
|
|
|
|
|
|
|
Gross premiums written
|
$ |
66 |
|
|
66 |
|
|
$ |
— |
|
|
— |
% |
Inforce
|
2,727 |
|
|
2,923 |
|
|
(196) |
|
|
(6.7) |
|
Gross premiums written in the table above are for direct and assumed
business. Gross premiums written reflect premiums collected on renewal business. There are no new premiums as these are closed blocks of business. Gross premiums written remained relatively consistent in 2021 and 2020 with small movements due to
assumed premium and policy restatements which occur in the run off of Legacy products. Inforce amounts represent gross life insurance within our Special Markets products. The continued decline in inforce volume is attributable to the Legacy segment
being a closed block of business.
Selected Financial Data and Management's Discussion and Analysis
Page 12 of 21
Three Months Ended March 31, 2021 Compared to Three Months Ended March 31, 2020
Overview
The Legacy segment favorable change in capital and surplus was driven by an
increase in investment income and lower policyholder benefits and surrenders expenses. This was partially offset by income tax expenses and change in unrealized capital losses.
Income
•Net investment income: Net investment income increased driven by growth in LTC reserves on the aging block of business.
Benefits and Other Expenses
•Policyholder benefits and surrenders: Policyholder benefits and surrenders decreased driven by lower paid claims on the LTC block business.
•Change in aggregate reserves: Change in aggregate reserves decreased driven by favorable impact of lower change in active life reserves.
•Income tax expense (benefit): Income tax expense (benefit) is driven by the pre-tax items discussed above.
Capital and Surplus
•Change in unrealized capital gain (losses): Change in unrealized capital gains (losses) increased driven by unrealized losses on Credit Default Swaps.
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
Increase
(decrease) and % change |
|
2021 |
|
2020 |
|
2021 - 2020 |
Capital and Surplus: |
|
|
|
|
|
|
|
Dividends to parent |
$ |
(400) |
|
|
(750) |
|
|
$ |
350 |
|
|
53.3 |
% |
We are required to meet minimum statutory capital and surplus requirements.
Our statutory capital and surplus as of March 31, 2021 and December 31, 2020, were in compliance with these requirements. The maximum amount of ordinary dividends that can be paid by Minnesota insurance companies to the stockholder without prior
approval of the Department is subject to restrictions relating to statutory earned surplus, also known as unassigned funds. Unassigned funds are determined in accordance with the accounting procedures and practices governing preparation of the
statutory annual statement. In accordance with Minnesota Statutes, the Company may declare and pay from its Unassigned surplus cash dividends of not more than the greater of 10% of its prior year-end statutory surplus, or the net gain from
operations of the insurer, not including realized gains, for the 12-month period ending the 31st day of the next preceding year. Based on these limitations, ordinary dividends of $766 can be paid in 2021 without prior approval of the Commissioner
of Commerce.
Financial Condition
Investment Strategy
Our investment strategy focuses on diversification by asset class. We seek to
achieve economic diversification, while reducing overall credit and liquidity risks. We attempt to mitigate these credit and liquidity risks by adhering to investment policies that provide portfolio diversification on an asset class, creditor, and
industry basis, and by complying with investment limitations governed by state insurance laws and regulations, as applicable. We also consider all relevant objective information available in estimating the cash flows related to structured
securities. We actively monitor and manage
Selected Financial Data and Management's Discussion and Analysis
Page 13 of 21
exposures, and determine whether any securities are impaired. The aggregate
credit risk taken in the investment portfolio is influenced by our risk/return preferences, the economic and credit environment, and the ability to manage this risk through liability portfolio management. We also have an asset-liability management
strategy to align cash flows and duration of the investment portfolio with contractholder liability cash flows and duration.
The following table presents the investment portfolio at March 31, 2021 and
December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
|
December 31, 2020 |
|
Carrying value |
|
% of total |
|
Carrying value |
|
% of total |
Bonds |
$ |
100,783 |
|
|
79.3 |
% |
|
$ |
99,088 |
|
|
79.1 |
% |
Stocks |
399 |
|
|
0.3 |
|
|
274 |
|
|
0.2 |
|
Investment in
subsidiaries |
1,338 |
|
|
1.0 |
|
|
1,329 |
|
|
1.1 |
|
Mortgage loans on real
estate |
15,901 |
|
|
12.5 |
|
|
15,634 |
|
|
12.5 |
|
Real estate |
71 |
|
|
0.1 |
|
|
69 |
|
|
0.1 |
|
Cash and cash equivalents
|
715 |
|
|
0.6 |
|
|
910 |
|
|
0.7 |
|
Policy loans |
260 |
|
|
0.2 |
|
|
255 |
|
|
0.2 |
|
Derivative assets |
3,628 |
|
|
2.9 |
|
|
4,114 |
|
|
3.3 |
|
Other invested assets |
3,978 |
|
|
3.1 |
|
|
3,556 |
|
|
2.8 |
|
Total cash and
invested assets |
$ |
127,073 |
|
|
100.0 |
% |
|
$ |
125,229 |
|
|
100.0 |
% |
Bonds
Refer to Note 3 of the Statutory Financial Statements for information
regarding the nature of our portfolio of bonds securities. The tables below set forth the amortized cost of the NAIC Securities Valuation Office quality ratings for the Company's bond securities portfolio at March 31, 2021 and December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
NAIC Classes |
Fair Value |
|
% of Total |
|
Amortized Cost |
|
% of Total |
1 |
$ |
60,765 |
|
|
54.8 |
% |
|
$ |
55,457 |
|
|
55.0 |
% |
2 |
46,826 |
|
|
42.2 |
|
|
42,287 |
|
|
42.0 |
|
Investment
grade |
107,591 |
|
|
97.0 |
% |
|
97,744 |
|
|
97.0 |
% |
3 |
3,122 |
|
|
2.8 |
|
|
2,843 |
|
|
2.8 |
|
4 |
175 |
|
|
0.2 |
|
|
191 |
|
|
0.2 |
|
5 |
2 |
|
|
— |
|
|
2 |
|
|
— |
|
6 |
3 |
|
|
— |
|
|
3 |
|
|
— |
|
Below
investment grade |
3,302 |
|
|
3.0 |
|
|
3,039 |
|
|
3.0 |
|
Total |
$ |
110,893 |
|
|
100.0 |
% |
|
$ |
100,783 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
NAIC Classes |
Fair Value |
|
% of Total |
|
Amortized Cost |
|
% of Total |
1 |
$ |
64,466 |
|
|
55.7 |
% |
|
$ |
55,379 |
|
|
55.9 |
% |
2 |
47,679 |
|
|
41.2 |
|
|
40,472 |
|
|
40.9 |
|
Investment
grade |
112,145 |
|
|
96.9 |
|
|
95,851 |
|
|
96.8 |
|
3 |
3,323 |
|
|
2.9 |
|
|
2,982 |
|
|
3.0 |
|
4 |
221 |
|
|
0.2 |
|
|
232 |
|
|
0.2 |
|
5 |
18 |
|
|
— |
|
|
20 |
|
|
— |
|
6 |
3 |
|
|
— |
|
|
3 |
|
|
— |
|
Below
investment grade |
3,565 |
|
|
3.1 |
|
|
3,237 |
|
|
3.2 |
|
Total |
$ |
115,710 |
|
|
100.0 |
% |
|
$ |
99,088 |
|
|
100.0 |
% |
Selected Financial Data and Management's Discussion and Analysis
Page 14 of 21
Sub-prime and Alt-A Mortgage Exposure
Sub-prime lending is the origination of loans to customers with weaker credit
profiles. Due to the high quality of our mortgaged-backed securities, and the lack of sub-prime loans in the securities, we do not have a material exposure to sub-prime or Alt-A mortgages in those holdings. Alt-A loans are defined as any security
backed by residential mortgage collateral which is not clearly identifiable as prime or sub-prime.
Commercial Mortgage-backed, Residential 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 NAIC classes and vintage year as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
NAIC Classes |
% of total CMBS |
|
|
Vintage |
1 |
$ |
11,069 |
|
|
100.0 |
% |
|
2021 |
$ |
190 |
|
|
1.7 |
% |
2 |
1 |
|
|
— |
|
|
2020 |
327 |
|
|
3.0 |
|
3 |
3 |
|
|
— |
|
|
2019 |
1,503 |
|
|
13.6 |
|
4 |
— |
|
|
— |
|
|
2018 |
1,732 |
|
|
15.6 |
|
5 |
— |
|
|
— |
|
|
2017 and prior |
7,321 |
|
|
66.1 |
|
6 |
— |
|
|
— |
|
|
|
$ |
11,073 |
|
|
100.0 |
% |
|
$ |
11,073 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020 |
NAIC Classes |
% of total CMBS |
|
|
Vintage |
1 |
$ |
11,234 |
|
|
99.5 |
% |
|
2020 |
$ |
335 |
|
|
3.0 |
% |
2 |
1 |
|
|
— |
|
|
2019 |
1,607 |
|
|
14.2 |
|
3 |
47 |
|
|
0.4 |
|
|
2018 |
1,845 |
|
|
16.3 |
|
4 |
15 |
|
|
0.1 |
|
|
2017 |
1,627 |
|
|
14.4 |
|
5 |
— |
|
|
0.0 |
|
|
2016 and prior |
5,883 |
|
|
52.1 |
|
6 |
— |
|
|
— |
|
|
|
$ |
11,297 |
|
|
100.0 |
% |
|
$ |
11,297 |
|
|
100.0 |
% |
|
|
|
|
|
Asset backed security (ABS) holdings consist primarily of aircraft leases,
credit card receivables and other asset-backed securities that meet specific criteria, such as credit quality, insurance requirements, or limits on these types of investments.
The following table summarizes our exposure to other ABS holdings by NAIC
classes and vintage year as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
NAIC Classes |
% of total other
ABS |
|
|
Vintage |
1 |
$ |
3,177 |
|
|
71.4 |
% |
|
2021 |
$ |
562 |
|
|
12.6 |
% |
2 |
1,089 |
|
|
24.5 |
|
|
2020 |
750 |
|
|
16.9 |
|
3 |
72 |
|
|
1.6 |
|
|
2019 |
1,184 |
|
|
26.6 |
|
4 |
112 |
|
|
2.5 |
|
|
2018 |
1,057 |
|
|
23.7 |
|
5 |
— |
|
|
— |
|
|
2017 and prior |
897 |
|
|
20.2 |
|
6 |
— |
|
|
— |
|
|
|
$ |
4,450 |
|
|
100.0 |
% |
|
$ |
4,450 |
|
|
100.0 |
|
|
|
|
|
|
Selected Financial Data and Management's Discussion and Analysis
Page 15 of 21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020 |
NAIC Classes |
% of total other
ABS |
|
|
Vintage |
1 |
$ |
2,883 |
|
|
70.6 |
% |
|
2020 |
$ |
758 |
|
|
18.6 |
% |
2 |
976 |
|
|
23.9 |
|
|
2019 |
1,264 |
|
|
30.9 |
|
3 |
74 |
|
|
1.8 |
|
|
2018 |
1,094 |
|
|
26.8 |
|
4 |
134 |
|
|
3.3 |
|
|
2017 |
302 |
|
|
7.4 |
|
5 |
18 |
|
|
0.4 |
|
|
2016 and prior |
667 |
|
|
16.3 |
|
6 |
— |
|
|
— |
|
|
|
$ |
4,085 |
|
|
100.0 |
% |
|
$ |
4,085 |
|
|
100.0 |
% |
|
|
|
|
|
Non-agency residential mortgage-backed securities (NA RMBS) are backed by pools of residential
mortgage loans made to non-prime borrowers, diversified across geographies.
The following table summarizes our exposure NA RMBS holdings by NAIC classes and vintage year as
of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
NAIC Classes |
% of total NA RMBS |
|
|
Vintage |
1 |
$ |
223 |
|
|
95.3 |
% |
|
2021 |
$ |
— |
|
|
— |
% |
2 |
— |
|
|
— |
|
|
2020 |
— |
|
|
— |
|
3 |
4 |
|
|
1.7 |
|
|
2019 |
— |
|
|
— |
|
4 |
4 |
|
|
1.7 |
|
|
2018 |
— |
|
|
— |
|
5 |
— |
|
|
— |
|
|
2017 and prior |
234 |
|
|
100.0 |
|
6 |
3 |
|
|
1.3 |
|
|
|
$ |
234 |
|
|
100.0 |
% |
|
$ |
234 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2020 |
NAIC Classes |
% of total NA RMBS |
|
|
Vintage |
1 |
$ |
222 |
|
|
95.3 |
% |
|
2020 |
$ |
— |
|
|
— |
% |
2 |
— |
|
|
— |
|
|
2019 |
— |
|
|
— |
|
3 |
4 |
|
|
1.7 |
|
|
2018 |
— |
|
|
— |
|
4 |
4 |
|
|
1.7 |
|
|
2017 |
— |
|
|
— |
|
5 |
— |
|
|
— |
|
|
2016 and prior |
233 |
|
|
100.0 |
|
6 |
3 |
|
|
1.3 |
|
|
|
$ |
233 |
|
|
100.0 |
% |
|
$ |
233 |
|
|
100.0 |
% |
|
|
|
|
|
Selected Financial Data and Management's Discussion and Analysis
Page 16 of 21
Unrealized investment losses of bonds, for investment grade (NAIC classes 1-2) and below
investment grade (NAIC classes 3-6) securities by duration are as follows at March 31, 2021, and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
|
Investment Grade |
|
% of
Total |
|
Below Investment
Grade |
|
% of
Total |
Twelve months
or less below carrying value |
$ |
617 |
|
|
91.8 |
% |
|
$ |
26 |
|
|
3.9 |
% |
More than
twelve months below carrying value |
12 |
|
|
1.8 |
|
|
17 |
|
|
2.5 |
|
Total |
$ |
629 |
|
|
93.6 |
% |
|
$ |
43 |
|
|
6.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
|
Investment Grade |
|
% of Total |
|
Below Investment
Grade |
|
% of Total |
Twelve months
or less below carrying value |
$ |
66 |
|
|
58.8 |
% |
|
$ |
31 |
|
|
27.6 |
% |
More than
twelve months below carrying value |
10 |
|
|
9.3 |
|
|
5 |
|
|
4.3 |
|
Total |
$ |
76 |
|
|
68.1 |
% |
|
$ |
36 |
|
|
31.9 |
% |
See Note 3 of the Statutory Financial Statements for additional disclosures
in regards to unrealized investment losses of bonds, for instances in which fair value declined below amortized cost by greater than or less than 20% for consecutive periods at March 31, 2021 and December 31, 2020.
Other-than-temporary impairments, by market sector, for impairments included
in the Statutory Statements of Operations, were as follows for the three months March 31, 2021, and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
|
March 31, 2020 |
|
Impairment |
|
No. of Securities |
|
Impairment |
|
No. of Securities |
U.S. government |
$ |
— |
|
|
— |
|
|
$ |
— |
|
|
— |
|
Corporate securities |
— |
|
|
1 |
|
|
222 |
|
|
65 |
|
Partnerships |
$ |
— |
|
|
1 |
|
|
$ |
— |
|
|
— |
|
Preferred Stock |
1 |
|
|
2 |
|
|
— |
|
|
— |
|
Total |
$ |
1 |
|
|
4 |
|
|
$ |
222 |
|
|
65 |
|
Refer to Note 4 of the Statutory Financial Statements for information
regarding the fair value and level of our financial instruments.
Mortgage Loans on Real Estate
See Note 3 of the Statutory Financial Statements for information regarding
Mortgage Loans on Real Estate.
Loan-to-value (LTV) and debt service coverage (DSC) ratios are common
measurements used to assess the risk and quality of mortgage loans. The LTV ratio, calculated at the time of origination, is the percentage of the loan amount relative to the value of the underlying property. The DSC ratio, based upon the most
recently received financial statements from the debtor, is calculated as the amount of the property’s net income divided by the debt service payments.
See Note 3 of the Statutory Financial Statements for additional information
relating to LTV and DSC ratios.
Selected Financial Data and Management's Discussion and Analysis
Page 17 of 21
Properties collateralizing mortgage loans are geographically dispersed
throughout the United States as follows at March 31, 2021 and December 31, 2020 and a reconciliation to total mortgage loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
|
December 31, 2020 |
|
Gross Carry Value |
|
% of Total |
|
Gross Carry Value |
|
% of Total |
Mortgage loans by region |
|
|
|
|
|
|
|
East North
Central |
$ |
1,183 |
|
|
7.5 |
% |
|
$ |
1,244 |
|
|
8.0 |
% |
East South
Central |
382 |
|
|
2.4 |
|
|
375 |
|
|
2.4 |
|
Middle
Atlantic |
1,246 |
|
|
7.8 |
|
|
1,249 |
|
|
8.0 |
|
Mountain |
1,555 |
|
|
9.8 |
|
|
1,506 |
|
|
9.6 |
|
New England |
709 |
|
|
4.5 |
|
|
652 |
|
|
4.2 |
|
Pacific |
4,364 |
|
|
27.4 |
|
|
4,258 |
|
|
27.2 |
|
South
Atlantic |
3,626 |
|
|
22.8 |
|
|
3,599 |
|
|
23.0 |
|
West North
Central |
671 |
|
|
4.2 |
|
|
674 |
|
|
4.3 |
|
West South
Central |
1,356 |
|
|
8.5 |
|
|
1,314 |
|
|
8.4 |
|
Total
commercial mortgage loans |
15,092 |
|
|
94.9 |
% |
|
14,871 |
|
|
95.1 |
% |
Total
residential mortgage loans |
809 |
|
|
5.1 |
% |
|
763 |
|
|
4.9 |
% |
Total
mortgage loans |
$ |
15,901 |
|
|
100.0 |
% |
|
$ |
15,634 |
|
|
100.0 |
% |
Properties collateralizing commercial mortgage loans are diversified by
property type are as follows at March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
|
December 31, 2020 |
|
Gross Carry Value |
|
% of Total |
|
Gross Carry Value |
|
% of Total |
Mortgage loans by
property type |
|
|
|
|
|
|
|
Industrial |
$ |
3,232 |
|
|
21.4 |
% |
|
$ |
3,182 |
|
|
21.4 |
% |
Retail |
2,678 |
|
|
17.7 |
|
|
2,765 |
|
|
18.6 |
|
Office |
4,747 |
|
|
31.4 |
|
|
4,771 |
|
|
32.1 |
|
Apartments |
4,435 |
|
|
29.5 |
|
|
4,153 |
|
|
27.9 |
|
Total |
$ |
15,092 |
|
|
100.0 |
% |
|
$ |
14,871 |
|
|
100.0 |
% |
Liquidity and Capital Resources
Overview
The Company’s liquidity requirements are generally met through funds provided
by investment income, receipt of insurance premiums, M&E fees and benefit rider income, maturities and sales of investments, reinsurance recoveries, and capital contributions from Allianz SE, as needed.
The Company has access to funding through securities lending under which the
Company lends bonds and receives cash collateral and short term securities in an amount in excess of the fair value of the securities loaned.
The Company is also a member of the Federal Home Loan Bank (FHLB) of Des
Moines, which provides access to collateralized borrowings. Funding from the FHLB of Des Moines is collateralized with bonds from the Company’s general account investment portfolio.
Reinsurance may play a key role in funding the Company’s continued growth,
and may be utilized for any product for which there is significant uncertainty related to future claims experience. Moreover, the Company is generally risk adverse for its smaller lines of business, and predictability of future profitability takes
precedence over retaining a large percentage of risk.
Selected Financial Data and Management's Discussion and Analysis
Page 18 of 21
The Company does not utilize the capital markets as a source of capital.
Should the need for capital arise, the Company may obtain capital contributions from Allianz SE as an alternative source of funding. If capital infusions are deemed necessary, the Company obtains prior approval by the Minnesota Department of
Commerce, as appropriate.
The primary uses of funds are policy benefits, commissions, other
product-related acquisition costs, investment purchases, operating expenses, and dividends to parent. The Company routinely reviews its sources and uses of funds in order to meet its ongoing obligations.
Financial Ratings and Strength
•Standard & Poor’s AA (Very Strong)
•Moody’s A1 (Good)
•AM Best A+ (Superior)
Financial strength ratings are based upon an independent review of the
Company, its ultimate parent (Allianz SE), subsidiaries, and the industry in which the Company operates. Each rating agency assigns ratings based on an independent review and takes into account a variety of factors to arrive at its final rating.
Ratings are subject to change and there can be no assurance that the ratings afforded to the Company in the future will be consistent with historical ratings.
Cash Flows
The following table sets forth information from our Statutory Statements of
Cash Flows for the three months ended March 31 2021, and 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Month Periods Ended March , 31 |
|
2021 |
|
2020 |
Net cash provided by
operating activities |
$ |
781 |
|
|
1,271 |
|
Net cash used in investing activities |
(2,914) |
|
|
(741) |
|
Net cash provided by
(used in) financing and miscellaneous activities |
1,938 |
|
|
(938) |
|
Net change in cash, cash equivalents, and short-term investments
|
$ |
(195) |
|
|
(408) |
|
We have the funds necessary to meet the capital requirements of all states in
which we do business, and to support our operations.
The decrease in net cash provided by operating activities in Q1 2021 as
compared to Q1 2020 is primarily due to an increase in transfers to separate accounts due to higher variable-indexed premium and a decrease in fees from separate accounts. These impacts were partially offset by an increase in premiums and continued
growth in investment income due to higher invested assets driven by positive cash flows.
The increase in net cash used in investing activities in Q1 2021 as compared
to Q1 2020 is driven by higher net bonds purchased, net increase in cost of derivatives acquired to hedge product liabilities, and net mortgage loans purchased.
The increase in net cash provided from financing and miscellaneous activities
is primarily driven by FHLB borrowings in Q1 2021, and a decrease in dividends paid to parent.
Risk-Based Capital
The Company's Risk Based Capital (RBC) ratio significantly exceeds required
minimum thresholds as of March 31, 2021 and December 31, 2020.
Selected Financial Data and Management's Discussion and Analysis
Page 19 of 21
Commitments
The following table summarizes certain contractual obligations and the
Company’s commitments by period as of March 31, 2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 1 year |
|
After 1 year |
|
After 3 years |
|
After |
|
Total |
|
or less |
|
up to 3 years |
|
up to 5 years |
|
5 Years |
Payments due |
|
|
|
|
|
|
|
|
|
Policyholder
liabilities |
$ |
146,583 |
|
|
8,929 |
|
|
17,224 |
|
|
17,538 |
|
|
102,892 |
|
Mortgage notes
payable |
38 |
|
|
8 |
|
|
22 |
|
|
8 |
|
|
— |
|
Operating
leases |
6 |
|
|
1 |
|
|
3 |
|
|
2 |
|
|
— |
|
Total payments
due |
$ |
146,621 |
|
|
8,937 |
|
|
17,246 |
|
|
17,546 |
|
|
102,892 |
|
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 Annuities and Life segments. We have excluded the separate account liabilities as these
obligations are legally insulated from general account obligations and will be fully funded by cash flows from separate account assets. The obligations have not been discounted to present value. Estimated claim and benefit obligations are based
upon mortality, morbidity and lapse assumptions comparable to historical experience. The results are based on assuming market growth and interest crediting consistent with other valuation assumptions. In contrast to this table, the majority of our
obligations are recorded on the Balance Sheets at current account values or other prescribed measurements that are not directly related to liability cash flows. These obligations do not incorporate an expectation on future market growth, interest
crediting, or future deposits. Therefore, due to the significance of the assumptions used, the amounts presented could materially differ from actual results.
Mortgage notes payable includes contractual principal and interest payments
and therefore exceeds the amount shown in the Balance Sheet.
The Company had investments in limited partnerships that required a
commitment of capital of $310 and $306 as of March 31, 2021 and December 31, 2020, respectively. The Company had commitments to fund private placement investments of $420 and $187 as of March 31, 2021 and December 31, 2020, respectively.
Contingencies
See Note 8 of the Statutory Financial Statements for information regarding Contingencies.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet transactions, arrangements or
other relationships that management believes would be reasonably likely to have a material effect on the Company’s liquidity or the requirements for capital resources.
The Company utilizes certain exchange-traded futures to economically hedge
certain product liabilities. Under this kind of transaction, the Company agrees to purchase a specified number of contracts and settles 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 the Company enters into the exchange-traded futures contracts are regulated futures commissions merchants who are members of a trading exchange.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties under the terms of the futures contracts. The Company minimizes counterparty credit risk by establishing relationships only with counterparties rated BBB+ and higher. Given the credit ratings of the counterparties
with which the Company transacts, the Company does not expect any counterparties to default on their obligations. The Company has also executed Credit Support Annex (CSA) agreements with all active counterparties and requires a CSA from all new
counterparties added to the Company’s
Selected Financial Data and Management's Discussion and Analysis
Page 20 of 21
counterparty pool. The CSA agreements further limit the Company’s
counterparty credit risk by requiring the counterparty to post collateral to a segregated custodial account based on the net exposure to the Company.
As the Company’s 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. The Company has minimal exposure to credit-related losses in the event of non-performance. The Company is required to post collateral for
any futures, options and swap contracts that are executed. The amount of collateral required is determined by the exchange on which the contract is traded. Refer to Note 3 in the Statutory Financial Statements for additional information regarding
derivative collateral posted.
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.
Sensitivity Analysis
To assess the impact of changes in interest rate and equity markets, we
perform sensitivity tests. Sensitivity tests measure the instantaneous impact of a single hypothetical interest rate or equity price change on our 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 bps. To assess equity risk, we perform a sensitivity test which instantaneously shocks 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 statutory 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 cause our post-tax income to decrease
by $18 for the period ending March 31, 2021.
We also examined the impact on post-tax income due to a hypothetical decrease in interest rates of 50 bps
across all maturities. Under this model, with all other factors being constant, we estimated that such a decline would cause our post-tax income to decrease by $67 as of March 31, 2021. Note that the impacts referenced reflect reserve changes net
of economic hedge impact and does not include economic impact related to our fixed-income investment portfolio or economic changes in
reserve calculations.
Equity Market Risk
One means of assessing exposure to changes in equity market prices is to estimate the potential changes in
post-tax income from a hypothetical change in equity market prices of 15%. Under this model, with all other factors constant, we estimated that a decrease in equity market prices would cause our post-tax income to decrease by $393, while an
increase in equity market prices would cause our income to increase by $242, based on our equity exposure as of March 31, 2021. Note that the impacts referenced reflect reserve changes net of economic hedge impact and does not include economic
impact related to
our fixed-income investment portfolio or economic changes in reserve calculations.
Selected Financial Data and Management's Discussion and Analysis
Page 21 of 21
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Statutory Financial Statements (unaudited)
For the interim period ended March 31, 2021
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus (unaudited)
March 31, 2021 and December 31, 2020
(Dollars in millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admitted Assets |
2021 |
|
2020 |
Cash and
invested assets: |
|
|
|
|
Bonds |
|
$ |
100,783 |
|
|
99,088 |
|
Stocks |
|
399 |
|
|
274 |
|
Investment
in subsidiaries |
|
1,338 |
|
|
1,329 |
|
Mortgage
loans on real estate |
|
15,901 |
|
|
15,634 |
|
Real estate |
|
71 |
|
|
69 |
|
Cash, cash
equivalents and short-term investments |
|
715 |
|
|
910 |
|
Policy loans |
|
260 |
|
|
255 |
|
Derivative
assets |
|
3,628 |
|
|
4,114 |
|
Other
invested assets |
|
3,978 |
|
|
3,556 |
|
Total cash
and invested assets |
|
127,073 |
|
|
125,229 |
|
Investment
income due and accrued |
|
1,053 |
|
|
1,040 |
|
Current
federal and foreign income tax recoverable |
|
38 |
|
|
200 |
|
Deferred tax
asset, net |
|
328 |
|
|
273 |
|
Other assets |
|
786 |
|
|
745 |
|
Admitted
assets, exclusive of separate account assets |
|
129,278 |
|
|
127,487 |
|
Separate
account assets |
|
48,173 |
|
|
45,901 |
|
Total
admitted assets |
|
$ |
177,451 |
|
|
173,388 |
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus (unaudited)
March 31, 2021 and December 31, 2020
(Dollars in millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Capital and Surplus |
2021 |
|
2020 |
Policyholder
liabilities: |
|
|
|
|
Life policies and annuity contracts |
|
$ |
101,892 |
|
|
102,549 |
|
Accident and
health policies |
|
1,946 |
|
|
1,912 |
|
Deposit-type contracts |
|
4,699 |
|
|
4,749 |
|
Life policy
and contract claims |
|
6 |
|
|
8 |
|
Accident and health policy and
contract claims |
|
17 |
|
|
18 |
|
Other
policyholder funds |
|
118 |
|
|
117 |
|
Total policyholder liabilities |
|
108,678 |
|
|
109,353 |
|
Interest
maintenance reserve |
|
51 |
|
|
18 |
|
Commissions due and accrued |
|
29 |
|
|
0 |
|
General
expenses due and accrued |
|
140 |
|
|
157 |
|
Due from separate accounts |
|
(205) |
|
|
(294) |
|
Current
income taxes payable |
|
36 |
|
|
35 |
|
Deferred tax liability, net |
|
— |
|
|
— |
|
Borrowed
money |
|
3,601 |
|
|
1,501 |
|
Asset valuation reserve |
|
1,027 |
|
|
983 |
|
Derivative
liabilities |
|
3,103 |
|
|
3,262 |
|
Payable to affiliates |
|
45 |
|
|
— |
|
Other
liabilities |
|
5,101 |
|
|
4,811 |
|
Liabilities, exclusive of separate
account liabilities |
|
121,606 |
|
|
119,826 |
|
Separate
account liabilities |
|
48,173 |
|
|
45,901 |
|
Total liabilities |
|
169,779 |
|
|
165,727 |
|
Capital and
surplus: |
|
|
|
|
Class A,
Series A preferred stock, $1 par value. Authorized, issued, and outstanding, 8,909,195 shares; liquidation preference of $4 and $12 at March 31, 2021 and December 31, 2020, respectively |
|
9 |
|
|
9 |
|
Class A,
Series B preferred stock, $1 par value. Authorized, 10,000,000 shares; issued and outstanding, 9,994,289 shares; liquidation preference of $5 and $14 at March 31, 2021 and December 31, 2020, respectively |
|
10 |
|
|
10 |
|
Common
stock, $1 par value. Authorized, 40,000,000 shares; issued and outstanding, 20,000,001 shares at March 31, 2021 and December 31, 2020, respectively |
|
20 |
|
|
20 |
|
Additional
paid-in capital |
|
3,676 |
|
|
3,676 |
|
Special surplus funds |
|
(1,200) |
|
|
(1,844) |
|
Unassigned
surplus |
|
5,157 |
|
|
5,790 |
|
Total
capital and surplus |
|
7,672 |
|
|
7,661 |
|
Total
liabilities and capital and surplus |
|
$ |
177,451 |
|
|
173,388 |
|
|
|
|
|
|
See
accompanying notes to unaudited statutory financial statements. |
|
|
|
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Statutory Statements of Operations (unaudited)
Three months ended March 31, 2021 and 2020
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
Income: |
|
|
|
|
Premiums and annuity considerations |
|
$ |
2,779 |
|
|
2,684 |
|
Consideration
for supplementary contracts |
|
44 |
|
|
65 |
|
Net investment income |
|
1,186 |
|
|
1,189 |
|
Commissions
and expense allowances on reinsurance ceded |
|
85 |
|
|
54 |
|
Reserve adjustments related to
reinsurance ceded |
|
(11) |
|
|
1 |
|
Fees from
separate accounts |
|
144 |
|
|
146 |
|
Other |
|
(234) |
|
|
449 |
|
Total income |
|
3,993 |
|
|
4,588 |
|
Benefits and other expenses: |
|
|
|
|
Policyholder
benefits |
|
560 |
|
|
508 |
|
Surrenders |
|
2,243 |
|
|
2,286 |
|
Change in
aggregate reserves and deposit funds |
|
(333) |
|
|
1,542 |
|
Commissions and other agent
compensation |
|
304 |
|
|
283 |
|
General and
administrative expenses |
|
156 |
|
|
131 |
|
Net transfers to separate accounts |
|
506 |
|
|
45 |
|
Total benefits
and other expenses |
|
3,436 |
|
|
4,795 |
|
Income (loss)
from operations before income taxes and net realized capital gain |
|
557 |
|
|
(207) |
|
Income tax
expense (benefit) |
|
151 |
|
|
(525) |
|
Net income from
operations before net realized capital gain |
|
406 |
|
|
318 |
|
Net realized
capital gain, net of taxes and interest maintenance reserve |
|
25 |
|
|
28 |
|
Net income |
|
$ |
431 |
|
|
346 |
|
|
|
|
|
|
See accompanying notes to unaudited
statutory financial statements. |
|
|
|
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Statutory Statements of Capital and Surplus (unaudited)
Three months ended March 31, 2021 and 2020
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
Capital and
surplus at beginning of year |
|
$ |
7,661 |
|
|
7,954 |
|
Change in reserve on account of
change in valuation basis (Note 2) |
|
— |
|
|
(1) |
|
Adjusted
balance at beginning of year |
|
7,661 |
|
|
7,953 |
|
Net income |
|
431 |
|
|
346 |
|
Change in
unrealized capital gain (loss) |
|
(177) |
|
|
(639) |
|
Change in net deferred income tax |
|
70 |
|
|
(220) |
|
Change in
nonadmitted assets |
|
(13) |
|
|
(7) |
|
Change in asset valuation reserve |
|
(44) |
|
|
7 |
|
Dividends
paid to parent |
|
(400) |
|
|
(750) |
|
Change in unamortized gain on
reinsurance transactions |
|
145 |
|
|
(35) |
|
Other
changes in capital and surplus |
|
(1) |
|
|
(1) |
|
Capital and surplus at March 31 |
|
$ |
7,672 |
|
|
6,654 |
|
|
|
|
|
|
See
accompanying notes to unaudited statutory financial statements. |
|
|
|
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Statutory Statements of Cash Flow (unaudited)
Three months ended March 31, 2021 and 2020
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
Cash flow from
operating activities: |
|
|
|
|
Revenues: |
|
|
|
|
Premiums and
annuity considerations, net |
|
$ |
2,825 |
|
|
2,750 |
|
Net investment
income |
|
1,210 |
|
|
1,150 |
|
Commissions and
expense allowances on reinsurance ceded |
|
5 |
|
|
18 |
|
Fees from
separate accounts |
|
144 |
|
|
146 |
|
Other |
|
64 |
|
|
37 |
|
Cash provided
by operating activities |
|
4,248 |
|
|
4,101 |
|
Benefits and
expenses paid: |
|
|
|
|
Benefit and
loss-related payments |
|
2,566 |
|
|
2,549 |
|
Net transfers to
(from) separate accounts |
|
417 |
|
|
(201) |
|
Commissions,
expenses paid, and aggregate write-ins for deductions |
|
470 |
|
|
447 |
|
|
|
|
|
|
Change in
unallocated remittances and items |
|
14 |
|
|
35 |
|
Cash used in
operating activities |
|
3,467 |
|
|
2,830 |
|
Net cash
provided by operating activities |
|
781 |
|
|
1,271 |
|
Cash flow from
investing activities: |
|
|
|
|
Proceeds from
investments sold, matured or repaid: |
|
|
|
|
Bonds |
|
4,057 |
|
|
2,773 |
|
Stocks |
|
45 |
|
|
122 |
|
Mortgage loans |
|
422 |
|
|
273 |
|
Other invested
assets |
|
20 |
|
|
14 |
|
Derivatives |
|
— |
|
|
300 |
|
Miscellaneous
proceeds |
|
398 |
|
|
842 |
|
Cash provided
by investing activities |
|
4,942 |
|
|
4,324 |
|
Cost of
investments acquired: |
|
|
|
|
Bonds |
|
5,752 |
|
|
3,729 |
|
Stocks |
|
163 |
|
|
136 |
|
Mortgage loans |
|
692 |
|
|
883 |
|
Real estate |
|
5 |
|
|
2 |
|
Other invested
assets |
|
40 |
|
|
35 |
|
Derivatives |
|
779 |
|
|
— |
|
Miscellaneous
applications |
|
420 |
|
|
273 |
|
Cash used in
investing activities |
|
7,851 |
|
|
5,058 |
|
Net increase in
policy loans and premium notes |
|
5 |
|
|
7 |
|
Net cash used
in investing activities |
|
(2,914) |
|
|
(741) |
|
Cash flow from
financing and miscellaneous activities: |
|
|
|
|
Change in
borrowed money |
|
2,100 |
|
|
— |
|
Payments on
deposit-type contracts and other insurance liabilities, net of deposits |
|
(358) |
|
|
(367) |
|
Dividends
paid to parent |
|
(400) |
|
|
(750) |
|
Other cash
provided |
|
596 |
|
|
179 |
|
Net cash
provided (used) in financing and miscellaneous activities |
|
1,938 |
|
|
(938) |
|
Net change in
cash, cash equivalents, and short-term investments |
|
(195) |
|
|
(408) |
|
Cash, cash
equivalents, and short-term investments: |
|
|
|
|
Beginning of
period |
|
910 |
|
|
1,869 |
|
Balance at
March 31 |
|
$ |
715 |
|
|
1,461 |
|
|
|
|
|
|
See
accompanying notes to unaudited statutory financial statements. |
|
|
|
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
(1) Organization
Allianz Life Insurance Company of North America (the
Company) is a wholly-owned subsidiary of Allianz of America, Inc. (AZOA or parent company), which is a wholly-owned subsidiary of Allianz Europe, B.V. Allianz Europe, B.V. is a wholly-owned subsidiary of Allianz SE. Allianz SE is a European company
registered in Munich, Germany, and is the Company’s ultimate parent. The Company has a wholly-owned life insurance company subsidiary, Allianz Life Insurance Company of New York (AZNY). The Company also wholly owns a captive reinsurer, Allianz Life
Insurance Company of Missouri (AZMO).
After evaluating the Company’s ability to continue as a going concern,
management is not aware of any conditions or events which raise substantial doubts concerning the Company’s ability to continue as a going concern as of the date of filing these Statutory Financial Statements.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The Statutory Financial Statements have been prepared in
accordance with accounting practices prescribed or permitted by the Minnesota Department of Commerce (the Department). The Department recognizes statutory accounting practices prescribed or permitted by the state of Minnesota for determining and
reporting the financial condition and results of operations of an insurance company and its solvency under Minnesota insurance law. The state of Minnesota has adopted the National Association of Insurance Commissioners (NAIC) Accounting Practices and Procedures Manual as its prescribed basis of statutory accounting principles (SAP), without significant modification. The Company has no material statutory accounting practices that differ from those of the Department or NAIC
SAP. These practices differ in some respects from accounting principles generally accepted in the United States of America (U.S. GAAP). The effects of these differences, while not quantified, are presumed to be material to the Statutory Financial
Statements. The more significant of these differences are as follows:
(1) Acquisition costs, such as
commissions and other costs incurred in connection with acquiring new and renewal business, are charged to current operations as incurred. Under U.S. GAAP, acquisition costs that are directly related to the successful acquisition of insurance
contracts are capitalized and charged to operations as the corresponding revenues or future profits are recognized.
(2) Aggregate reserves for life
policies and annuity contracts, excluding variable annuities, are based on statutory mortality and interest assumptions without consideration for lapses or withdrawals. Under U.S. GAAP, aggregate reserves consider lapses and withdrawals.
(3) Certain reinsurance transactions,
primarily used for annuity business, are recognized as reinsurance for statutory purposes only.
(4) Ceded reinsurance recoverable are
netted against their related reserves within Policyholder liabilities, Life policies and annuity contracts and Life policy and contract claims, on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. Under U.S. GAAP,
these ceded reserves are presented on a gross basis as an asset.
(5) The Company reinsures a portion of
its in-force block of business through several reinsurance agreements. Under NAIC SAP, the after-tax gains associated with these indemnity reinsurance transactions are recorded in Unassigned surplus and recognized through income as future earnings
of the
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
books of business emerge. Under U.S. GAAP, the pretax gains
associated with such transactions that qualify as reinsurance, are deferred as liabilities and are amortized into operations over the revenue-producing period of the policies.
(6) Bonds are carried at values
prescribed by the NAIC, generally amortized cost, except for those with an NAIC rating of 6, which are reported at the lower of amortized cost or fair value. Under U.S. GAAP, bonds classified as “available-for-sale” are carried at fair value, with
unrealized gains and losses recorded in stockholder’s equity.
(7) Changes in deferred income taxes
are recorded directly to Unassigned surplus. Under U.S. GAAP, these items are recorded as an item of income tax benefit or expense in operations. Moreover, under NAIC SAP, a valuation allowance may be recorded against the deferred tax asset (DTA)
and admittance testing may result in an additional charge to capital and surplus for nonadmitted portions of DTAs. Under U.S. GAAP, a valuation allowance may be recorded against the DTA and reflected as an expense.
(8) Investments in subsidiaries are
carried at net equity values as prescribed by the NAIC. Changes in equity values are reflected in Unassigned surplus within the Statutory Statements of Capital and Surplus as credits or charges to Unassigned surplus. Under U.S. GAAP, wholly owned
subsidiary results are consolidated.
(9) The Company is required to
establish an asset valuation reserve (AVR) liability and an interest maintenance reserve (IMR) liability. The AVR provides for a standardized statutory investment valuation reserve for certain invested assets. Changes in this reserve are recorded
as direct charges or credits to Unassigned surplus. The IMR is designed to defer net realized capital gains and losses resulting from changes in the level of prevailing market interest rates and amortize them into income within the Statutory
Statements of Operations over the remaining life of the investment sold. The IMR represents the unamortized portion of applicable investment gains and losses as of the balance sheet date. There is no such concept under U.S. GAAP.
(10) Canadian asset and liability
amounts are expressed in Canadian dollars without foreign exchange translation into U.S. dollars. A net foreign currency translation adjustment is recorded within the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus
with an offset to Other changes in capital and surplus within the Statutory Statements of Capital and Surplus. Under U.S. GAAP, Canadian assets and liabilities are converted to U.S. dollars, with any translation adjustment recorded to stockholder’s
equity.
(11) Certain assets designated as
“nonadmitted assets” are not recognized and are charged directly to Unassigned surplus within the Statutory Statements of Capital and Surplus. These include, but are not limited to, investments in unaudited subsidiary, controlled, and affiliated
(SCA) entities, electronic data processing (EDP) software, portions of goodwill, furniture and fixtures, prepaid expenses, receivables outstanding greater than 90 days, and portions of DTAs. There is no such concept under U.S. GAAP.
(12) A provision is made for amounts
ceded to unauthorized reinsurers in excess of collateral in the form of a trust or letter of credit through a direct charge to Unassigned surplus within the Statutory Statements of Capital and Surplus. There is no such requirement under U.S. GAAP.
(13) Revenues for universal life
policies and annuity contracts, excluding deposit-type contracts, are recognized as revenue when received within the Statutory Statements of Operations. Under U.S. GAAP,
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
policy and contract fees charged for the cost of insurance,
policy administrative charges, amortization of policy initiation fees, and surrender contract charges are recorded as revenues when earned.
(14) Benefits for universal life
policies and annuity contracts within the Statutory Statements of Operations, excluding deposit-type contracts, consist of payments made to policyholders. Under U.S. GAAP, benefits represent interest credited, and claims and benefits incurred in
excess of the policyholder’s contract balance.
(15) Derivatives are reported at fair
value in accordance with SSAP No. 86, Derivatives (SSAP No. 86) and SSAP No. 108, Derivatives Hedging Variable Annuity Guarantees (SSAP No. 108). See additional information in Note 3. Changes in the fair value of derivatives, except those reported
under SSAP No. 108, are recorded as direct adjustments to Unassigned surplus as a component of Change in unrealized capital gains (losses) within the Statutory Statements of Capital and Surplus. For derivatives reported under SSAP No. 108, changes
in fair value are recognized as net deferred assets or liabilities within Other assets or Other liabilities, respectively, in the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus, for fluctuations in fair value that do
not offset the changes in the hedged item. The deferred asset or liability is amortized over the timeframe required under SSAP No. 108. Under U.S. GAAP, changes in the fair value of the derivative are recorded in derivative income (loss) as part of
operating income and the hedged derivatives are carried at fair value. In addition, the effective and ineffective portions of a hedge are accounted for separately.
(16) Commissions allowed by reinsurers
on business ceded are reported as income when received within the Statutory Statements of Operations. Under U.S. GAAP, such commissions are deferred and amortized as a component of deferred acquisition costs to the extent recoverable.
(17) The Statutory Financial
Statements do not include a statement of comprehensive income as required under U.S. GAAP.
(18) The Statutory Statements of Cash
Flow do not classify cash flows consistent with U.S. GAAP and a reconciliation of net income to net cash provided from operating activities is not provided.
(19) The calculation of reserves and
transfers in the separate account statement requires the use of a Commissioners Annuity Reserve Valuation Method (CARVM) allowance on annuities for NAIC SAP. There is no such requirement under U.S. GAAP.
(20) Sales inducements and premium
bonuses are included in Life policies and annuity contracts in the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus, and are charged to current operations as incurred. Under U.S. GAAP, deferred sales inducements and
premium bonuses are similarly reserved; however, the costs are capitalized as assets and charged to operations as future profits are recognized in a manner similar to acquisition costs.
(21) Negative cash balances are
presented as a negative asset within the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. These balances are presented as a liability under U.S. GAAP.
(22) Embedded derivatives are not
separated from the host contract and accounted for separately as a derivative instrument. Under U.S. GAAP, entities must separate the embedded derivative from the host contracts and separately account for those embedded derivatives at fair value.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
(23) For certain annuity products with
a market value adjustment feature sold to Minnesota residents and variable-indexed annuities, the Department requires the Company to maintain a separate asset portfolio to back related reserves. These assets and liabilities are required to be
included as part of the Separate account assets and Separate account liabilities presented on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. Under U.S. GAAP, there is no such requirement.
(b) Use of Estimates
The preparation of Statutory Financial Statements in
conformity with NAIC SAP requires management to make certain estimates and assumptions that affect reported amounts of admitted assets and liabilities, including reporting or disclosure of contingent assets and liabilities as of March 31, 2021 and
December 31, 2020, and the reported amounts of revenues and expenses during the reporting period. Future events, including changes in mortality, morbidity, interest rates, capital markets, and asset valuations could cause actual results to differ
from the estimates used within the Statutory Financial Statements. Such changes in estimates are recorded in the period they are determined.
(c) Recently Issued Accounting Standards – Adopted
in 2021
In July 2020, the NAIC adopted revisions to SSAP No. 32R,
Preferred Stock. The revisions update the definitions, measurement, and impairment guidance for various types of preferred stock and require perpetual preferred stock to be measured at fair value, not to exceed any currently effective call price,
instead of at the lower of cost or fair value. The revisions were effective January 1, 2021. The implementation of these revisions on January 1, 2021 resulted in a pre-tax increase to surplus of $2.
(d) Recently Issued Accounting Standards – Adopted in
2020
Effective January 1, 2020, the Company adopted SSAP No.
108. This standard establishes statutory accounting principles to address certain limited derivative transactions hedging variable annuity guarantees subject to fluctuations as a result of interest rate sensitivity. The Company added all applicable
new disclosures required by the standard. There were no impacts to net income or surplus during the year ended December 31, 2020, as a result of this adoption.
In 2016, the NAIC adopted revisions to SSAP No. 51R, Life
Contracts and SSAP No. 54, Individual and Group Accident and Health Contracts, Issue Paper No. 154, Implementation of Principles-Based Reserving. These revisions relate to the adoption of the Valuation Manual and provides for principle-based
reserving for Life and Heath contracts, and are effective January 1, 2017. The Valuation Manual provides the following revisions: 1) VM-20, Requirements for Principle-Based Reserves, for Life Products, includes an optional three-year deferral. The
Company elected the deferral and adopted this update effective January 1, 2020. It applies to business issued on or after this date. 2) VM-21, Principle-Based Reserving Methodology for Variable Annuities, was effective January 1, 2020. It applies
to business issued on or after January 1, 2017. Under VM-21, during 2017, 2018, and 2019, the Company elected to combine contracts subject to AG43 and VM-21 for purposes of calculating reserves. In 2019, the NAIC adopted revisions to both AG43 and
VM-21, effective January 1, 2020. The implementation of the 2019 revisions resulted in a pre-tax increase of $1 to Policyholder liabilities for Life policies and annuity contracts within the Statutory Statement of Admitted Assets, Liabilities, and
Capital and Surplus and the corresponding decrease to surplus for the same amount is recorded through Change in reserve on account of change in valuation basis within the Statutory Statements of Capital and Surplus. 3) VM-22, Statutory Maximum
Valuation Interest Rates for Income Annuities, was effective January 1, 2018. It applies to annuitizations on contracts issued on or after that date. Because most annuitizations occur years after a contract
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
has been issued, its impact on net income and surplus has
not been material. 4) VM-25, Health Insurance Reserves Minimum Requirements, and VM-26, Credit Life and Disability Reserve Requirements, are not applicable as the Company does not issue these contracts.
In August 2019, the NAIC adopted SSAP No. 22R, Leases. This
revised standard is a substantive revision, reorganization, and clarification of SSAP 22. It adopts much of the language of US GAAP ASU 2016-02, Leases, but retains operating lease accounting for Statutory accounting. It was effective January 1,
2020, with early adoption permitted. The Company adopted the revised standard effective January 1, 2020. There was no impact on net income or surplus during the year ended December 31, 2020, as a result of adopting the revision.
In March 2020, the NAIC adopted INT 20-01, Reference Rate
Reform. The interpretation adopted the optional guidance outlined in Accounting Standards Update (ASU) 2020-04, Reference Rate Reform, for a limited period of time to ease the potential burden on accounting for reference rate reform. The practical
expedients outlined in the interpretation are for modifications solely related to reference rate reform and optionally suspends assessments for re-measuring a contract and dedesignating a hedge relationship. This interpretation is effective on the
date of adoption and expires on December 31, 2022. The Company adopted the optional guidance in this interpretation effective March 12, 2020. As of March 31, 2021, the Company has not made any modifications to financial assets or liabilities as a
result of reference rate reform.
In May 2020, the NAIC adopted revisions to SSAP No. 26R,
Bonds, which provides clarifying guidance when assessing other than temporary impairments (OTTI) for debt instruments that have been previously modified pursuant to SSAP No. 36, Troubled Debt Restructuring, or SSAP No. 103R, Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities. The revisions to SSAP No. 26R state subsequent OTTI assessments for debt instruments modified under SSAP No. 36 or SSAP No 103 will be based on the modified contractual terms and not revert
back to the original acquisition terms. These revisions were effective May 20, 2020 and were subsequently adopted by the Company. There was no impact on net income or surplus during the year ended December 31, 2020, as a result of adopting the
revisions.
In April, May, June, and August 2020, the NAIC adopted the
following interpretations (INT) in response to the COVID-19 pandemic:
•INT 2020-02, Extension of the 90-Day Rule for the Impact of COVID-19, extends a one-time optional extension of the nonadmission assessment
guidance for premiums and similar receivables due from policyholders or agents. For receivables that were current prior to the beginning of the declaration of a state of emergency by the U.S. federal government on March 13, 2020 or originated on or
after March 13, 2020, insurers may continue to admit assets greater than 90 days past due. This INT is applicable for the March 31, 2020, June 30, 2020, and September 30, 2020 financial statements and expired on December 30, 2020. This INT did not
have an impact to the Company.
•INT 2020-03, Troubled Debt Restructuring Due to COVID-19, follows the inter-agency COVID-19 guidance issued by the federal and state prudential
banking regulators (and concurred by the Financial Accounting Standards Board) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Specifically, a modification of a mortgage loan or bank loan terms does not result in troubled debt
restructuring as long as the modification is in response to COVID-19, the borrower was current at the time of the modification, and the modification is short-term. In addition, insurers are not required to designate mortgage loans or bank loans
with deferrals granted due to COVID-19 as past due or report them as nonaccrual loans. This INT is effective for the period beginning March 1, 2020 and originally
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
expired on December 31, 2020. In January 2021, the
provisions in this INT were extended updating the effective period to be the earlier of January 1, 2022 or the date that is 60 days after the date on which the national emergency declared by the President terminates. The Company implemented a loan
modification program that adhered to the requirements outlined in the INT for investments in commercial and residential mortgage loans.
•INT 2020-04, Mortgage Loan Impairment Assessment Due to COVID-19, defers the impairment assessment for bank loans, mortgage loans, and
investments which predominantly hold underlying mortgage loans and are impacted by forbearance or modifications in response to COVID-19. This INT was applicable for the March 31, 2020, June 30, 2020, and September 30, 2020 financial statements and
expired on December 30, 2020. This INT did not have a material impact to the Company.
•INT 2020-05, Investment Income Due and Accrued. This INT provides temporary relief guidance for assessing the collectability of interest income,
admissibility relief of accrued investment income 90 days past due, and clarifies how interest income should be recognized during a payment holiday. This INT is applicable for the June 30, 2020, and September 30, 2020 financial statements and
expired on December 30, 2020. This INT did not have a material impact to the Company.
•INT 2020-06, Participation in the 2020 TALF Program. This INT provides guidance for reporting Term Asset-Backed Securities Lending Facility
(TALF) loans for the duration of the 2020 TALF program. This INT did not impact the Company as the Company did not participate in this program.
•INT 2020-07, Troubled Debt Restructuring of Certain Debt Investments Due to COVID-19. This INT provides temporary guidance by allowing practical
expedients when assessing whether modifications made to debt securities (under SSAP No. 26R and SSAP No. 43R) due to COVID-19 are insignificant. Specifically, the guidance proposes restructurings in response to COVID-19 are considered to be
insignificant if the restructuring results in a 10% or less shortfall amount in the contractual amount due and does not extend the maturity of the investment by more than 3 years. This INT was effective for the period beginning March 1, 2020 and
originally expired on December 31, 2020. In January 2021, the provisions in this INT were extended updating the effective period to be the earlier of January 1, 2022 or the date that is 60 days after the date on which the national emergency
declared by the President terminates. This INT did not have a material impact to the Company.
•INT 2020-08, COVID-19 Premium Refunds, Rate Reductions and Policyholder Dividends. This INT provides guidance for returns or benefits to
policyholders. This INT did not impact the Company.
These INTs have an immaterial effect on the financial
statements as of December 31, 2020. The Company will continue to monitor these INTs and assess impacts until they are nullified.
In July 2020, the NAIC adopted INT 20-09, Basis Swaps as a
Result of the LIBOR Transition, to address the statutory accounting and reporting requirements for basis swaps issued by central clearing parties solely in response to the market-wide transition away from the London Interbank Offered Rate (LIBOR)
and toward the Secured Oversight Financing Rate (SOFR). This INT allows basis swaps issued solely in response to reference rate reform to be classified as derivatives used for “hedging” and reported as admitted assets in the statutory financial
statements. The INT is effective July 30, 2020 and was subsequently adopted by the Company. There was no impact on net income or surplus during the year ended December 31, 2020, as a result of adopting the INT.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
In November 2020, the NAIC adopted revisions to SSAP No.
43R, Loan-Backed and Structured Securities. The revisions reflect the updated NAIC designation category for residential and commercial mortgage-backed securities that utilize the financial modeling guidance. The revisions were effective November
12, 2020 and were subsequently adopted by the Company. There was no impact on net income or surplus during the year ended December 31, 2020, as a result of adopting the INT.
(e) Accounting Changes
Adoption of VM-21 Principle-Based
Reserving Methodology for Variable Annuities
Effective January 1, 2020, the Company adopted VM-21, as the effective
guidance under which the Company's variable and variable-indexed annuities reserves are calculated. Previously, the Company calculated these reserves using guidance found in AG43. VM-21 applies to business issued on or after January 1, 2017. Under
VM-21, during 2017, 2018, and 2019, the Company elected to combine contracts subject to AG43 and VM-21 for purposes of calculating reserves. In 2019, the NAIC adopted revisions to both AG43 and VM-21, effective January 1, 2020. The implementation
of the 2019 revisions on January 1, 2020 resulted in a pre-tax increase of $1 to Policyholder liabilities for Life policies and annuity contracts within the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus and the
corresponding decrease to surplus for the same amount is recorded through Change in reserve on account of change in valuation basis within the Statutory Statements of Capital and Surplus. The 2019 amendments allow an optional phase-in of the
increase which the Company did not elect.
(3) Investments
(a) Bonds, Other Assets Receiving Bond Treatment, and Stocks
At March 31, 2021 and December 31, 2020, the amortized cost, gross
unrealized gains, gross unrealized losses, and fair values of investments, excluding investments in affiliates, are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
|
|
Amortized cost |
|
Gross unrealized
gains |
|
Gross unrealized
losses |
|
Fair value |
Bonds: |
|
|
|
|
|
|
|
|
U.S.
government |
|
$ |
3,317 |
|
|
152 |
|
|
103 |
|
|
3,366 |
|
Agencies not backed by the full faith and credit of the U.S. government
|
|
4 |
|
|
— |
|
|
— |
|
|
4 |
|
States and
political subdivisions |
|
9,579 |
|
|
1,626 |
|
|
17 |
|
|
11,188 |
|
Foreign
governments |
|
1,243 |
|
|
66 |
|
|
28 |
|
|
1,281 |
|
Corporate
securities |
|
72,538 |
|
|
8,079 |
|
|
479 |
|
|
80,138 |
|
Mortgage-backed
securities |
|
14,093 |
|
|
848 |
|
|
45 |
|
|
14,896 |
|
Collateralized
debt obligations |
|
17 |
|
|
13 |
|
|
— |
|
|
30 |
|
Total bonds |
|
100,791 |
|
|
10,784 |
|
|
672 |
|
|
110,903 |
|
Common stocks |
|
337 |
|
|
22 |
|
|
— |
|
|
359 |
|
Preferred stocks |
|
39 |
|
|
1 |
|
|
— |
|
|
40 |
|
Total |
|
$ |
101,167 |
|
|
10,807 |
|
|
672 |
|
|
111,302 |
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
|
|
Amortized cost |
|
Gross unrealized
gains |
|
Gross unrealized
losses |
|
Fair value |
Bonds: |
|
|
|
|
|
|
|
|
U.S.
government |
|
$ |
3,318 |
|
|
300 |
|
|
10 |
|
|
3,608 |
|
Agencies not backed by the full faith and credit of the U.S. government
|
|
3 |
|
|
1 |
|
|
— |
|
|
4 |
|
States and
political subdivisions |
|
9,536 |
|
|
2,335 |
|
|
2 |
|
|
11,869 |
|
Foreign
governments |
|
1,138 |
|
|
125 |
|
|
2 |
|
|
1,261 |
|
Corporate
securities |
|
70,975 |
|
|
12,730 |
|
|
90 |
|
|
83,615 |
|
Mortgage-backed
securities |
|
14,126 |
|
|
1,232 |
|
|
9 |
|
|
15,349 |
|
Collateralized
debt obligations |
|
17 |
|
|
12 |
|
|
— |
|
|
29 |
|
Total bonds |
|
99,113 |
|
|
16,735 |
|
|
113 |
|
|
115,735 |
|
Common stocks |
|
217 |
|
|
18 |
|
|
1 |
|
|
234 |
|
Preferred stocks |
|
41 |
|
|
2 |
|
|
— |
|
|
43 |
|
Total |
|
$ |
99,371 |
|
|
16,755 |
|
|
114 |
|
|
116,012 |
|
At March 31, 2021 and December 31, 2020, amortized cost
differed from the carrying value of bonds on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus due to NAIC-6 rated bonds where the market value was lower than amortized cost. The total unrealized losses recorded by
the Company for these bonds was an insignificant amount as of March 31, 2021 and December 31, 2020.
The Company had NAIC-6 rated bonds with a statement value
of $3 as of March 31, 2021 and December 31, 2020. There was no interest due on bonds in default that was excluded from investment income due and accrued as of March 31, 2021 and December 31, 2020.
At March 31, 2021 and December 31, 2020, the Company had
hybrid securities with a carrying value of $30.
As of March 31, 2021 and December 31, 2020, investments
with a statement value of $30 and $23, respectively, were held on deposit with various insurance departments and in other trusts as required by statutory regulations.
At March 31, 2021, the amortized cost and fair value of
bonds and other assets receiving bond treatment, by expected maturity, are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
value |
|
Fair value |
Due in 1 year
or less |
$ |
892 |
|
|
$ |
906 |
|
Due after 1 year through 5 years |
12,466 |
|
|
13,473 |
|
Due after 5
years through 10 years |
20,427 |
|
|
22,301 |
|
Due after 10 years |
51,229 |
|
|
57,552 |
|
No maturity
date |
1,667 |
|
|
1,745 |
|
Loan-backed and other structured securities
|
14,110 |
|
|
14,926 |
|
Total bonds
and other assets receiving bond treatment |
$ |
100,791 |
|
|
$ |
110,903 |
|
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.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
Proceeds from sales of bonds includes sales, maturities,
paydowns, and other redemptions of bonds and other assets receiving bond treatment. Proceeds from sales of bonds for the three months ended March 31 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
Proceeds from
sales |
$ |
4,057 |
|
|
$ |
2,773 |
|
Gross gains |
59 |
|
|
73 |
|
Gross losses |
8 |
|
|
— |
|
Proceeds from sales of common stocks for the three months
ended March 31 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
Proceeds from
sales |
$ |
45 |
|
|
$ |
122 |
|
Gross gains |
2 |
|
|
1 |
|
Gross losses |
— |
|
|
— |
|
There were no sales of preferred stocks for the three
months ended March 31, 2021 and 2020.
For the three months ended March 31, 2021 and 2020, there
were 40 and 27 CUSIPs sold, disposed, or otherwise redeemed as a result of a callable feature, respectively. The aggregate amount of investment income generated as a result of these transactions was $25 and $3 for the three months ended March 31,
2021 and 2020, respectively.
The Company’s bond 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
To determine whether or not declines in fair value are
other than temporary, the Company performs a quarterly review of its entire combined investment portfolio, including investments held by subsidiaries, using quoted market prices by third-party sources.
Unrealized losses and the related fair value of
investments held by the Company as of March 31, 2021 and December 31, 2020 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
12 months or less |
|
Greater than 12 months |
|
Total |
|
|
Fair value |
|
Unrealized losses |
|
Fair value |
|
Unrealized losses |
|
Fair value |
|
Unrealized losses |
Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government |
|
$ |
1,073 |
|
|
103 |
|
|
— |
|
|
— |
|
|
1,073 |
|
|
103 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
governments |
|
464 |
|
|
28 |
|
|
1 |
|
|
— |
|
|
465 |
|
|
28 |
|
States and
political subdivisions |
|
334 |
|
|
17 |
|
|
4 |
|
|
— |
|
|
338 |
|
|
17 |
|
Corporate
securities |
|
9,099 |
|
|
453 |
|
|
721 |
|
|
26 |
|
|
9,820 |
|
|
479 |
|
Mortgage-backed
securities |
|
1,297 |
|
|
42 |
|
|
79 |
|
|
3 |
|
|
1,376 |
|
|
45 |
|
Total bonds |
|
12,267 |
|
|
643 |
|
|
805 |
|
|
29 |
|
|
13,072 |
|
|
672 |
|
Common stock |
|
10 |
|
|
— |
|
|
2 |
|
|
— |
|
|
12 |
|
|
— |
|
Total
temporarily impaired securities |
|
$ |
12,277 |
|
|
643 |
|
|
807 |
|
|
29 |
|
|
13,084 |
|
|
672 |
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
|
12 months or less |
|
Greater than 12 months |
|
Total |
|
|
Fair value |
|
Unrealized losses |
|
Fair value |
|
Unrealized losses |
|
Fair value |
|
Unrealized losses |
Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government |
|
$ |
374 |
|
|
10 |
|
|
— |
|
|
— |
|
|
374 |
|
|
10 |
|
Foreign
governments |
|
51 |
|
|
2 |
|
|
— |
|
|
— |
|
|
51 |
|
|
2 |
|
States and
political subdivisions |
|
85 |
|
|
2 |
|
|
— |
|
|
— |
|
|
85 |
|
|
2 |
|
Corporate
securities |
|
2,085 |
|
|
78 |
|
|
578 |
|
|
12 |
|
|
2,663 |
|
|
90 |
|
Mortgage-backed
securities |
|
158 |
|
|
5 |
|
|
41 |
|
|
4 |
|
|
199 |
|
|
9 |
|
Total bonds |
|
2,753 |
|
|
97 |
|
|
619 |
|
|
16 |
|
|
3,372 |
|
|
113 |
|
Common stock |
|
7 |
|
|
— |
|
|
9 |
|
|
1 |
|
|
16 |
|
|
1 |
|
Total
temporarily impaired securities |
|
$ |
2,760 |
|
|
97 |
|
|
628 |
|
|
17 |
|
|
3,388 |
|
|
114 |
|
As of March 31, 2021 and December 31, 2020 the number of
investment holdings that were in an unrealized loss position was 1,322 and 472, respectively, for bonds, and 11 and 13, respectively, for common stocks. The unrealized loss positions for common stocks as of March 31, 2021 and December 31, 2020 were
immaterial.
As of March 31, 2021 and December 31, 2020, of the total
amount of unrealized losses, $629, or 93.4 %, and $76, or 67.7%, respectively, are related to unrealized losses on investment grade securities. Investment grade is defined as a security having an NAIC Securities Valuation Office credit rating of 1
or 2. 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 and does not consider these investments to be other-than-temporarily impaired.
(c) Realized Investment Gains (Losses)
Net realized capital gains (losses) for the three months
ended March 31 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
Bonds |
$ |
52 |
|
|
(149) |
|
Stocks |
2 |
|
|
1 |
|
Derivatives |
20 |
|
|
75 |
|
Other |
3 |
|
|
— |
|
Total
realized capital gains (losses) |
77 |
|
|
(73) |
|
Income tax benefit (expense) on net
realized gains (losses) |
(12) |
|
|
(16) |
|
Total
realized capital gains (losses), net of taxes |
65 |
|
|
(89) |
|
Net gains transferred to IMR, net of
taxes |
40 |
|
|
(117) |
|
Net realized
gains (losses), net of taxes and IMR |
$ |
25 |
|
|
28 |
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
(d) Net Investment Income
Major categories of net investment income for the three
months ended March 31 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
Interest: |
|
|
|
Bonds |
$ |
1,036 |
|
|
1,039 |
|
Mortgage
loans on real estate |
156 |
|
|
170 |
|
Policy loans |
3 |
|
|
3 |
|
Cash, cash
equivalents, and short-term investments |
— |
|
|
5 |
|
Dividends: |
|
|
|
Stocks |
1 |
|
|
2 |
|
Investment in subsidiaries |
12 |
|
|
14 |
|
Rental income
on real estate |
5 |
|
|
5 |
|
Derivatives |
4 |
|
|
(21) |
|
Other |
(4) |
|
|
1 |
|
Gross investment income |
1,213 |
|
|
1,218 |
|
Investment
expenses |
(34) |
|
|
(37) |
|
Net investment income before
amortization of IMR |
1,179 |
|
|
1,181 |
|
Amortization
of IMR |
7 |
|
|
8 |
|
Net investment income |
$ |
1,186 |
|
|
1,189 |
|
e) Mortgage Loans on Real Estate
The Company's investment in mortgage loans on real estate
includes commercial mortgage loans (CMLs) and residential mortgage loans (RMLs) as of March 31, 2021 and December 31, 2020.
At March 31, 2021 and December 31, 2020, the Company's CML
portfolio includes concentrations exceeding 10% for the following states:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
|
Concentration Amount |
Concentration % |
|
Concentration Amount |
Concentration % |
California |
$ |
3,456 |
|
22.9 |
% |
|
$ |
3,356 |
|
22.6 |
% |
The maximum lending rates for CMLs made during the three
months ended March 31, 2021 and the year ended December 31, 2020 were 4.2% and 4.1%, respectively. The minimum lending rates for CMLs made during the three months ended March 31, 2021 and the year ended December 31, 2020 were 2.1% and 2.2%,
respectively. The maximum percentage of any one loan to the value at the time of the loan extension exclusive of insured, guaranteed or purchased money mortgages for CMLs was 78.9% and 84.8% during the three months ended March 31, 2021 and the year
ended December 31, 2020, respectively.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
At March 31, 2021 and December 31, 2020, the Company's RML
portfolio includes concentrations exceeding 10% for the following states:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
|
Concentration Amount |
Concentration % |
|
Concentration Amount |
Concentration % |
California |
$ |
365 |
|
45.2 |
% |
|
$ |
353 |
|
46.3 |
% |
Florida |
$ |
90 |
|
11.1 |
% |
|
80 |
|
10.4 |
% |
The maximum lending rates for RMLs made during the three
months ended March 31, 2021 and the year ended December 31, 2020 were 6.8% and 8.3% respectively. The minimum lending rates for RMLs made during the three months ended March 31, 2021 and the year ended December 31, 2020 were 2.8% and 3.0%
respectively. The maximum percentage of any one loan to the value at the time of the loan extension exclusive of insured, guaranteed or purchased money mortgages for RMLs was 93.0% and 93.3% during the three months ended March 31, 2021 and the year
ended December 31, 2020, respectively.
As of March 31, 2021 and December 31, 2020, there were no
taxes, assessments, or amounts advanced that were excluded from the mortgage loan investment total.
(1) Age Analysis of
Mortgage Loan Investments
The following table presents an age analysis of the Company's mortgage loan investments as of March 31, 2021
and December 31, 2020 by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
|
Residential |
Commercial |
|
Residential |
Commercial |
Current |
$ |
746 |
|
15,035 |
|
|
693 |
|
14,813 |
|
30-59 Days Past Due |
28 |
|
— |
|
|
17 |
|
— |
|
60-89 Days Past Due |
5 |
|
— |
|
|
2 |
|
— |
|
90-179 Days Past Due |
5 |
|
— |
|
|
4 |
|
— |
|
180+ Days Past Due |
25 |
|
57 |
|
|
47 |
|
58 |
|
Total |
$ |
809 |
|
15,092 |
|
|
763 |
|
14,871 |
|
For mortgage loan investments greater than 90 days past due and still accruing interest, the recorded
investment and interest accrued as of March 31, 2021 and December 31, 2020 by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
|
Residential |
Commercial |
|
Residential |
Commercial |
Accruing Interest 90-179
Days Past Due |
|
|
|
|
|
Recorded
Investment |
$ |
— |
|
— |
|
|
2 |
|
— |
|
Interest
Accrued |
— |
|
— |
|
|
— |
|
— |
|
Accruing Interest 180+
Days Past Due |
|
|
|
|
|
Recorded
Investment |
— |
|
— |
|
|
— |
|
— |
|
Interest
Accrued |
— |
|
— |
|
|
— |
|
— |
|
There were no mortgage loan investments for which interest was reduced as of March 31, 2021 and December 31,
2020.
As of March 31, 2021 and December 31, 2020 there were no RMLs in which the Company participated as a co-lender
in a mortgage loan investment agreement. As of March 31, 2021 and December 31, 2020, for CML investments, the recorded investment for which the Company participated as a co-lender in a mortgage loan investment agreement was $2,082 and $1,979,
respectively.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
(2) Impaired Mortgage
Loan Invesments
As of March 31, 2021 and December 31, 2020, the recorded
investment in impaired CMLs was $25 and $25. These amounts also represent the average recorded investment in impaired mortgage loan investments as of March 31, 2021 and December 31, 2020. There was no related allowance for credit losses on these
investments and the Company did not participate as a co-lender in the related mortgage loan agreement. In addition, the impaired CMLs were not in nonaccrual status and no interest income recognized using a cash-basis method of accounting during the
time that the loan was impaired. There was no recorded investment in impaired RMLs as of as of March 31, 2021 and December 31, 2020.
There was no interest income recognized on impaired
mortgage loan investments as of March 31, 2021 and 2020. The Company recognizes interest income on its impaired mortgage loan investments upon receipt of payment.
There were no mortgage loan investments derecognized as a
result of foreclosure as of March 31, 2021 and December 31, 2020.
(3) Credit
Quality Indicators
The Company analyzes certain financing receivables for
credit risk by using specific credit quality indicators. The Company has determined the loan-to-value ratio and the debt service coverage ratio are the most reliable indicators in analyzing the credit risk of its CML portfolio. The loan-to-value
ratio is based on the Company’s internal valuation methodologies, including discounted cash flow analysis and comparative sales, depending on the characteristics of the property being evaluated. The debt service coverage ratio analysis is
normalized to reflect a 25 year amortization schedule.
The credit quality for CMLs as of March 31, 2021 and
December 31, 2020, respectively, is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Service Coverage Ratios |
|
|
|
|
2021: |
Greater than 1.4x |
|
1.2x – 1.4x |
|
1.0x – 1.2x |
|
Less than 1.0x |
|
Total |
|
Percent of Total |
Loan-to-value ratios: |
|
|
|
|
|
|
|
|
|
|
|
Less than 50% |
$ |
4,132 |
|
|
85 |
|
|
86 |
|
|
645 |
|
|
4,948 |
|
|
32.8 |
% |
50% – 60% |
4,365 |
|
|
753 |
|
|
252 |
|
|
526 |
|
|
5,896 |
|
|
39.1 |
% |
60% – 70% |
2,367 |
|
|
950 |
|
|
292 |
|
|
450 |
|
|
4,059 |
|
|
26.9 |
% |
70% – 80% |
— |
|
|
114 |
|
|
40 |
|
|
35 |
|
|
189 |
|
|
1.3 |
% |
80% – 90% |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
% |
90% – 100% |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
% |
Greater than
100% |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
% |
Total |
$ |
10,864 |
|
|
1,902 |
|
|
670 |
|
|
1,656 |
|
|
15,092 |
|
|
100 |
% |
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Service Coverage Ratios |
|
|
|
|
2020: |
Greater than 1.4x |
|
1.2x – 1.4x |
|
1.0x – 1.2x |
|
Less than 1.0x |
|
Total |
|
Percent of Total |
Loan-to-value ratios: |
|
|
|
|
|
|
|
|
|
|
|
Less than 50% |
$ |
3,992 |
|
|
73 |
|
|
52 |
|
|
622 |
|
|
4,739 |
|
|
31.9 |
% |
50% – 60% |
4,477 |
|
|
770 |
|
|
132 |
|
|
359 |
|
|
5,738 |
|
|
38.5 |
% |
60% – 70% |
2,288 |
|
|
905 |
|
|
273 |
|
|
582 |
|
|
4,048 |
|
|
27.2 |
% |
70% – 80% |
— |
|
|
163 |
|
|
102 |
|
|
35 |
|
|
300 |
|
|
2.0 |
% |
80% – 90% |
— |
|
|
— |
|
|
21 |
|
|
— |
|
|
21 |
|
|
0.1 |
% |
90% – 100% |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
% |
Greater than
100% |
— |
|
|
— |
|
|
25 |
|
|
— |
|
|
25 |
|
|
0.2 |
% |
Total |
$ |
10,757 |
|
|
1,911 |
|
|
605 |
|
|
1,598 |
|
|
14,871 |
|
|
100 |
% |
The Company has determined the delinquency status and the loan-to-value ratio are the most
reliable indicators in analyzing the credit risk of its RML portfolio. The loan-to-value ratio is based on the Company's internal valuation methodologies, including discounted cash flow analysis and comparative sales, depending on the
characteristics of the property being evaluated.
The loan-to-value ratios of RMLs as of March 31, 2021 and December 31, 2020 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
|
Total |
|
Percent of Total |
|
Total |
|
Percent of Total |
Loan-to-value ratios: |
|
|
|
|
|
|
|
Below 70% |
$ |
188 |
|
|
23.2 |
% |
|
$ |
165 |
|
|
21.6 |
% |
71% to 80% |
405 |
|
50.1 |
% |
|
380 |
|
49.8 |
% |
81% to 90% |
206 |
|
25.5 |
% |
|
206 |
|
27.0 |
% |
91% to 95% |
10 |
|
1.2 |
% |
|
12 |
|
1.6 |
% |
Above 95% |
— |
|
|
— |
% |
|
— |
|
|
— |
% |
Total |
$ |
809 |
|
|
100.0 |
% |
|
$ |
763 |
|
|
100.0 |
% |
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
(f) Loan-Backed Securities
SSAP No. 43R – Loan-Backed and Structured Securities requires the bifurcation of impairment losses on loan-backed or structured securities into interest and noninterest-related portions. The noninterest portion is the difference between the present value of cash flows expected to be collected
from the security and the amortized cost basis of the security. The interest portion is the difference between the present value of cash flows expected to be collected from the security and its fair value at the balance sheet date.
The Company had no loan-backed securities recognized in
other-than-temporary impairments for the three-month periods ended March 31, 2021 and 2020.
(g) Derivatives and Hedging Instruments
The Company uses exchange-traded and over-the-counter (OTC)
derivative instruments 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 that do not qualify for hedge accounting treatment
are recorded at fair value in the Statutory Financial Statements using valuation techniques further discussed in Note 4. The Company does not have derivative contracts with financing premium.
Derivatives held by the Company are designated as either a
cash flow hedging instrument (cash flow hedge) or nonqualified hedging instrument (nonqualifying strategies).
(1) Cash Flow Hedges
Foreign Currency Swaps on Debt Securities
Foreign currency swaps have notional amounts and maturity
dates equal and offsetting to the underlying debt securities and are determined to be highly effective as of March 31, 2021 and December 31, 2020.
(2) Fair Value Hedges
Interest Rate Swaps on Variable Annuity Insurance Liabilities
Interest Rate Swaps (IRS) traded after June 2013 are
centrally cleared through an exchange. For IRS traded prior to June 2013 the IRS exposure was netted with other OTC derivatives upon settlement and were subject to the rules of the International Swaps and Derivatives Association, Inc. agreements.
The fair values of the collateral posted for OTC and exchange traded derivatives are discussed in the derivative collateral management section below.
Prior to January 1, 2020, the Company designated hedge
accounting for these IRS as a cash flow hedge under SSAP No. 86. The amounts previously recorded under the SSAP No. 86 relationship continue to be deferred and amortized over the life of the former hedge program. Effective January 1, 2020, the
Company de-designated its previous hedging relationship under SSAP No. 86 and simultaneously designated the hedging relationship under SSAP No. 108 as a fair value hedge. The relationship is deemed to be highly effective at March 31, 2021 and
December 31, 2020.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
(3) Nonqualifying Strategies
Futures and Options Contracts
OTC options and exchange-traded option (ETO) contracts are
cleared through the Options Clearing Corporation, which operates under the jurisdiction of both the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission. The fair values of the collateral posted for futures, OTC
options, and ETO are discussed in the derivative collateral management section below.
Interest Rate Swaps
The Company can receive the fixed or variable rate; IRS are
traded in varying maturities. The fair values of the collateral posted and variation margin for OTC and centrally cleared IRS are discussed in the derivative collateral management section below.
Credit Default Swaps (CDS)
The CDS within the investment portfolios assume credit risk
from a single entity or referenced index for the purpose of synthetically replicating investment transactions. The Company can be required to pay or be the net receiver on the contract depending on the net position. Credit events include bankruptcy
of the reference and failure to pay by the reference. Prior to 1/1/2021, the notional amount is equal to the maximum potential future loss amount. Beginning 1/1/2021, the Company updated the potential future exposure (PFE) to zero, as PFE is not
determinable. The PFE is zero for the following reasons:
(a) CDS are used to hedge indices allocated to products by policyholders. Fluctuations in value of the CDS are
offset by credits provided to policyholders and results in a minimal amount of hedge inefficiency. It is impossible to determine the potential future amount of hedge inefficiency.
(b) The CDS used are exchange traded and daily variation margin is required to settle market movements. This
minimizes counterparty credit risk. It also makes it impossible to determine what the potential future exposure related to counterparty risk, net of variation margin received could be.
The fair value of the collateral posted for centrally cleared CDS is discussed in the derivative collateral
management section below.
Total Return Swaps (TRS)
The Company engages in the use of OTC TRS, which allow the
parties to exchange cash flows based on a variable reference rate such as the three-month LIBOR and the return of an underlying index. The fair value of the collateral posted for OTC TRS is discussed in the derivative collateral management section
below.
To Be Announced Securities (TBA)
The Company uses OTC TBA forward contracts to gain exposure to the investment
risk and return of mortgage-backed securities. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at a specified future date. The fair value of the collateral posted for OTC TBA securities is
discussed in the derivative collateral management section below.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
The following table presents a summary of the aggregate notional amounts and
fair values of the Company’s derivative instruments reported on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus as of March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
|
|
|
|
Gross Fair Value |
|
|
|
Gross Fair Value |
|
|
Notional (1)
|
|
Assets |
|
Liabilities |
|
Notional (1)
|
|
Assets |
|
Liabilities |
Cash flow
hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency swaps |
|
$ |
1,367 |
|
|
57 |
|
|
(57) |
|
|
1,341 |
|
|
56 |
|
|
(76) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cash flow
hedging instruments |
|
|
|
57 |
|
|
(57) |
|
|
|
|
56 |
|
|
(76) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value
hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
IRS |
|
2,709 |
|
|
200 |
|
|
(24) |
|
|
2,709 |
|
|
472 |
|
|
(40) |
|
Total fair value
hedging instruments |
|
|
|
200 |
|
|
(24) |
|
|
|
|
472 |
|
|
(40) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualifying
hedging instruments |
|
|
|
|
|
|
|
|
|
|
|
|
OTC options |
|
$ |
56,596 |
|
|
3,298 |
|
|
(2,854) |
|
|
51,430 |
|
|
3,433 |
|
|
(3,013) |
|
ETO |
|
6,259 |
|
|
51 |
|
|
(43) |
|
|
15,224 |
|
|
136 |
|
|
(96) |
|
TBA securities |
|
2,890 |
|
|
— |
|
|
(6) |
|
|
1,331 |
|
|
1 |
|
|
(1) |
|
IRS |
|
3,533 |
|
|
9 |
|
|
(18) |
|
|
2,631 |
|
|
9 |
|
|
(18) |
|
Futures |
|
14,375 |
|
|
— |
|
|
— |
|
|
19,312 |
|
|
— |
|
|
— |
|
TRS |
|
9,826 |
|
|
13 |
|
|
(101) |
|
|
11,653 |
|
|
7 |
|
|
(18) |
|
Total nonqualifying hedging instruments |
|
|
|
3,371 |
|
|
(3,022) |
|
|
|
|
3,586 |
|
|
(3,146) |
|
Total
derivative instruments |
|
|
|
$ |
3,628 |
|
|
(3,103) |
|
|
|
|
4,114 |
|
|
(3,262) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Notional amounts are presented on an absolute basis.
|
Derivative Collateral Management
The Company manages derivative collateral for the general
account and separate account combined and separate collateral for exchange-traded and OTC derivatives. The total collateral posted for exchange-traded derivatives at March 31, 2021 and December 31, 2020, had a fair value of $2,427 and $2,476,
respectively, and is included in Bonds on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus and recorded at amortized cost. The Company retains ownership of the exchange-traded collateral, but the collateral resides
in an account designated by the exchange. The collateral is subject to specific exchange rules regarding rehypothecation. The total collateral posted for OTC derivatives at March 31, 2021 and December 31, 2020, had a fair value of $9 and $3,
respectively, and is included in Bonds on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. The Company posts collateral to OTC counterparties based upon exposure amounts. The Company retains ownership of the OTC
collateral.
(h) Offsetting Assets and Liabilities
The Company elects to disclose derivative assets and
liabilities eligible for offset under SSAP No. 64 – Offsetting and Netting of Assets and Liabilities on a gross basis on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus in accordance with the provisions set
forth in SSAP No. 86 – Derivatives. This treatment is consistent with the Company’s historical reporting presentation.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
(i) Securities Lending
The Company loaned securities with a carrying value of
$3,215 and $2,212 and a fair value of $3,444 and $2,610 as of March 31, 2021 and December 31, 2020, respectively. The aggregate amount of collateral received through securities lending at March 31, 2021 and December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
2021 |
|
2020 |
Cash |
|
|
|
|
Open |
|
$ |
3,171 |
|
|
2,587 |
|
30 days or less |
|
— |
|
|
— |
|
31 to 60
days |
|
— |
|
|
— |
|
61 to 90 days |
|
— |
|
|
— |
|
Greater than
90 days |
|
— |
|
|
— |
|
Subtotal |
|
3,171 |
|
|
2,587 |
|
Securities
received |
|
353 |
|
|
86 |
|
Total collateral received |
|
$ |
3,524 |
|
|
2,673 |
|
The aggregate amount of cash collateral reinvested through
securities lending at March 31, 2021 and December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
|
|
Amortized cost |
|
Fair value |
|
Amortized cost |
|
Fair value |
Open |
|
$ |
— |
|
|
— |
|
|
— |
|
|
— |
|
30 days or
less |
|
1,079 |
|
|
1,079 |
|
|
950 |
|
|
950 |
|
31 to 60 days |
|
580 |
|
|
580 |
|
|
955 |
|
|
955 |
|
61 to 90 days |
|
113 |
|
|
113 |
|
|
66 |
|
|
66 |
|
91 to 120 days |
|
301 |
|
|
301 |
|
|
— |
|
|
— |
|
121 to 180
days |
|
286 |
|
|
286 |
|
|
143 |
|
|
143 |
|
181 to 365 days |
|
462 |
|
|
462 |
|
|
473 |
|
|
473 |
|
Greater than
1 year |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Total collateral reinvested |
|
$ |
2,821 |
|
|
2,821 |
|
|
2,587 |
|
|
2,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2021, the Company had borrowings
outstanding of $350 from securities lending cash collateral, and therefore such amounts are excluded from the table above. The Company had no borrowings outstanding from securities lending collateral as of December 31, 2020.
Reinvested collateral is recorded in Other invested assets
on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. The amount and type of reinvested collateral at March 31, 2021 and December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
Cash and cash
equivalents |
$ |
1,847 |
|
|
1,630 |
|
Short-term investments |
974 |
|
|
957 |
|
Total |
$ |
2,821 |
|
|
2,587 |
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
(j) Reverse Repurchase Agreements
The Company participates in both bilateral and tri-party
repos. As of March 31, 2021 and December 31, 2020, the Company did not sell or acquire any securities that resulted in default. The Company did not recognize a liability to return cash collateral as of March 31, 2021 and December 31, 2020.
All collateral received, as of March 31, 2021 and
December 31, 2020, were bonds with a designated NAIC-1 rating.
Further information related to repos for the three months
ended March 31, 2021 and the year ended December 31, 2020, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of end of period |
|
2021 |
|
2020 |
1. Maturity |
|
|
|
|
a. Overnight |
$ |
190 |
|
|
430 |
|
b. 2 Days to 1
Week |
— |
|
|
— |
|
2. Collateral Pledged and Securities
Acquired Under Repo |
|
|
|
a. Cash
Collateral Pledged - Secured Borrowing |
$ |
190 |
|
|
430 |
|
b. Fair Value of Securities Acquired
Under Repo - Secured Borrowing |
190 |
|
|
435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Amount |
|
2021 |
|
2020 |
1. Maturity |
|
|
|
|
a. Overnight |
$ |
734 |
|
|
2,878 |
|
b. 2 Days to 1
Week |
— |
|
|
— |
|
2. Collateral
Pledged and Securities Acquired Under Repo |
|
|
|
a. Cash
Collateral Pledged - Secured Borrowing |
$ |
734 |
|
|
2,878 |
|
b. Fair Value
of Securities Acquired Under Repo - Secured Borrowing |
736 |
|
|
2,906 |
|
(k) Non-insurance SCA Investments
A summary of the Company’s SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities, non-insurance SCA investments, including their respective asset value and NAIC filing information, as of March 31, 2021 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCA Name |
|
Gross Asset |
|
Non-Admitted Asset |
|
Net Admitted Assets |
|
NAIC Filing Date |
|
NAIC Filing Type |
|
NAIC Filing Balance |
|
Re-submission Required? |
AZLPF |
|
$ |
773 |
|
|
— |
|
|
773 |
|
|
6/10/2020 |
|
S2 |
|
792 |
|
|
N |
Total |
|
$ |
773 |
|
|
— |
|
|
773 |
|
XXX |
|
XXX |
|
792 |
|
|
XXX |
(l) Federal Home Loan Bank (FHLB) Agreements
The Company held Class A FHLB membership stock of $10 and
$10 at March 31, 2021 and December 31, 2020 and activity stock of $144 and $60 at March 31, 2021 and December 31, 2020. The Company has a fully collateralized funding agreement with a balance of $3,600 and $1,500 as of March 31, 2021 and
December 31, 2020 which is recorded in Borrowed money on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. All FHLB transaction activity occurs in the Company's general account.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
Securities collateral pledged to FHLB at March 31, 2021 and December 31, 2020
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
Carrying
value |
|
$ |
3,888 |
|
|
1,336 |
|
Fair value |
|
4,556 |
|
|
1,736 |
|
The maximum of collateral pledged to FHLB during the three months ended
March 31, 2021 and for the year ended December 31, 2020 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
2020 |
Carrying
value |
|
$ |
3,888 |
|
|
1,994 |
|
Fair value |
|
4,556 |
|
|
2,254 |
|
As of March 31, 2021 and December 31, 2020, the Company had
$3,600 and $1,500 in total borrowing capacity under its agreement with the FHLB. The maximum amount of aggregate borrowing from FHLB during the three months ended March 31, 2021 and for the year ended December 31, 2020 was $3,600 and $2,000,
respectively. Current borrowings are not subject to prepayment penalties. Outstanding borrowings as of March 31, 2021, were issued on various dates ranging from October 17, 2016 to March 30, 2021 and interest rates on those borrowings range from
0.43% to 3.2%. Interest paid on borrowings was $3 for the three months ended March 31, 2021.
(m) Restricted Assets
As of March 31, 2021 and December 31, 2020, the Company
had the following restricted assets, including assets pledged to others as collateral:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Restricted |
|
|
|
|
|
Percentage |
|
|
Total general account |
|
Total from prior year |
|
Increase (decrease) |
|
Total current year
admitted restricted |
|
Gross restricted to total assets |
|
Admitted restricted to total admitted assets |
Collateral held
under security lending arrangements |
|
$ |
3,524 |
|
|
2,673 |
|
|
851 |
|
|
3,524 |
|
|
2.0 |
% |
|
2.0 |
% |
FHLB Capital
Stock |
|
154 |
|
|
70 |
|
|
84 |
|
|
154 |
|
|
0.1 |
% |
|
0.1 |
% |
On deposit with
states |
|
4 |
|
|
4 |
|
|
— |
|
|
4 |
|
|
— |
% |
|
— |
% |
On deposit with
other regulatory bodies |
|
26 |
|
|
19 |
|
|
7 |
|
|
26 |
|
|
— |
% |
|
— |
% |
Pledged as
collateral to FHLB (including assets backing funding agreements) |
|
3,888 |
|
|
1,336 |
|
|
2,552 |
|
|
3,888 |
|
|
2.2 |
% |
|
2.2 |
% |
Derivative
collateral |
|
2,312 |
|
|
2,266 |
|
|
46 |
|
|
2,312 |
|
|
1.3 |
% |
|
1.3 |
% |
Total restricted
assets |
|
$ |
9,908 |
|
|
6,368 |
|
|
3,540 |
|
|
9,908 |
|
|
5.6 |
% |
|
5.6 |
% |
(n) Low Income Housing Tax Credits (LIHTC)
As of March 31, 2021 the Company had various LIHTC
investments with a range of 4 to 12 remaining years of unexpired tax credits and no required holding period.
The amount of tax credits and other tax benefits recognized
during the three months ended March 31, 2021 and 2020 is $11 and $10, respectively.
The balance of the investment recognized in the Statutory
Statements of Admitted Assets, Liabilities, and Capital and Surplus is $392 and $403 as of March 31, 2021 and December 31, 2020, respectively.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
Additionally, the Company's LIHTC investments require a commitment of
capital. The Company has open capital commitments of $188 and $199 at March 31, 2021 and December 31, 2020, respectively, which are recorded as an unfunded commitment liability in Other liabilities.
(4) Fair Value Measurements
SSAP No. 100R – Fair Value establishes a fair
value hierarchy that prioritizes the inputs used in the valuation techniques to measure fair value.
Level 1 – Unadjusted quoted prices
for identical assets or liabilities in active markets that the Company has the ability to access at the measurement date.
Level 2 – Valuations derived from
techniques that utilize observable inputs, other than quoted prices included in Level 1, which are observable for the asset or liability either directly or indirectly, such as:
(a) Quoted prices for similar assets or liabilities in
active markets.
(b) Quoted prices for identical or similar assets or
liabilities in markets that are not active.
(c) Inputs other than quoted prices that are observable.
(d) Inputs that are derived
principally from or corroborated by observable market data by correlation or other means.
Level 3 – Valuations derived from
techniques in which the significant inputs are unobservable. Level 3 fair values reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The Company has analyzed the valuation techniques and
related inputs, evaluated its assets and liabilities reported at fair value, and determined an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Based on the results of this evaluation and
investment class analysis, each financial asset and liability was classified into Level 1, 2, or 3.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
The following presents the assets and liabilities measured
at fair value on a recurring basis and their corresponding level in the fair value hierarchy at March 31, 2021 and December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
Level 1 |
|
Level 2 (a)
|
|
Level 3 |
|
Total |
Assets
at fair value: |
|
|
|
|
|
|
|
|
Bonds |
|
— |
|
|
4 |
|
|
— |
|
|
4 |
|
Common stocks |
|
204 |
|
|
— |
|
|
1 |
|
|
205 |
|
Preferred
stocks |
|
— |
|
|
— |
|
|
40 |
|
40 |
|
Derivative
assets |
|
51 |
|
|
3,600 |
|
|
13 |
|
|
3,664 |
|
Separate
account assets |
|
21,741 |
|
|
12,251 |
|
|
— |
|
|
33,992 |
|
Total assets
reported at fair value |
|
21,996 |
|
|
15,855 |
|
|
54 |
|
|
37,905 |
|
Liabilities
at fair value: |
|
|
|
|
|
|
|
|
Derivative
liabilities |
|
43 |
|
|
2,986 |
|
|
101 |
|
|
3,130 |
|
Separate
account derivative liabilities |
|
— |
|
|
10,943 |
|
|
— |
|
|
10,943 |
|
Total
liabilities reported at fair value |
|
$ |
43 |
|
|
13,929 |
|
|
101 |
|
|
14,073 |
|
|
|
|
|
|
|
|
|
|
(a) The Company does not have any assets or liabilities measured at net asset value (NAV) that are included in Level 2 within this
table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
|
Level 1 |
|
Level 2 (a)
|
|
Level 3 |
|
Total |
Assets
at fair value: |
|
|
|
|
|
|
|
|
Bonds |
|
$ |
— |
|
|
4 |
|
|
0 |
|
|
4 |
|
Common stocks |
|
163 |
|
|
— |
|
|
1 |
|
|
164 |
|
|
|
|
|
|
|
|
|
|
Derivative
assets |
|
136 |
|
|
4,036 |
|
|
7 |
|
|
4,179 |
|
Separate
account assets |
|
21,789 |
|
|
11,408 |
|
|
— |
|
|
33,197 |
|
Total assets
reported at fair value |
|
22,088 |
|
|
15,448 |
|
|
8 |
|
|
37,544 |
|
Liabilities
at fair value: |
|
|
|
|
|
|
|
|
Derivative
liabilities |
|
96 |
|
|
3,161 |
|
|
18 |
|
|
3,275 |
|
Separate
account derivative liabilities |
|
— |
|
|
10,332 |
|
|
— |
|
|
10,332 |
|
Total
liabilities reported at fair value |
|
$ |
96 |
|
|
13,493 |
|
|
18 |
|
|
13,607 |
|
|
|
|
|
|
|
|
|
|
(a) The Company does not have any assets or liabilities measured at NAV that are included in Level 2 within this table.
|
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). The
Company has not made changes to valuation techniques in 2021.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
(a) Valuation of Bonds and Unaffiliated Stock
The fair value of bonds is based on quoted market prices in
active markets when available. Based on the market data, the securities are categorized into asset class, and based on the asset class of the security, appropriate pricing applications, models and related methodology, and standard inputs are
utilized to determine what a buyer in the marketplace would pay for the security in a current sale. When quoted prices are not readily available or in an inactive market, standard inputs used in the valuation models, listed in approximate order of
priority, include, but are not limited to, benchmark yields, reported trades, Municipal Securities Rulemaking Board reported trades, Nationally Recognized Municipal Securities Information Repository material event notices, broker-dealer quotes,
issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In some cases, including private placement securities and certain difficult-to-price securities, internal pricing models may be
used that are based on market proxies. Internal pricing models based on market spread and U.S. Treasury rates are used to value private placement holdings. The primarily unobservable input used in the discounted cash flow models for states and
political subdivisions, foreign government, and corporate bonds is a corporate index option adjusted spread (OAS). CDO and certain mortgage-backed securities are priced by a third-party vendor and the Company internally reviews the valuation for
reasonableness. The Company does not have insight into the specific inputs; however, the key unobservable inputs would generally include default rates.
Generally, U.S. Treasury securities and exchange-traded
stocks are included in Level 1. Most bonds for which prices are provided by third-party pricing sources are included in Level 2, because the inputs used are market observable. Bonds for which prices were obtained from broker quotes, certain bonds
without active trading markets and private placement securities that are internally priced are included in Level 3.
The fair value of unaffiliated common stocks is based on
quoted market prices in active markets when available and included in Level 1. When quoted prices are not readily available or in an inactive market, the Company arrives at fair value utilizing internal pricing models based on available market
inputs or obtains valuations from third party brokers or investment managers. Such investments may be categorized in Level 2 or Level 3. The primary unobservable input used to value common stock are indicative quotes received from third-party
vendors.
The fair value of unaffiliated preferred stocks is based on
quoted market prices in active markets. When available, such investments are included in Level 1. When quoted prices are not readily available or in an inactive market, the Company arrives at fair value utilizing internal pricing models based on
available market inputs. Such investments may be categorized in Level 2 or Level 3.
(b) Valuation of Derivatives
Active markets for over-the-counter (OTC) options do not
exist. The fair value of OTC options is derived internally, by calculating their expected discounted cash flows, using a set of calibrated, risk-neutral stochastic scenarios, including a market data monitor, a market data model generator, a
stochastic scenario calibrator, and the actual asset pricing calculator. The valuation results are reviewed by Management via the Pricing Committee. OTC options that are internally priced, foreign currency swaps, credit default swaps (CDS), To Be
Announced (TBA) securities, and interest rate swaps (IRS) are included in Level 2, because they use market observable inputs. Total return swaps (TRS) are included in Level 3 because they use valuation techniques in which significant inputs are
unobservable. The fair value of exchange-traded options (ETOs) and futures are based on quoted market prices and are generally included in Level 1.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
Certain derivatives are priced using external third-party
vendors. The Company has controls in place to monitor the valuations of these derivatives. Using market observable inputs, IRS prices are derived from a third-party source and are independently recalculated internally and reviewed for
reasonableness at the position level on a monthly basis. TRS prices are obtained from the respective counterparties. These prices are also internally recalculated and reviewed for reasonableness at the position level on a monthly basis. The Company
does not have insight into the specific inputs used by third-party vendors; however, the key unobservable input would generally include the spread.
(c) Valuation of Separate Account Assets and Separate
Account Derivative Liabilities
Separate account assets and Separate account derivative
liabilities, with the exception of certain bonds, cash, cash equivalents, and investment income due and accrued, 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 variable investment option funds with the following investment types: bond, domestic equity, international equity, or specialty. Variable investment option funds are included in Level 1 because their fair value is based on net asset
values that are quoted as prices (unadjusted) in an active, observable market. 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 bonds,
short-term investments and derivatives, that portion could be classified within Level 2 or Level 3).
(d) 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2021 |
Transfers into
Level 3 |
Transfers out
of Level 3 |
Total gains
and (losses)
included in
Net Income |
Total gains
and (losses)
included in
Surplus |
Purchases, Issuances, Sales, and Settlements |
March 31, 2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
1 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
1 |
|
Preferred
stocks |
— |
|
41 |
|
— |
|
(2) |
|
1 |
|
— |
|
40 |
|
TRS assets |
7 |
|
— |
|
— |
|
56 |
|
6 |
|
(56) |
|
13 |
|
Total Level 3
Assets |
8 |
|
41 |
|
— |
|
54 |
|
7 |
|
(56) |
|
54 |
|
|
|
|
|
|
|
|
|
TRS
liabilities |
(18) |
|
— |
|
— |
|
(228) |
|
(83) |
|
228 |
|
(101) |
|
Total Level 3 Liabilities |
$ |
(18) |
|
— |
|
— |
|
(228) |
|
(83) |
|
228 |
|
(101) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2020 |
Transfers into
Level 3 |
Transfers out
of Level 3 |
Total gains
and (losses)
included in
Net Income |
Total gains
and (losses)
included in
Surplus |
Purchases, issuances, sales and settlements |
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
1 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
1 |
|
TRS assets |
1 |
|
— |
|
— |
|
960 |
|
6 |
|
(960) |
|
7 |
|
Total Level 3
Assets |
2 |
|
0 |
|
0 |
|
960 |
|
6 |
|
(960) |
|
8 |
|
|
|
|
|
|
|
|
|
TRS
liabilities |
(13) |
|
— |
|
— |
|
(568) |
|
(5) |
|
568 |
|
(18) |
|
Total Level 3
Liabilities |
$ |
(13) |
|
— |
|
— |
|
(568) |
|
(5) |
|
568 |
|
(18) |
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
(e) Transfers
The Company reviews its fair value hierarchy
classifications annually. Transfers between levels occur when there are changes in the observability of inputs and market activity.
All transfers into Level 3 were a result of observable
inputs no longer being considered reliable or could no longer be validated against an alternative source. Level 3 transfers are measured at the end of the period. The transfers out of Level 3 were a result of securities no longer being carried at
fair value as a result of new availability of reliable observable inputs or the ability to validate market price of the security against an alternative source.
(f) Sensitivity of Fair Value Measurements to Changes
in Unobservable Inputs
Bonds: The primary unobservable input used in the discounted cash flow models for states and political subdivisions, foreign government, and corporate bonds is a corporate index option
adjusted spread (OAS). The corporate index OAS used is based on a security's sector, rating, and average life. A significant increase (decrease) of the corporate index OAS in isolation could result in a decrease (increase) in fair value.
Collateralized debt obligation (CDO) and mortgage-backed securities are
priced by a third-party vendor and the Company internally reviews the valuation for reasonableness. The Company does not have insight into the specific inputs used; however, the key unobservable inputs would generally include default rates. A
significant increase (decrease) in default rates in isolation could result in an decrease (increase) in fair value.
Common and preferred stocks: The primary unobservable inputs used to value common and preferred stock are indicative quotes received from third-party vendors and subsequent offering
prices. A significant increase (decrease) in either the indicative quotes or offering prices in isolation could result in an increase (decrease) in fair value.
Derivative assets and liabilities: The TRS are priced by a third-party vendor and the Company internally reviews the valuation for reasonableness. The Company does not have
insight into the specific inputs used; however, the key unobservable input would generally include the spread. For a long position, a significant increase (decrease) in the spread used in the fair value of the TRS in isolation could result in
higher (lower) fair value. For a short position, a significant increase (decrease) in the spread used in the fair value of the TRS in isolation could result in lower (higher) fair value.
(g) Estimates
The Company has been able to estimate the fair value of all
financial assets and liabilities.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
(h) Aggregate Fair Value of Financial Instruments
The following tables present the carrying amounts and fair
values of all financial instruments at March 31, 2021 and December 31, 2020 (b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2021 |
|
|
|
|
|
|
Fair Value
|
|
|
Aggregate Fair Value |
|
Admitted Assets/
Carrying Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Financial
Assets |
|
|
|
|
|
|
|
|
|
|
Bonds |
|
$ |
110,895 |
|
|
100,783 |
|
|
5,103 |
|
|
89,264 |
|
|
16,528 |
|
Preferred
stocks, unaffiliated |
|
40 |
|
|
40 |
|
|
— |
|
|
— |
|
|
40 |
|
Common
stocks, unaffiliated |
|
359 |
|
|
359 |
|
|
204 |
|
|
— |
|
|
155 |
|
Mortgage
loans on real estate |
|
16,167 |
|
|
15,901 |
|
|
— |
|
|
— |
|
|
16,167 |
|
Cash
equivalents |
|
848 |
|
|
848 |
|
|
658 |
|
|
190 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
assets |
|
3,664 |
|
|
3,628 |
|
|
51 |
|
|
3,600 |
|
|
13 |
|
Securities lending reinvested
collateral assets |
|
2,821 |
|
|
2,821 |
|
|
— |
|
|
2,821 |
|
|
— |
|
Other
invested assets |
|
756 |
|
|
756 |
|
|
— |
|
|
17 |
|
|
739 |
|
Corporate owned life insurance (COLI) |
|
670 |
|
|
670 |
|
|
— |
|
|
670 |
|
|
— |
|
Separate
account assets |
|
48,411 |
|
|
48,173 |
|
|
22,570 |
|
|
25,841 |
|
|
— |
|
Financial Liabilities |
|
|
|
|
|
|
|
|
|
|
Deposit-type
contracts |
|
$ |
5,299 |
|
|
4,699 |
|
|
— |
|
|
— |
|
|
5,299 |
|
Other investment contracts |
|
102,157 |
|
|
94,206 |
|
|
— |
|
|
— |
|
|
102,157 |
|
Borrowed
money |
|
3,593 |
|
|
3,601 |
|
|
— |
|
|
— |
|
|
3,593 |
|
Derivative liabilities |
|
3,130 |
|
|
3,103 |
|
|
43 |
|
|
2,986 |
|
|
101 |
|
Payable for
securities lending |
|
3,171 |
|
|
3,171 |
|
|
— |
|
|
3,171 |
|
|
— |
|
Payable for securities |
|
188 |
|
|
188 |
|
|
— |
|
|
— |
|
|
188 |
|
|
|
|
|
|
|
|
|
|
|
|
Separate
account liabilities |
|
48,411 |
|
|
48,173 |
|
|
22,570 |
|
|
25,841 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
(b) The Company does not have any assets or liabilities measured at NAV that are included in Level 2 in this table. In addition,
the Company has no assets or liabilities for which it is not practicable to measure at fair value.
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
|
|
|
|
|
Fair Value
|
|
|
Aggregate Fair Value |
|
Admitted Assets/
Carrying Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Financial
Assets |
|
|
|
|
|
|
|
|
|
|
Bonds |
|
$ |
115,710 |
|
|
99,088 |
|
|
4,995 |
|
|
93,714 |
|
|
17,001 |
|
Preferred
stocks, unaffiliated |
|
43 |
|
|
41 |
|
|
— |
|
|
— |
|
|
43 |
|
Common
stocks, unaffiliated |
|
234 |
|
|
234 |
|
|
163 |
|
|
— |
|
|
71 |
|
Mortgage
loans on real estate |
|
17,117 |
|
|
15,634 |
|
|
— |
|
|
— |
|
|
17,117 |
|
Cash
equivalents |
|
878 |
|
|
878 |
|
|
448 |
|
|
430 |
|
|
— |
|
Derivative
assets |
|
4,179 |
|
|
4,114 |
|
|
136 |
|
|
4,036 |
|
|
7 |
|
Securities
lending reinvested collateral assets |
|
2,587 |
|
|
2,587 |
|
|
— |
|
|
2,587 |
|
|
— |
|
Other
invested assets |
|
757 |
|
|
757 |
|
|
— |
|
|
23 |
|
|
734 |
|
COLI |
|
653 |
|
|
653 |
|
|
— |
|
|
653 |
|
|
— |
|
Separate
account assets |
|
46,886 |
|
|
45,901 |
|
|
22,732 |
|
|
24,154 |
|
|
— |
|
Financial
Liabilities |
|
|
|
|
|
|
|
|
|
|
Deposit-type
contracts |
|
$ |
5,395 |
|
|
4,749 |
|
|
— |
|
|
— |
|
|
5,395 |
|
Other
investment contracts |
|
103,518 |
|
|
95,083 |
|
|
— |
|
|
— |
|
|
103,518 |
|
Borrowed
money |
|
1,516 |
|
|
1,501 |
|
|
— |
|
|
— |
|
|
1,516 |
|
Derivative
liabilities |
|
3,275 |
|
|
3,262 |
|
|
96 |
|
|
3,161 |
|
|
18 |
|
Payable for
securities lending |
|
2,587 |
|
|
2,587 |
|
|
— |
|
|
2,587 |
|
|
— |
|
Payable for
securities |
|
199 |
|
|
199 |
|
|
— |
|
|
— |
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
Separate
account liabilities |
|
46,886 |
|
|
45,901 |
|
|
22,732 |
|
|
24,154 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
(b) The Company does not have any assets or liabilities measured at NAV that are included in Level 2 in this table. In addition,
the Company has no assets or liabilities for which it is not practicable to measure at fair value.
|
A description of the Company’s valuation techniques for
financial instruments not reported at fair value and categorized within the fair value hierarchy is shown below:
Valuation of FHLB Stock
FHLB stock, included in Common stocks, is not traded in an
active market and is categorized in Level 3. FHLB stock is carried at cost, which approximates fair value unless it is impaired, based on provisions within the Company’s FHLB agreement that allow for return of outstanding shares of FHLB stock at
the Company’s cost basis.
Valuation of Mortgage Loans on Real Estate
The fair value of commercial mortgage loans on real estate
is calculated by analyzing individual loans and assigning ratings to each loan based on a combination of loan-to-value ratios and debt service coverage ratios. Fair value is determined based on the contractual cash flows of each loan and the
current market interest rates for similar loans. The fair value of residential mortgage loans on real estate is calculated by discounting estimated cash flows, with discount rates based on current market conditions.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
Valuation of Cash Equivalents
Cash equivalents are comprised of money market mutual funds, cash sweep
accounts, and reverse repurchase agreements. The fair value of money market mutual funds and cash sweep accounts is based on quoted market prices in active markets and included in Level 1. Reverse repurchase prices are provided by third-party
pricing sources and included in Level 2, because the inputs used to determine fair value are market observable.
Valuation of Securities Lending Reinvested Collateral Assets
Collateral held from securities lending agreements is
comprised of cash and cash equivalents and highly liquid short-term investments. Fair values are determined and classified within the fair value hierarchy in a manner consistent with the method utilized to determine the fair value of similar
securities held within the Company’s general account investment portfolio.
Valuation of Other Invested Assets
Other invested assets include LIHTC investments (including
the unfunded commitment asset), limited partnership investments, loans to affiliates, and restricted stock unit (RSU) assets. As there is no observable market data on which to calculate fair value of the LIHTC investment balances, the fair value is
set equal to carrying value. Limited partnership investments are recorded using the cost method in line with SSAP No. 48 – Joint Ventures, Partnerships and Limited Liability Companies using unobservable inputs. Loans to affiliates are
carried at cost; due to the lack of an active market, the current carrying value is the only market price at which the transaction could be settled, the Company believes cost approximates fair value. Due to the use of unobservable inputs, LIHTC
investments, limited partnership investments, and loans to affiliates are categorized as Level 3. RSU assets tied to the share price of Allianz SE stock but does not participate in an active market and is categorized as Level 2.
Valuation of COLI
The COLI policies held by the Company are carried at their
respective cash surrender values, which approximates fair value. The cash surrender value of the policies is based on the value of the underlying assets, which are regularly priced utilizing observable inputs. The COLI asset is included within
Other assets on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.
Valuation of Deposit-Type Contracts
Fair values of deposit-type contracts are based on
discounted cash flows using internal inputs, including the discount rate and consideration of the Company’s own credit standing and a risk margin for actuarial inputs.
Valuation of Other Investment Contracts
Other investment contracts are included within Life
policies and annuity contracts within the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. Other investment contracts include certain reserves related to deferred annuities and other payout annuities that may include
life contingencies, but do not have significant mortality risk due to substantial periods certain. Fair values are based on discounted cash flows using internal inputs, including the discount rate and consideration of the Company’s own credit
standing and a risk margin for market inputs.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
Valuation of Borrowed Money
The fair value of the FHLB borrowing is calculated on a
discounted cash flow basis. Each position includes a monthly interest rate, a maturity payment amount, and a maturity date. The interest and maturity payments are projected as of the valuation date, and the expected cash flows are discounted using
the valuation date swap curve.
Valuation of Payable for Securities Lending
Securities lending payable is set equal the to the cash
collateral received. Due to the short-term nature of these loans, the carrying value is deemed to approximate fair value.
Valuation of Payable for Securities
Included in Payable for securities is the LIHTC investments
unfunded commitment liability. As there is no observable market data on which to calculate fair value of the LIHTC investment unfunded commitment asset and liability, fair value is set equal to carrying value, and the balance is categorized as
Level 3.
Valuation of Separate Account Liabilities
The fair value of separate account liabilities approximates the fair value of
separate account assets.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
(5) Income Taxes
Reconciliation of Federal Income Tax Rate to Actual
Effective Rate
The provision for federal income taxes incurred is different from that which
would be obtained by applying the statutory federal income tax rate to income before income taxes. The significant items causing this difference are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
|
March 31, 2020 |
Federal income tax rate |
21.0 |
% |
|
21.0 |
% |
Amortization of IMR |
(0.3) |
|
|
0.8 |
|
Dividends received
deduction |
(0.5) |
|
|
1.2 |
|
Nondeductible expenses |
— |
|
|
(0.3) |
|
Affiliated LLC income |
— |
|
|
0.1 |
|
COLI |
(0.6) |
|
|
(5.4) |
|
Tax hedges |
(8.9) |
|
|
48.7 |
|
Tax hedge reclassification (1)
|
0.8 |
|
|
(7.7) |
|
Tax credits |
(2.4) |
|
|
5.5 |
|
|
|
|
|
Change in deferred taxes
on impairments |
— |
|
|
22.6 |
|
Change in deferred taxes
on nonadmitted assets |
(0.2) |
|
|
0.8 |
|
Reinsurance |
5.5 |
|
|
3.6 |
|
Change in valuation |
— |
|
|
0.1 |
|
NOL Carryback Benefit |
— |
|
|
56.6 |
|
Tax Contingencies |
0.2 |
|
|
— |
|
Realized Capital Gains
Tax |
2.1 |
|
|
(7.5) |
|
Other |
(0.1) |
|
|
0.3 |
|
Effective tax rate |
16.6 |
% |
|
140.4 |
% |
|
|
|
|
Federal and foreign
income taxes incurred |
27.1 |
% |
|
254.3 |
% |
Realized Capital Gains
Tax |
2.1 |
|
|
(7.5) |
|
Change in net deferred
tax |
(12.6) |
|
|
(106.4) |
|
Effective tax rate |
16.6 |
% |
|
140.4 |
% |
|
|
|
|
(6) Reinsurance
During the three months ended March 31, 2021, the Company entered into a new
reinsurance agreement that included policies or contracts that were in force or which had existing reserves established by the Company as of the effective date of the agreement. The agreement resulted in a reduction in Policyholder liabilities,
life policies and annuity contracts in the amount of $224 as of the effective date of the agreement.
(7)Related-Party Transactions
(a) Organization Changes
The Company legally dissolved and terminated its
subsidiary, Allianz Annuity Company of Missouri (AAMO), by voluntary action on February 24, 2020. Upon termination, AAMO paid an insignificant dividend to the Company.
On July 1 2020, American Financial Marketing, LLC, Ann Arbor Annuity Exchange, LLC, GamePlan
Financial Marketing, LLC, and The Annuity Store Financial & Insurance Services, LLC, all of which are wholly owned subsidiaries of TruChoice Financial Group, LLC (TruChoice), which is a wholly owned subsidiary of AIIG,
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
which is a wholly owned subsidiary of the Company, merged into TruChoice. TruChoice was the
surviving entity.
Allianz Investment Management U.S. LLC, a Minnesota limited company was formed on October
11, 2020. Allianz Life is its direct parent.
On January 1, 2021, the Company formed Allianz Strategic Investments (ASI), a non-insurance
subsidiary. ASI's sole operations are investment activities associated with direct equity holdings performed in coordination with Allianz Life.
(b) Related-Party Invested Assets
The Company has an agreement to lend AZOA $39. The
remaining loan balance was $39 as of March 31, 2021 and December 31, 2020 and is included in Other invested assets on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. Repayment of this loan will begin in 2021 and
has a final maturity date of August 30, 2023. The interest rate is a fixed rate of 0.34 %. Interest income earned and accrued had an immaterial impact to the Company during the three months ended March 31, 2021 and 2020, respectively.
The Company has investments in limited partnerships that
are managed by its affiliate Pacific Investment Management Company (PIMCO). The total committed capital for this investment is $100 of which $64 and $45 is unfunded as of March 31, 2021 and December 31, 2020, respectively. As of March 31, 2021 and
December 31, 2020, the fair value of the investment is $35 and $35, respectively, and is recorded in Other invested assets on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.
The Company has a seed money investment in exchange traded
funds that are managed by a related party, PIMCO, with a reported balance of $35 as of March 31, 2021 within Other invested assets on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.
The Company invests in bonds that are managed by a related
party, PIMCO. The total committed capital for the bond is $135, of which $135 was unfunded as of March 31, 2021. The Company reported a balance of $0 as of March 31, 2021 related to the PIMCO bonds.
The Company has a seed money investment in exchange traded
funds that are managed by a related party, AIM. The Company reported a balance of $104 and $58 as of March 31, 2021 and December 31, 2020 related to the seed money investment within Stocks on the Statutory Statements of Admitted Assets,
Liabilities, and Capital and Surplus. There is no additional commitment related to these investments.
(c) Service Fees
The Company incurred fees for services provided by
affiliated companies of $47 and $42 in the three months ended March 31, 2021 and 2020, respectively. The Company’s liability for these expenses was $31 and $37 at March 31, 2021 and December 31, 2020, respectively, and is included in Other
liabilities on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. In the normal course of business, the outstanding amount is settled in cash.
The Company earned revenues for various services provided
to affiliated companies and subsidiaries of $13 and $15 in the three months ended March 31, 2021 and 2020, respectively. The receivable for these revenues was $5 and $6 at March 31, 2021 and December 31, 2020, respectively, and is included in Other
assets on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. In the normal course of business, the outstanding amount is settled in cash.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
The Company has agreements with its affiliates PIMCO,
Oppenheimer Capital LLC (OpCap), and with certain other related parties whereby (1) specific investment options managed by PIMCO and OpCap are made available through the Company's separate accounts to holders of the Company's variable annuity
products, and (2) the Company receives compensation for providing administrative and recordkeeping services relating to the investment options managed by PIMCO and OpCap. Income recognized by the Company from these affiliates for distribution and
in-force related costs as a result of providing investment options to the contractholders was $2 during the three months ended March 31, 2021 and 2020, which is included in Fees from separate accounts on the Statutory Statements of Operations. At
March 31, 2021 and December 31, 2020, $1 was included for related receivables of these fees in Other assets on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.
The Company has incurred commission expense related to the
distribution of variable annuity products from Allianz Life Financial Services, LLC (ALFS) in the amount of $97 and $71 for the three months ended March 31, 2021 and 2020, respectively. The Company has an agreement with ALFS, whereby interest
receivable is assigned to the company and 12b-1 fee receivables are assigned to the Company and AZNY. The Company has also agreed with AZNY to share in reimbursing ALFS for direct and indirect expenses incurred in performing services for the
Company and AZNY. In the event that assigned receivables exceed expenses, ALFS records a dividend-in-kind to the Company and a loss on the transaction with AZNY. The Company recorded net expense from this agreement of $7 and $4 for the three months
ended March 31, 2021 and 2020, respectively.
(d) Capital
Contributions and Dividends with Subsidiaries
During the the three months ended March 31, the Company
received dividends from its subsidiaries as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
|
March 31, 2020 |
Allianz Investment
Management, LLC (AIM) |
$ |
10 |
|
|
$ |
14 |
|
Allianz Investment
Management U.S., LLC (AIM US) |
3 |
|
|
— |
|
|
|
|
|
|
$ |
13 |
|
|
$ |
14 |
|
During the three month periods ended March 31, the Company
made capital contributions to subsidiaries as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021 |
|
March 31, 2020 |
ALFS |
$ |
7 |
|
|
$ |
4 |
|
AIM US |
8 |
|
|
— |
|
|
$ |
15 |
|
|
$ |
4 |
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
(e) Reinsurance
The Company wholly-owns AZMO, a Special Purpose Life
Reinsurance Captive Insurance Company domiciled in Missouri. The Company cedes to AZMO, and AZMO provides reinsurance on a coinsurance basis and modified coinsurance basis, a 100% quota share of the Company’s net liability of level term life
insurance policies and certain universal life insurance policies written directly by the Company. The Company recorded an immaterial amount of premium and ceding commission for the three months ended March 31, 2021 and 2020, respectively. In
addition, the Company recorded a deferred gain of $97 upon execution of the reinsurance agreement in 2009, of which $1 was amortized in the three months ended March 31, 2021 and 2020, respectively, and included in Commissions and expense allowances
on reinsurance ceded on the Statutory Statements of Operations.
The Company has reinsurance recoverables and receivables
related to reinsurance agreements with affiliated entities. Total affiliated reinsurance recoverables and receivables were $5 and $3 as of March 31, 2021 and December 31, 2020, respectively, and are included in Other assets on the Statutory
Statements of Admitted Assets, Liabilities, and Capital and Surplus.
(f) Line of Credit Agreement
The Company has a line of credit agreement with AZNY, to provide liquidity,
as needed. The Company’s lending capacity under the agreement is limited to 5% of the general account admitted assets of AZNY as of the preceding year end. No amounts have been borrowed during the three months ended March 31, 2021 and for the year
ended December 31, 2020.
(8) Commitments and Contingencies
The Company and its subsidiaries are named as defendants in
various pending or threatened legal proceedings on an ongoing basis, arising from the conduct of business, including two putative class action proceedings: Sanchez v. Allianz Life Ins. Co. of North America (Superior Court of California, L.A.
County, BC594715), which has been certified as a class, and Small v. Allianz Life Ins. Co. of North America (United Stated District Court, Central District of California, Case No. 2:20-cv-01944-AB (KESx), which has not been certified as a class
action. The Company generally intends to vigorously contest the lawsuits, but may pursue settlement negotiations in some cases, if appropriate. The outcome of the cases is uncertain at this time, and there can be no assurance that such litigation,
or any future litigation, will not have a material adverse effect on the Company and/or its subsidiaries. The Company recognizes legal costs as incurred.
The Company is contingently liable for possible future
assessments under regulatory requirements pertaining to insolvencies and impairments of unaffiliated insurance companies. Provision has been made for assessments currently received and assessments anticipated for known insolvencies.
The financial services industry, including mutual funds,
variable and fixed annuities, life insurance, distribution companies, and broker-dealers, is subject to close scrutiny by regulators, legislators, and the media.
Federal and state regulators, such as state insurance
departments, state securities departments, the SEC, the Financial Industry Regulatory Authority, and other regulatory bodies regularly make inquiries and conduct examinations or investigations concerning various selling practices, including
suitability reviews, product exchanges, sales to seniors, and compliance with, among other things, insurance and securities law. The Company is subject to ongoing market conduct examinations and investigations by regulators, which may have a
material adverse effect on the Company.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to the Statutory Financial Statements (unaudited)
(Dollars in millions, except share data and security holdings quantities)
It can be expected that annuity and life product designs,
management, and sales practices will be an ongoing source of regulatory scrutiny and enforcement actions, litigation, and rulemaking.
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.
Certain guarantees of the Company provide for the
maintenance of a subsidiary’s regulatory capital, surplus levels and liquidity sufficient to meet certain obligations. Those unlimited guarantees are made on behalf of certain wholly owned subsidiaries (AZNY, AZMO, ALFS and Questar Capital
Corporation, through its parent, Yorktown). These guarantees are not limited and cannot be estimated as of the balance sheet date. From time to time, the Company makes capital contributions to these subsidiaries as needed under the guarantees.
Capital contributions made during the three months ended March 31, 2021 and 2020 are detailed in Note 7.
The Company had investments in limited partnerships that required a
commitment of capital of $310 and $306 as of March 31, 2021 and December 31, 2020, respectively. The Company had commitments to fund private placement investments of $420 and $187 as of March 31, 2021 and December 31, 2020, respectively.
(9) Subsequent Events
The Company has evaluated subsequent events through July 2,
2021, which is the date the Statutory Financial Statements were available to be issued. No material subsequent events have occurred since March 31, 2021 that require adjustment to the Statutory Financial Statements.
Appendix
F – Selected Financial Data and Statutory Financial Statements
Management’s Discussion and Analysis of Financial Condition and
Results of Operations (For the 12 month period ended December 31, 2020)
The following discussion of our financial condition and results of
operations should be read in conjunction with our statutory financial statements and notes to those statements included in this Appendix. The discussion and analysis in this Appendix 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 our actual growth, results of operations, performance, financial position and business prospects and opportunities in 2021
and beyond to differ materially from those expressed in, or implied by, those forward-looking statements. See “Forward-Looking Statements.”
Statutory Financial Statements
The statutory financial statements of Allianz Life Insurance
Company of North America as of December 31, 2020 and 2019 and for each of the three years in the period ended December 31, 2020 included in this Appendix F have been so included in reliance on the report of PricewaterhouseCoopers LLP, an
independent registered public accounting firm, given on the authority of said firm as experts in auditing and accounting. The principal business address of PricewaterhouseCoopers LLP is 45 South Seventh Street, Suite 3400, Minneapolis, MN.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021
Appendix F
Item 11(f).
Selected Financial Data
(dollars in millions, unless otherwise stated)
The following table sets forth the Company’s selected historical financial
data. The selected financial data has been derived from the Statutory 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 audited Statutory Financial Statements.
These historical results are not necessarily indicative of results to be
expected for any future period.
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
Selected income data |
|
2020 |
|
2019 |
|
2018 |
|
2017 |
|
2016 |
Premium and annuity considerations* |
|
$ |
10,542 |
|
|
13,029 |
|
|
12,193 |
|
|
10,231 |
|
|
12,914 |
|
Net investment income |
|
4,864 |
|
|
4,839 |
|
|
4,593 |
|
|
4,504 |
|
|
4,361 |
|
Ceded reinsurance
reserve and expense adjustments |
|
(45) |
|
|
329 |
|
|
245 |
|
|
612 |
|
|
157 |
|
Fees from separate accounts |
|
567 |
|
|
613 |
|
|
676 |
|
|
719 |
|
|
726 |
|
Other income |
|
694 |
|
|
(13) |
|
|
(3) |
|
|
150 |
|
|
179 |
|
Total income |
|
16,622 |
|
|
18,797 |
|
|
17,704 |
|
|
16,216 |
|
|
18,337 |
|
Policyholder benefits
and surrenders |
|
10,343 |
|
|
10,368 |
|
|
9,436 |
|
|
8,649 |
|
|
8,111 |
|
Change in aggregate reserves |
|
2,465 |
|
|
1,034 |
|
|
7,299 |
|
|
10,628 |
|
|
7,755 |
|
General and
administrative and commission |
|
1,739 |
|
|
1,878 |
|
|
1,770 |
|
|
1,616 |
|
|
1,824 |
|
Net transfers to (from) separate accounts |
|
1,460 |
|
|
5,254 |
|
|
(2,009) |
|
|
(1,851) |
|
|
(1,380) |
|
Total benefits
and other expenses |
|
16,007 |
|
|
18,534 |
|
|
16,496 |
|
|
19,042 |
|
|
16,310 |
|
Income tax expense (benefit) |
|
18 |
|
|
773 |
|
|
(51) |
|
|
24 |
|
|
530 |
|
Net realized capital
gain (loss) |
|
142 |
|
|
1,053 |
|
|
(490) |
|
|
3,655 |
|
|
(486) |
|
Net income (loss) |
|
$ |
739 |
|
|
543 |
|
— |
|
769 |
|
|
805 |
|
|
1,011 |
|
Capital and Surplus: |
|
|
|
|
|
|
|
|
|
|
Change in unrealized capital gain (loss) |
|
$ |
(61) |
|
|
719 |
|
|
(230) |
|
|
(78) |
|
|
180 |
|
Dividends to parent |
|
(750) |
|
|
(325) |
|
|
— |
|
|
(780) |
|
|
(894) |
|
Other change in capital & surplus |
|
(220) |
|
|
441 |
|
|
26 |
|
|
(101) |
|
|
46 |
|
Net change in
capital & surplus |
|
$ |
(292) |
|
|
1,378 |
|
|
565 |
|
|
(154) |
|
|
343 |
|
*Includes premiums and
annuity and supplementary contract considerations. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, |
Selected balance sheet
data |
|
2020 |
|
2019 |
|
2018 |
|
2017 |
|
2016 |
Total cash and invested assets |
|
$ |
125,229 |
|
|
121,870 |
|
|
117,203 |
|
|
109,328 |
|
|
99,840 |
|
Investment income due
and accrued |
|
1,040 |
|
|
1,031 |
|
|
1,047 |
|
|
1,004 |
|
|
962 |
|
Other admitted assets |
|
1,218 |
|
|
945 |
|
|
951 |
|
|
982 |
|
|
685 |
|
Separate account assets |
|
45,901 |
|
|
34,638 |
|
|
22,835 |
|
|
26,755 |
|
|
26,071 |
|
Total
admitted assets |
|
173,388 |
|
|
158,484 |
|
|
142,036 |
|
|
138,069 |
|
|
127,558 |
|
Total policyholder
liabilities |
|
109,353 |
|
|
107,098 |
|
|
107,118 |
|
|
100,433 |
|
|
90,504 |
|
Other liabilities |
|
10,473 |
|
|
8,794 |
|
|
5,507 |
|
|
4,869 |
|
|
4,818 |
|
Separate account
liabilities |
|
45,901 |
|
|
34,638 |
|
|
22,835 |
|
|
26,755 |
|
|
26,071 |
|
Total
liabilities |
|
165,727 |
|
|
150,530 |
|
|
135,460 |
|
|
132,057 |
|
|
121,393 |
|
Total capital
and surplus |
|
7,661 |
|
|
7,954 |
|
|
6,576 |
|
|
6,011 |
|
|
6,165 |
|
Allianz Life Insurance Company of North America
NAIC Group Code: 0761
NAIC Company Code: 90611
- 1 -
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, 2020, compared with December 31, 2019, and its results of operations for each of the three years ended December 31, 2020, 2019, 2018, respectively. The information contained herein should be read
in conjunction with the financial statements, notes, exhibits and schedules in the 2020 and 2019 Annual Statement and audited Statutory Financial Statements of the Company. Amounts are presented on a non-consolidated basis in accordance with
Statutory Accounting Principles (SAP).
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. The Company undertakes no obligation to update publicly or revise any forward-looking statements.
Company Overview
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, the Company’s ultimate parent, which is incorporated in Munich, Germany. The Company is a life insurance company domiciled in the State
of Minnesota and is licensed to sell insurance products in all U.S. states, except New York, several U.S. territories, and Canada. The Company offers a portfolio of individual fixed-indexed annuities, variable-indexed annuities, and individual
ordinary fixed-indexed universal life (FIUL) products. The Company’s products are either sold through licensed independent agents contracted with a field marketing organization or insurance agency, or licensed registered representatives contracted
with a broker/dealer. The Company also maintains a closed portfolio of individual and group long-term care (LTC) and group life, annuity and accident and health policies, and does not actively issue new policies related to these products.
The Company has organized its principal operations into the following
segments: Individual Annuities, Life, and Legacy.
Individual Annuities
The Individual Annuities segment provides tax-deferred investment growth and
lifetime income opportunities for our customers through fixed, fixed-indexed, variable-indexed, and variable annuities. The “fixed” and “variable” classifications describe whether we or the contractholders bear the investment risk of the assets
supporting the contract. We are one of the largest sellers of fixed-indexed and variable-indexed products. Fixed and variable annuities provide for both asset accumulation and asset distribution needs. Our Individual Annuity products are sold
through both independent and wholly-owned distribution channels made up of agents and registered representatives.
Fixed and fixed-indexed annuities provide guarantees related to the
preservation of principal and interest credited. In 2020, sales of our fixed-indexed annuity products were lower than the prior year due to the low interest rate environment and social distancing constraints as a result of the coronavirus pandemic.
In 2019, sales of our fixed-indexed annuity products were lower than the prior year due to the product changes made in response to the continued low interest rate environment.
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. The Company's variable annuity sales strategy has shifted to variable-indexed annuity products, which combines a separate account option with a general account option
that is similar to a fixed-indexed annuity. In 2020, sales of the variable-indexed annuity were higher than the prior year due to strong sales for the Index Advantage Income® product driven by the market environment and a 2020 sales
promotion. In 2019, sales of the variable-indexed annuity were higher than the prior year due to a sales promotion related to the new Allianz Index Advantage Income® product.
Selected Financial Data and Management's Discussion and Analysis
Page 2 of 23
Life
Our life insurance products provide flexibility and control over a person’s
assets, providing the assurance that the beneficiaries will be protected after the insured is gone and, in certain cases, to add cash value accumulation potential. The sales focus of our Life segment is our FIUL insurance products. Deposits are
credited to an account maintained for the policyholder. Our individual life products are sold through independent distribution channels made up of agents and registered representatives. The Life business has continued to grow for the last several
years and was driven by strong product proposition and expanded accelerated underwriting.
Legacy
The Legacy business consists of closed blocks of LTC and Special Markets
products. The Special Markets products include individual and group annuity and life products, including universal life and term life insurance. Although Legacy products are part of the total results, the Company does not allocate additional
resources to these areas other than to maintain the operational support to its current customers. The Company enters into reinsurance agreements to manage risk resulting from businesses we have chosen to exit. The performance of these product lines
is not material enough to warrant discussion as separate operating segments.
Income and Expense Allocation
We maintain segregated investment portfolios at the subsidiary level but do
not maintain segregated portfolios for each segment. All net investment income and other Corporate income and expense activity is allocated to the segments. Assets are only monitored at the total Company level, and as such, asset disclosures by
segment are not included herein.
Income and expense related to assets backing policyholder reserves are
allocated to the segments based on policyholder statutory reserve levels. The results of our 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.
Basis of Presentation
The Statutory Financial Statements have been prepared in accordance with
accounting practices prescribed or permitted by the Minnesota Department of Commerce (the Department). The Department recognizes statutory accounting practices prescribed or permitted by the state of Minnesota for determining and reporting the
financial condition and results of operations of an insurance company and its solvency under Minnesota insurance law. The state of Minnesota has adopted the National Association of Insurance Commissioners (NAIC) Accounting Practices and Procedures Manual as its prescribed basis of SAP, without significant modification. The Company has no material statutory accounting practices that differ from those of the Department or NAIC SAP. These practices differ in some respects from
accounting principles generally accepted in the United States of America (U.S. GAAP). The effects of these differences, while not quantified, are presumed to be material to the Statutory Financial Statements.
The preparation of Statutory Financial Statements in conformity with NAIC SAP
requires management to make certain estimates and assumptions that affect reported amounts of admitted assets and liabilities, including reporting or disclosure of contingent assets and liabilities as of December 31, 2020, and 2019 and the reported
amounts of revenues and expenses during the reporting period. Future events, including changes in mortality, morbidity, interest rates, capital markets, and asset valuations could cause actual results to differ from the estimates used within the
Statutory Financial Statements. Such changes in estimates are recorded in the period they are determined.
Adoption of New Financial Accounting Standards
See Note 3 – “Accounting Changes and Correction of Errors” of the Company’s
audited Statutory Financial Statements in this prospectus for information related to recent accounting pronouncements.
Application of Critical Accounting Policies
Our accounting policies require management to make interpretative and
valuation judgments and to make estimates based upon assumptions that affect the amounts of assets, liabilities, revenues, and expenses reported in our Statutory Financial Statements. Because the use of assumptions and estimates inherently entails
uncertainty, the effects of accounting policies under different conditions could produce results that are significantly different. A discussion of the presentation of the business factors that affect critical accounting policies can be found in
Note 2 of the accompanying Statutory Financial Statements and are summarized below.
Selected Financial Data and Management's Discussion and Analysis
Page 3 of 23
Accounting for Investments
Investment valuation and presentation are determined to be in accordance with
methods prescribed by the NAIC. See Note 5 and 6 of the audited Statutory Financial Statements for additional information regarding the portfolio and fair value of investments.
Aggregate Reserves for Life Policies and Annuity
Contracts
See Notes 12 through 14 of the audited Statutory Financial Statements for
additional information regarding our annuity and life actuarial reserves, deposit liabilities, and separate accounts.
Derivatives
See Note 2 and 5 of the audited Statutory Financial Statements for additional
information regarding our derivatives and hedging instruments.
Reinsurance
See Note 11 of the audited Statutory Financial Statements for additional
information regarding reinsurance agreements we have entered into to manage insurance risk, as well as businesses we exited.
Income Taxes
See Note 9 of the audited Statutory Financial Statements for additional
information regarding income tax estimates and assumptions.
Selected Financial Data and Management's Discussion and Analysis
Page 4 of 23
Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
Increase
(decrease) and % change |
|
Increase
(decrease) and % change |
|
2020 |
|
2019 |
|
2018 |
|
2020 - 2019 |
|
2019 - 2018 |
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium and annuity considerations* |
$ |
10,542 |
|
|
13,029 |
|
|
12,193 |
|
|
$ |
(2,487) |
|
|
(19.1) |
% |
|
$ |
836 |
|
|
6.9 |
% |
Net investment
income |
4,864 |
|
|
4,839 |
|
|
4,593 |
|
|
25 |
|
|
0.5 |
|
|
246 |
|
|
5.4 |
|
Ceded reinsurance reserve and expense
adjustments |
(45) |
|
|
329 |
|
|
245 |
|
|
(374) |
|
|
(113.7) |
|
|
84 |
|
|
34.3 |
|
Fees from
separate accounts |
567 |
|
|
613 |
|
|
676 |
|
|
(46) |
|
|
(7.5) |
|
|
(63) |
|
|
(9.3) |
|
Other income |
694 |
|
|
(13) |
|
|
(3) |
|
|
707 |
|
|
NM** |
|
(10) |
|
|
(333.3) |
|
Total income |
16,622 |
|
|
18,797 |
|
|
17,704 |
|
|
(2,175) |
|
|
(11.6) |
|
|
1,093 |
|
|
6.2 |
|
Benefits and other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder
benefits and surrenders |
10,343 |
|
|
10,368 |
|
|
9,436 |
|
|
(25) |
|
|
(0.2) |
|
|
932 |
|
|
9.9 |
|
Change in aggregate reserves |
2,465 |
|
|
1,034 |
|
|
7,299 |
|
|
1,431 |
|
|
138.4 |
|
|
(6,265) |
|
|
(85.8) |
|
General and
administrative and commission |
1,739 |
|
|
1,878 |
|
|
1,770 |
|
|
(139) |
|
|
(7.4) |
|
|
108 |
|
|
6.1 |
|
Net transfers to (from) separate accounts |
1,460 |
|
|
5,254 |
|
|
(2,009) |
|
|
(3,794) |
|
|
(72.2) |
|
|
7,263 |
|
|
361.5 |
|
Total
benefits and other expenses |
16,007 |
|
|
18,534 |
|
|
16,496 |
|
|
(2,527) |
|
|
(13.6) |
|
|
2,038 |
|
|
12.4 |
|
Pretax income (loss) |
615 |
|
|
263 |
|
|
1,208 |
|
|
352 |
|
|
133.8 |
|
|
(945) |
|
|
(78.2) |
|
Income tax
expense (benefit) |
18 |
|
|
773 |
|
|
(51) |
|
|
(755) |
|
|
(97.7) |
|
|
824 |
|
|
NM** |
Net realized capital gain (loss) |
142 |
|
|
1,053 |
|
|
(490) |
|
|
(911) |
|
|
(86.5) |
|
|
1,543 |
|
|
314.9 |
|
Net income
(loss) |
$ |
739 |
|
|
543 |
|
|
769 |
|
|
$ |
196 |
|
|
36.1 |
% |
|
$ |
(226) |
|
|
(29.4) |
% |
Capital and Surplus: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
unrealized capital gain (loss) |
$ |
(61) |
|
|
719 |
|
|
(230) |
|
|
$ |
(780) |
|
|
(108.5) |
% |
|
$ |
949 |
|
|
412.6 |
% |
Dividends to parent |
(750) |
|
|
(325) |
|
|
— |
|
|
(425) |
|
|
(130.8) |
|
|
(325) |
|
|
— |
|
Other change in
capital & surplus |
(220) |
|
|
441 |
|
|
26 |
|
|
(661) |
|
|
(149.9) |
|
|
415 |
|
|
NM** |
Net change in capital & surplus |
$ |
(292) |
|
|
1,378 |
|
|
565 |
|
|
$ |
(1,670) |
|
|
(121.2) |
% |
|
$ |
813 |
|
|
143.9 |
% |
*Includes premiums and annuity and
supplementary contract considerations. |
**Not meaningful
|
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Overview
The decrease in capital and surplus was primarily
driven by volatility within the equity market movements resulting in hedging losses, a ceded reinsurance recapture in fixed-indexed annuities, and an increase in the 2020 dividend payment to the parent.
Income
•Premium and annuity considerations: Premium and annuity considerations
decreased primarily due to lower fixed-indexed annuity sales based upon product changes made in response to the continued low interest rate environment and social distancing constraints impacting sales methods. This was partially offset by higher
variable-indexed annuity premium driven by a 2020 sales promotion all within the Individual Annuities segment. The Life segment increased as a result of an increase in first year and renewal premiums due to a growing block of business.
•Net investment income: Net investment income increased due to an increase in average
invested assets and positive cash flows.
•Ceded reinsurance reserve and expense adjustments: Ceded reinsurance reserve and
expense adjustments decreased primarily due to impacts from a ceded reserve recapture that was executed in 2020 in the Individual Annuities segment.
•Fees from separate accounts: Fees from separate accounts decreased
primarily due to lower average separate account
Selected Financial Data and Management's Discussion and Analysis
Page 5 of 23
assets as a result of outflows
due to policyholder activity and negative equity market impacts in early 2020 in the Individual Annuities segment.
•Other income: Other income increased primarily due to an increase in derivative income on interest rate swaps that hedge variable annuities and amortization of the deferred hedge liability under SSAP No.
108 in the Individual Annuities segment.
Benefits and Other Expenses
•Change in aggregate reserves: Change in aggregate reserves increased
primarily due to a change in presentation of assets and liabilities relating to the variable-indexed product in 2019. In 2019, the Company transferred assets from the general account to the separate account to align with state product filing
requirements, and the reserve decrease is completely offset in Net transfers to(from) separate accounts. In addition, variable
annuity reserves increased in 2020 driven by overall net growth in the variable-index annuity block of business. This was partially offset by the decrease of the fixed-index annuity reserves driven by lower index credits as a result of the less
favorable equity market increase and lower fixed-indexed annuity premiums due to the decrease in production..
•General and administrative and commission: General, administrative and commission
expense decreased primarily due to a decrease in commissions expense as a result of lower overall premium as discussed above.
•Net transfers to (from) separate accounts: Net transfers to (from) separate accounts decrease is driven by the aforementioned 2019 presentation of assets and liabilities for variable-indexed annuities
change referenced in the Change in aggregate reserves in the Individual Annuities segment. The decrease in Net transfers to (from) separate accounts was partially offset by lower policyholder activity.
•Income tax expense (benefit): There is a federal income tax expense due to
impacts from hedging gains in the Company's Individual Annuity and Life segments which was partially offset by a tax net operating loss carry back recorded in 2020.
•Net realized capital gain (loss): Net realized capital gains decreased due to lower gains on derivatives used to economically hedge the Company's product liabilities as a result of less
favorable equity markets in the Individual Annuities and Life segments, as well as unfavorable investment results due to impairments.
Capital and Surplus
•Change in unrealized capital gain (loss): Unrealized capital losses are primarily due to negative hedging results on fixed-indexed and variable-indexed annuities in the Individual Annuities segment
and the Life segment.
•Dividends to parent: Dividends of $750 were paid to the parent in 2020.
•Other change in capital and surplus: Other change in capital and surplus decreased due to a fixed-indexed ceded reserve recapture that was completed in 2020, and an increase in AVR that
decreased capital and surplus due to the growth of the Company's investment portfolio.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Overview
The increase in capital and surplus was primarily driven by positive equity
market movements resulting in realized and unrealized hedging gains, a new reinsurance agreement covering certain fixed-indexed annuities, and increases in premium and annuity considerations within the Individual Annuities and Life segments. This
was partially offset by the 2019 dividend payment to the parent, and an increase in policyholder benefits and surrenders.
Income
•Premium and annuity considerations: Individual Annuities premium and annuity considerations increased primarily due to a variable-indexed annuity product sales promotion in 2019 and increased Life first year and renewal
premiums due to the growing block of business. This was partially offset by lower fixed-indexed annuity sales due to product changes made in response to the continued low interest rate environment in 2019.
•Net investment income: Net investment income increased due to an increase in average invested assets and positive cash flows.
•Ceded reinsurance reserve and expense adjustments: Ceded reinsurance reserve and expense adjustments increased primarily due to new reinsurance agreements entered into in 2019 in the Individual Annuities segment.
Selected Financial Data and Management's Discussion and Analysis
Page 6 of 23
•Fees from separate accounts: Fees from separate accounts decreased primarily due to lower average separate account assets as a result of outflows due to policyholder activity and negative equity market impacts in late
2018 in the Individual Annuities segment. The 2018 equity market downturn resulted in lower average assets under management throughout 2019.
•Other income: Other income decreased primarily due to lower derivative income on interest rate swaps that hedge changes in cash flows for variable annuities in the Individual Annuities segment.
Benefits and Other Expenses
•Policyholder benefits and surrenders: Policyholder benefits and surrenders increased primarily due to an increase in fixed-indexed annuity surrenders within the Individual Annuities segment driven by policyholder activity, and
are impacted by the surrender period of the underlying annuity contract. Policyholder benefits and surrenders in the Life Segment also increased primarily due to policyholder activity and an increase in death claims.
•Change in aggregate reserves: Change in aggregate reserves decreased primarily due to a change in presentation of assets and liabilities relating to the variable-indexed product in 2019 in the Individual Annuities
segment. The Company transferred assets from the general account to the separate account to align with state product filing requirements. The change is completely offset in Net transfers to (from) separate accounts. This decrease was partially
offset by the growth of the fixed-index annuity reserves driven by higher index credits as a result of the year over year equity market increase in the Individual Annuities segment.
•General and administrative and commission: General, administrative and commission expense increased primarily due to an increase in commissions expense as a result of higher premium as discussed above.
•Net transfers to (from) separate accounts: Net transfers to (from) separate accounts increase is driven by afore mentioned 2019 presentation of assets and liabilities for variable-indexed annuities change referenced in the
Change in aggregate reserves in the Individual Annuities segment. The increase in Net transfers to (from) separate accounts was partially offset by higher policyholder withdrawals.
•Income tax expense (benefit): There is a federal income tax expense due to impacts from hedging gains in the Company's Individual Annuity and Life segments.
•Net realized capital gain (loss): Net realized capital gains increased due to gains on derivatives used to economically hedge the Company's product liabilities as a result of an increase in equity markets in the Individual
Annuities and Life segments.
Capital and Surplus
•Change in unrealized capital gain (loss): Unrealized capital gains are primarily due to positive hedging results on fixed-indexed annuities in the Individual Annuities segment and the Life segment.
•Dividends to parent: Dividends of $325 were paid to the parent in 2019.
•Other change in capital and surplus: Other change in capital and surplus increased due to a new reinsurance agreement covering certain fixed-indexed annuities in the Individual Annuities segment and an increase in deferred
income taxes. This was offset by an increase in AVR that decreased capital and surplus due to the growth of the Company's investment portfolio.
Selected Financial Data and Management's Discussion and Analysis
Page 7 of 23
Individual Annuities
Segment Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
Increase
(decrease) and % change |
|
Increase
(decrease) and % change |
|
2020 |
|
2019 |
|
2018 |
|
2020 - 2019 |
|
2019 - 2018 |
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium and annuity considerations* |
$ |
9,268 |
|
|
11,969 |
|
|
11,223 |
|
|
$ |
(2,701) |
|
|
(22.6) |
% |
|
$ |
746 |
|
|
6.6 |
% |
Net investment
income |
4,531 |
|
|
4,551 |
|
|
4,346 |
|
|
(20) |
|
|
(0.4) |
|
|
205 |
|
|
4.7 |
|
Ceded reinsurance reserve and expense
adjustments |
(54) |
|
|
321 |
|
|
254 |
|
|
(375) |
|
|
(116.8) |
|
|
67 |
|
|
26.4 |
|
Fees from
separate accounts |
567 |
|
|
613 |
|
|
676 |
|
|
(46) |
|
|
(7.5) |
|
|
(63) |
|
|
(9.3) |
|
Other income |
691 |
|
|
(17) |
|
|
(3) |
|
|
708 |
|
|
NM** |
|
(14) |
|
|
(466.7) |
|
Total income |
15,003 |
|
|
17,437 |
|
|
16,496 |
|
|
(2,434) |
|
|
(14.0) |
|
|
941 |
|
|
5.7 |
|
Benefits and other expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder
benefits and surrenders |
10,073 |
|
|
10,078 |
|
|
9,264 |
|
|
(5) |
|
|
— |
|
|
814 |
|
|
8.8 |
|
Change in aggregate reserves |
1,474 |
|
|
289 |
|
|
6,457 |
|
|
1,185 |
|
|
410.0 |
|
|
(6,168) |
|
|
(95.5) |
|
General and
administrative and commission |
1,369 |
|
|
1,591 |
|
|
1,518 |
|
|
(222) |
|
|
(14.0) |
|
|
73 |
|
|
4.8 |
|
Net transfers to (from) separate accounts |
1,462 |
|
|
5,258 |
|
|
(2,006) |
|
|
(3,796) |
|
|
(72.2) |
|
|
7,264 |
|
|
362.1 |
|
Total
benefits and other expenses |
14,378 |
|
|
17,216 |
|
|
15,233 |
|
|
(2,838) |
|
|
(16.5) |
|
|
1,983 |
|
|
13.0 |
|
Pretax income (loss) |
625 |
|
|
221 |
|
|
1,263 |
|
|
404 |
|
|
182.8 |
|
|
(1,042) |
|
|
(82.5) |
|
Income tax
expense (benefit) |
18 |
|
|
649 |
|
|
(53) |
|
|
(631) |
|
|
(97.2) |
|
|
702 |
|
|
NM** |
Net realized capital gain (loss) |
67 |
|
|
922 |
|
|
(489) |
|
|
(855) |
|
|
(92.7) |
|
|
1,411 |
|
|
288.5 |
|
Net income
(loss) |
$ |
674 |
|
|
494 |
|
|
827 |
|
|
$ |
180 |
|
|
36.4 |
% |
|
$ |
(333) |
|
|
(40.3) |
% |
Capital and Surplus: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
unrealized capital gain (loss) |
$ |
(79) |
|
|
588 |
|
|
(160) |
|
|
$ |
(667) |
|
|
(113.4) |
% |
|
$ |
748 |
|
|
467.5 |
% |
Other change in capital & surplus |
(220) |
|
|
439 |
|
|
36 |
|
|
(659) |
|
|
(150.1) |
|
|
403 |
|
|
NM** |
Net change in
capital & surplus |
$ |
375 |
|
|
1,521 |
|
|
703 |
|
|
$ |
(1,146) |
|
|
(75.3) |
% |
|
$ |
818 |
|
|
116.4 |
% |
*Includes premiums and annuity and
supplementary contract considerations. |
**Not meaningful |
Selected Operating Performance Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
Increase
(decrease) and % change |
|
Increase
(decrease) and % change |
|
2020 |
|
2019 |
|
2018 |
|
2020 - 2019 |
|
2019 - 2018 |
Individual Annuities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deposits |
$ |
9,474 |
|
|
12,135 |
|
|
11,318 |
|
|
$ |
(2,661) |
|
|
(21.9) |
% |
|
$ |
817 |
|
|
7.2 |
% |
In-force |
131,228 |
|
|
126,936 |
|
|
118,602 |
|
|
4,292 |
|
|
3.4 |
% |
|
8,334 |
|
|
7.0 |
% |
Deposits and in-force amounts in the table above are for direct and assumed
business. Deposits reflect amounts collected on both new and renewal business. In-force represents account values of the annuity contracts for our fixed, fixed-indexed, variable, and variable-indexed annuity contracts. In 2020, sales of
fixed-indexed annuities were lower than the prior year due to impacts of product changes due to the low interest rate environment and social distancing constraints. This was partially offset by higher variable-indexed annuity sales for the Index
Advantage suite of products driven by the market environment and a 2020 sales promotion. In 2019, sales of the variable-indexed annuity were higher than the prior year due to a sales promotion related to the new Allianz Index Advantage Income® product. This was
partially offset by lower sales of the fixed-indexed annuity products due to the product changes made in 2019 in response to the continued low interest rate environment.
Selected Financial Data and Management's Discussion and Analysis
Page 8 of 23
Change in Key Market Factors
Our Individual Annuities segment is impacted by various market impacts which
are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
% change
|
|
2020 |
|
2019 |
|
2018 |
|
2020 - 2019
|
|
2019 - 2018
|
Stock Index
|
|
|
|
|
|
|
|
|
|
S&P 500
|
16.26% |
|
28.88% |
|
(6.24)% |
|
(12.62)% |
|
35.12% |
NASDAQ 100
|
47.58% |
|
37.96% |
|
(1.04)% |
|
9.62% |
|
39.00% |
BUDBI
|
9.08% |
|
13.23% |
|
(0.88)% |
|
(4.15)% |
|
14.11% |
BUDBI II
|
6.15% |
|
14.05% |
|
0.40% |
|
(7.90)% |
|
13.65% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
Basis point (bps) change
|
|
2020 |
|
2019 |
|
2018 |
|
2020- 2019
|
|
2019 - 2018
|
Interest Rates
|
|
|
|
|
|
|
|
|
|
LIBOR 10yr
|
0.93% |
|
1.90% |
|
2.71% |
|
(97bps) |
|
(81bps) |
LIBOR 20yr
|
1.32% |
|
2.07% |
|
2.83% |
|
(75bps) |
|
(76bps) |
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Overview
The Individual Annuities segment net change in
capital and surplus was favorable, but decreased compared to the prior year primarily driven by less favorable equity market movements in 2020 resulting in lower realized hedging gains, unrealized hedging losses, and a recapture of a fixed-index
reinsurance agreement.
Income
•Premium and annuity considerations: Premium and annuity considerations decreased primarily due to lower
fixed-indexed annuity sales due to product changes made in response to the continued low interest rate environment and social distancing constraints, and lower traditional variable annuity sales driven by product changes. This was partially offset
by higher variable-indexed annuity premium driven by a 2020 sales promotion.
•Ceded reinsurance reserve and expense adjustments: Ceded reinsurance reserve and
expense adjustments decreased primarily due to impacts from a fixed-indexed ceded reserve recapture that was completed in 2020.
•Fees from separate accounts: Fees from separate accounts decreased primarily due to lower average separate
account assets as a result of outflows due to policyholder activity and negative equity market impacts in early 2020.
•Other income: Other income increased primarily due to an increase in derivative income on interest rate swaps that hedge variable annuities and amortization of the deferred hedge liability under SSAP No. 108.
Benefits and Other Expenses
•Change in aggregate reserves: Change in aggregate reserves increased primarily due to a change in presentation
of assets and liabilities relating to the variable-indexed product in 2019. In 2019, the Company transferred assets from the general account the separate account to align with state product filing requirements, and the reserve decrease is
completely offset in Net transfers to(from) separate accounts. In addition, variable annuity reserves increased in 2020 driven by
overall net growth in the variable-index annuity block of business. This was partially offset by the decrease of the fixed-index annuity reserves driven by lower index credits as a result of the less favorable equity market increase and lower
fixed-indexed annuity premiums due to the decrease in production.
•General and administrative and commission: General, administrative and commission
expense decreased primarily due to a decrease in commissions expense as a result of lower premium as discussed above.
•Net transfers to (from) separate accounts: Net transfers to (from) separate accounts decreased driven by the aforementioned presentation of assets and liabilities for variable-indexed annuities change referenced in the Change in aggregate reserves. The decrease in Net transfers to
(from) separate accounts was partially offset by lower policyholder activity.
•Income tax expense (benefit): Income tax expense is driven by a federal income tax expense in 2020 due to impacts from hedging losses.
Selected Financial Data and Management's Discussion and Analysis
Page 9 of 23
•Net realized capital gain (loss): Net realized capital gains decreased due to lower gains on derivatives used to economically hedge the Company's product liabilities as a result of a lower increase in equity markets, as well
as unfavorable investment results due to impairments.
Capital and Surplus
•Change in unrealized capital gain (loss): Unrealized capital losses are primarily due to negative hedging results on fixed-indexed annuities and variable-indexed annuities.
•Other change in capital and surplus: Other change in capital and surplus decreased primarily due to a fixed-indexed ceded reserve recapture that was completed in 2020.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Overview
The Individual Annuities segment net change in capital and surplus increase
was primarily driven by positive equity market movements resulting in realized hedging gains, a new reinsurance agreement covering certain fixed-indexed annuities, and an increase in premiums and annuity considerations. This was partially offset by
an increase in policyholder benefits and surrenders.
Income
•Premium and annuity considerations: Premium and annuity considerations increased primarily due to higher variable-indexed annuity premium driven by a 2019 sales promotion. This was partially offset by lower fixed-indexed
annuity sales due to product changes made in response to the continued low interest rate environment and lower traditional variable annuity sales also driven by product changes.
•Net investment income: Net investment income increased due an increase in fixed-indexed average invested assets.
•Ceded reinsurance reserve and expense adjustments: Ceded reinsurance reserve and expense adjustments increased primarily due to new reinsurance agreements entered into in 2019.
•Fees from separate accounts: Fees from separate accounts decreased primarily due to lower average separate account assets as a result of outflows due to policyholder activity and negative equity market impacts in late 2018. The 2018 equity market downturn
resulted in lower average assets under management throughout 2019.
•Other income: Other income decreased primarily due to a decrease in derivative income on interest rate swaps that hedge changes in cash flows for variable annuities.
Benefits and Other Expenses
•Policyholder benefits and surrenders: Policyholder benefits and surrenders increased primarily due to an increase in fixed-indexed annuity surrenders driven by policyholder activity, and are impacted by the surrender period of
the underlying annuity contract.
•Change in aggregate reserves: Change in aggregate reserves decreased primarily due to a change in presentation of assets and liabilities relating to the variable-indexed product in 2019. The Company transferred assets from the general account to the
separate account to align with state product filing requirements. The change is completely offset in Net transfers to (from) separate accounts. This was partially offset by the growth of the fixed-index annuity reserves driven by higher index
credits as a result of the year over year equity market increase partially offset by lower fixed-indexed annuity premiums due to the decrease in production.
•General and administrative and commission: General, administrative and commission expense increased primarily due to an increase in commissions expense as a result of higher premium as discussed above.
•Net transfers to (from) separate accounts: Net transfers to (from) separate accounts increase is driven by afore mentioned 2019 presentation of assets and liabilities for variable-indexed annuities change referenced in the Change
in aggregate reserves. The increase in Net transfers to (from) separate accounts was partially offset by higher policyholder withdrawals.
•Income tax expense (benefit): Income tax expense is driven by a federal income tax expense in 2019 due to impacts from hedging gains.
•Net realized capital gain (loss): Net realized capital gains increased due to gains on derivatives used to economically hedge the Company's product liabilities as a result of an increase in equity markets.
Selected Financial Data and Management's Discussion and Analysis
Page 10 of 23
Capital and Surplus
•Change in unrealized capital gain (loss): Unrealized capital gains are primarily due to positive hedging results on fixed-indexed annuities.
•Other change in capital and surplus: Other change in capital and surplus increased due to a new reinsurance agreement covering certain fixed-indexed annuities and an increase in deferred income taxes. This was offset by an
increase in AVR that decreased capital and surplus due to the growth of the Company's investment portfolio.
Life
Segment Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
Increase
(decrease) and % change |
|
Increase
(decrease) and % change |
|
2020 |
|
2019 |
|
2018 |
|
2020 - 2019 |
|
2019 - 2018 |
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium and annuity considerations |
$ |
1,115 |
|
|
906 |
|
|
816 |
|
|
$ |
209 |
|
|
23.1 |
% |
|
$ |
90 |
|
|
11.0 |
% |
Net investment
income |
210 |
|
|
177 |
|
|
158 |
|
|
33 |
|
|
18.6 |
|
|
19 |
|
|
12.0 |
|
Ceded reinsurance reserve and expense
adjustments |
3 |
|
|
2 |
|
|
(16) |
|
|
1 |
|
|
50.0 |
|
|
18 |
|
|
112.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
2 |
|
|
3 |
|
|
— |
|
|
(1) |
|
|
(33.3) |
|
|
3 |
|
|
— |
|
Total income |
1,330 |
|
|
1,088 |
|
|
958 |
|
|
242 |
|
|
22.2 |
|
|
130 |
|
|
13.6 |
|
Benefits and
other expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and surrenders |
173 |
|
|
199 |
|
|
96 |
|
|
(26) |
|
|
(13.1) |
|
|
103 |
|
|
107.3 |
|
Change in
aggregate reserves |
824 |
|
|
611 |
|
|
658 |
|
|
213 |
|
|
34.9 |
|
|
(47) |
|
|
(7.1) |
|
General and administrative and commission |
343 |
|
|
258 |
|
|
212 |
|
|
85 |
|
|
32.9 |
|
|
46 |
|
|
21.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
benefits and other expenses |
1,340 |
|
|
1,068 |
|
|
966 |
|
|
272 |
|
|
25.5 |
|
|
102 |
|
|
10.6 |
|
Pretax income (loss) |
(10) |
|
|
20 |
|
|
(8) |
|
|
(30) |
|
|
(150.0) |
|
|
28 |
|
|
350.0 |
|
Income tax
expense (benefit) |
— |
|
|
59 |
|
|
— |
|
|
(59) |
|
|
— |
|
|
59 |
|
|
— |
|
Net realized capital gain (loss) |
77 |
|
|
131 |
|
|
(1) |
|
|
(54) |
|
|
(41.2) |
|
|
132 |
|
|
NM* |
Net income
(loss) |
$ |
67 |
|
|
92 |
|
|
(9) |
|
|
$ |
(25) |
|
|
(27.2) |
% |
|
$ |
101 |
|
|
NM* |
Capital and Surplus: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in
unrealized capital gain (loss) |
$ |
23 |
|
|
130 |
|
|
(70) |
|
|
$ |
(107) |
|
|
(82.3) |
% |
|
$ |
200 |
|
|
285.7 |
% |
Other change in capital & surplus |
(4) |
|
|
4 |
|
|
(6) |
|
|
(8) |
|
|
(200.0) |
|
|
10 |
|
|
166.7 |
|
Net change in
capital & surplus |
$ |
86 |
|
|
226 |
|
|
(85) |
|
|
$ |
(140) |
|
|
(61.9) |
% |
|
$ |
311 |
|
|
365.9 |
% |
*Not meaningful
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Operating Performance Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
Increase
(decrease) and % change |
|
Increase
(decrease) and % change |
|
2020 |
|
2019 |
|
2018 |
|
2020 - 2019 |
|
2019 - 2018 |
Life |
|
|
|
|
|
|
|
|
|
|
|
|
|
First year
and renewal premiums |
$ |
1,170 |
|
|
960 |
|
|
864 |
|
|
$ |
210 |
|
|
21.9 |
% |
|
$ |
96 |
|
|
11.1 |
% |
In-force |
50,485 |
|
|
42,700 |
|
|
37,982 |
|
|
7,785 |
|
|
18.2 |
|
|
4,718 |
|
|
12.4 |
|
First year and renewal premiums and in-force amounts in the table above are
for direct and assumed business. In-force amounts represent life insurance in-force on our FIUL business and certain universal life, and term life business. The continued increase in first year and renewal premiums in 2020, 2019 and 2018 is a
result of continued product enhancements and overall strong product proposition. The movement of in-force, year over year, is primarily driven by policyholder activity. Increases are driven by new business, and decreases are driven by policyholder
charges, surrenders, and claims.
Selected Financial Data and Management's Discussion and Analysis
Page 11 of 23
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Overview
The Life segment net change in capital and surplus
was favorable, but decreased compared to prior year primarily due to less favorable hedging impacts as a result of the negative equity market performance in early 2020. This was partially offset by an increase in policy charges as a result of a
growing block of business and a lower income tax expense in 2020.
Income
•Premium and annuity considerations: Premiums and annuity considerations increased as a result of an increase in
first year and renewal premiums due to a growing block of business.
•Net investment income: Net investment income increased primarily due to an increase in Life average
invested assets.
Benefits and Other Expenses
•Policyholder benefits and surrenders: Policyholder benefits and surrenders decreased primarily due to
policyholder surrender activity and partially offset by an increase in death claims.
•Change in aggregate reserves: Change in aggregate reserves increased due to higher premiums and an increase in
policy charges as a result of a growing block of business and higher index credit levels as a result of the positive equity market performance after the first quarter of 2020.
•General and administrative and commission: General and administrative and commission expense increased
primarily due to an increase in first year and renewal commissions which is consistent with premium production.
•Income tax expense (benefit): Income tax expense (benefit) is driven by a pre-tax items discussed above, and a
minimal effective federal tax rate.
•Net realized capital gain (loss): Net realized capital gain decreased due to lower hedging gains as a result of negative equity market performance in early 2020.
Capital and Surplus
•Change in unrealized capital gain (loss): Change in unrealized capital gain is due to a
lower hedging gains as a result of negative equity markets in early 2020.
•Other change in capital and surplus: Other change in capital
and surplus decreased as a result of change in net deferred income taxes as result of hedging impacts.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Overview
The Life segment net change in capital and surplus increased primarily due to
realized and unrealized hedging gains as a result of positive equity market performance and an increase in policy charges as a result of a growing block of business.
Income
•Premium and annuity considerations: Premiums and annuity considerations increased as a result of an increase in first year and renewal premiums as a result of a growing block of business.
•Net investment income: Net investment income increased primarily due to an increase in Life average invested assets.
•Ceded reinsurance reserve and expense adjustments: Ceded reinsurance reserve and expense adjustments increased as a result of prior year changes in ceded modified coinsurance reserves on certain Life products, with minimal changes in the
current year.
Benefits and Other Expenses
•Policyholder benefits and surrenders: Policyholder benefits and surrenders increased primarily due to policyholder activity in addition to an increase in death claims.
•Change in aggregate reserves: Change in aggregate reserves decreased due to lower index credit levels as a result of the negative equity market performance in late 2018. This was partially offset by higher premiums and an increase in policy charges as a
result of a growing block of business.
Selected Financial Data and Management's Discussion and Analysis
Page 12 of 23
•General and administrative and commission: General and administrative and commission expense increased primarily due to an increase in first year and renewal commissions which is consistent with premium production.
•Income tax expense (benefit): Income tax expense is driven by a federal income tax expense in 2019 due to
impacts from hedging gains.
•Net realized capital gain (loss): Net realized capital gain increased due to hedging gains as a result of positive equity market performance.
Capital and Surplus
•Change in unrealized capital gain (loss): Change in unrealized capital gain is due to an increase in hedging gains as a result of positive equity markets.
•Other change in capital and surplus: Other change in capital and surplus increased as a result of change in net deferred income taxes as result of positive hedging impacts.
Legacy
Segment Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
Increase
(decrease) and % change |
|
Increase
(decrease) and % change |
|
2020 |
|
2019 |
|
2018 |
|
2020 - 2019 |
|
2019 - 2018 |
Income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Premium and annuity considerations |
$ |
158 |
|
|
154 |
|
|
154 |
|
|
$ |
4 |
|
|
2.6 |
% |
|
$ |
— |
|
|
— |
% |
Net investment
income |
123 |
|
|
110 |
|
|
89 |
|
|
13 |
|
|
11.8 |
|
|
21 |
|
|
23.6 |
|
Ceded reinsurance reserve and expense
adjustments |
6 |
|
|
7 |
|
|
7 |
|
|
(1) |
|
|
(14.3) |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income |
2 |
|
|
2 |
|
|
— |
|
|
— |
|
|
— |
|
|
2 |
|
|
NM* |
Total income |
289 |
|
|
273 |
|
|
250 |
|
|
16 |
|
|
5.9 |
|
|
23 |
|
|
9.2 |
|
Benefits and
other expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Policyholder benefits and surrenders |
97 |
|
|
91 |
|
|
76 |
|
|
6 |
|
|
6.6 |
|
|
15 |
|
|
19.7 |
|
Change in
aggregate reserves |
167 |
|
|
134 |
|
|
184 |
|
|
33 |
|
|
24.6 |
|
|
(50) |
|
|
(27.2) |
|
General and administrative and commission |
27 |
|
|
29 |
|
|
40 |
|
|
(2) |
|
|
(6.9) |
|
|
(11) |
|
|
(27.5) |
|
Net transfers to
(from) separate accounts |
(2) |
|
|
(3) |
|
|
(3) |
|
|
1 |
|
|
33.3 |
|
|
— |
|
|
— |
|
Total benefits and other expenses |
289 |
|
|
251 |
|
|
297 |
|
|
38 |
|
|
15.1 |
|
|
(46) |
|
|
(15.5) |
|
Pretax income
(loss) |
— |
|
|
22 |
|
|
(47) |
|
|
(22) |
|
|
(100.0) |
|
|
69 |
|
|
146.8 |
|
Income tax expense (benefit) |
— |
|
|
65 |
|
|
2 |
|
|
(65) |
|
|
(100.0) |
|
|
63 |
|
|
NM* |
Net realized
capital gain (loss) |
(2) |
|
|
— |
|
|
$ |
— |
|
|
(2) |
|
|
NM* |
|
— |
|
|
— |
|
Net income (loss) |
$ |
(2) |
|
|
(43) |
|
|
(49) |
|
|
$ |
41 |
|
|
95.3 |
% |
|
$ |
6 |
|
|
12.2 |
% |
Capital and Surplus: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized capital gain (loss) |
$ |
(5) |
|
|
1 |
|
|
1 |
|
|
$ |
(6) |
|
|
(600.0) |
|
|
$ |
— |
|
|
— |
% |
Other change in
capital & surplus |
2 |
|
|
(2) |
|
|
(4) |
|
|
4 |
|
|
200.0 |
|
|
2 |
|
|
50.0 |
|
Net change in capital & surplus |
$ |
(5) |
|
|
(44) |
|
|
(52) |
|
|
$ |
39 |
|
|
88.6 |
% |
|
$ |
8 |
|
|
15.4 |
% |
*Not meaningful |
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Financial Data and Management's Discussion and Analysis
Page 13 of 23
Selected Operating Performance Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
Increase
(decrease) and % change |
|
Increase
(decrease) and % change |
|
2020 |
|
2019 |
|
2018 |
|
2020 - 2019 |
|
2019 - 2018 |
Legacy Products |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross premiums written
|
$ |
257 |
|
|
254 |
|
|
258 |
|
|
$ |
3 |
|
|
1.2 |
% |
|
$ |
(4) |
|
|
(1.6) |
% |
In-force
|
2,796 |
|
|
2,993 |
|
|
3,101 |
|
|
(197) |
|
|
(6.6) |
|
|
(108) |
|
|
(3.5) |
|
Gross premium written in the table above are for direct and assumed business.
Gross premiums written reflect premiums collected on renewal business. There are no new premiums as these are closed blocks of business. Gross premiums written remained relatively consistent in 2020 and 2019 with small movements due to assumed
premium and policy restatements which occur in the run off of Legacy products. In-force amounts represent gross life insurance within our Special Markets products. The continued decline in in-force volume is attributable to the Legacy segment being
a closed block of business.
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
Overview
The Legacy segment unfavorable pre-tax income was
driven by higher reserves driven by the 2020 impacts of additional LTC premium deficiency reserves partially offset by favorable change in net LTC claim reserves.
Income
•Net investment income: Net investment income increase driven by the growth in LTC
reserves on the aging block of business.
Benefits and Other Expenses
•Policyholder benefits and surrenders: Policyholder benefits and surrenders increased driven by higher
paid claims on the LTC block of business.
•Change in aggregate reserves: Change in aggregate reserves increased driven by the unfavorable impact due to the additional premium deficiency reserve in 2020 and unfavorable impact of higher
change in active life reserves. This was partially offset by the favorable impact of net change in claims reserves.
•Income tax expense (benefit): Income tax expense (benefit) is driven by a pre-tax items discussed above, and a
minimal effective federal tax rate.
Year Ended December 31, 2019 Compared to Year Ended December 31, 2018
Overview
The Legacy segment favorable change in pre-tax income was driven by lower
reserves on future claim reserves driven by the prior period impacts of the additional premium deficiency reserve and establishment of claim administrative expense reserves on the LTC line of business. This was more than offset by a higher income
tax expense due to the Company's effective tax rate.
Income
•Net investment income: Net investment income increase driven by a LTC yield increase due to the growth in reserves on the aging block of business.
Benefits and Other Expenses
•Policyholder benefits and surrenders: Policyholder benefits and surrenders increased driven by higher paid claims on the the LTC block of business.
•Change in aggregate reserves: Change in aggregate reserves decreased driven by the favorable impact due to the additional premium deficiency reserve added in 2018 and favorable impacts of net change in claims reserves.
This was partially offset by negative impact of higher change in active life reserves.
•General and administrative and commission: The favorable change in general and administrative and commission is primarily due to the establishment of a claim administrative expense reserve added in 2018 to the claim reserves.
Selected Financial Data and Management's Discussion and Analysis
Page 14 of 23
•Income tax expense (benefit): Income tax expense is driven by a federal income tax expense in 2019 due to impacts from hedging gains.
Selected Financial Data and Management's Discussion and Analysis
Page 15 of 23
Dividends
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, |
|
Increase
(decrease) and % change |
|
Increase
(decrease) and % change |
|
2020 |
|
2019 |
|
2018 |
|
2020 - 2019 |
|
2019 - 2018 |
Capital and Surplus: |
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends to parent |
$ |
(750) |
|
|
(325) |
|
|
— |
|
|
$ |
(425) |
|
|
230.8 |
% |
|
$ |
(325) |
|
|
— |
% |
We are required to meet minimum statutory capital and surplus requirements.
Our statutory capital and surplus as of December 31, 2020 and 2019, were in compliance with these requirements. The maximum amount of ordinary dividends that can be paid by Minnesota insurance companies to the stockholder without prior approval of
the Department is subject to restrictions relating to statutory earned surplus, also known as unassigned funds. Unassigned funds are determined in accordance with the accounting procedures and practices governing preparation of the statutory annual
statement. In accordance with Minnesota Statutes, the Company may declare and pay from its Unassigned surplus cash dividends of not more than the greater of 10% of its prior year-end statutory surplus, or the net gain from operations of the
insurer, not including realized gains, for the 12-month period ending the 31st day of the next preceding year. Based on these limitations, ordinary dividends of $766 can be paid in 2021 without prior approval of the Commissioner of Commerce.
Financial Condition
Investment Strategy
Our investment strategy focuses on diversification
by asset class. We seek to achieve economic diversification, while reducing overall credit and liquidity risks. We attempt to mitigate these credit and liquidity risks by adhering to investment policies that provide portfolio diversification on an
asset class, creditor, and industry basis, and by complying with investment limitations governed by state insurance laws and regulations, as applicable. We also consider all relevant objective information available in estimating the cash flows
related to structured securities. We actively monitor and manage exposures, and determine whether any securities are impaired. The aggregate credit risk taken in the investment portfolio is influenced by our risk/return preferences, the economic
and credit environment, and the ability to manage this risk through liability portfolio management. We also have an asset-liability management strategy to align cash flows and duration of the investment portfolio with contractholder liability cash
flows and duration.
The following table presents the investment portfolio at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
Carrying value |
|
% of total |
|
Carrying value |
|
% of total |
Bonds |
$ |
99,088 |
|
|
79.1 |
% |
|
$ |
97,269 |
|
|
79.8 |
% |
Stocks |
274 |
|
|
0.2 |
|
|
181 |
|
|
0.1 |
|
Investment in
subsidiaries |
1,329 |
|
|
1.1 |
|
|
1,347 |
|
|
1.1 |
|
Mortgage loans on real
estate |
15,634 |
|
|
12.5 |
|
|
14,217 |
|
|
11.7 |
|
Real estate |
69 |
|
|
0.1 |
|
|
64 |
|
|
0.1 |
|
Cash and cash
equivalents |
910 |
|
|
0.7 |
|
|
1,868 |
|
|
1.5 |
|
Policy loans |
255 |
|
|
0.2 |
|
|
234 |
|
|
0.2 |
|
Derivative assets |
4,114 |
|
|
3.3 |
|
|
2,391 |
|
|
2.0 |
|
Other invested assets |
3,556 |
|
|
2.8 |
|
|
4,299 |
|
|
3.5 |
|
Total cash and
invested assets |
$ |
125,229 |
|
|
100.0 |
% |
|
$ |
121,870 |
|
|
100.0 |
% |
Bonds
Refer to Note 5 of the audited Statutory Financial Statements for information
regarding the nature of our portfolio of bonds securities. The tables below set forth the amortized cost of the NAIC Securities Valuation Office quality ratings for the Company's bond securities portfolio at December 31, 2020 and 2019.
Selected Financial Data and Management's Discussion and Analysis
Page 16 of 23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
NAIC Classes |
Fair Value |
|
% of Total |
|
Amortized Cost |
|
% of Total |
1 |
$ |
64,466 |
|
|
55.7 |
% |
|
$ |
55,379 |
|
|
55.9 |
% |
2 |
47,679 |
|
|
41.2 |
|
|
40,472 |
|
|
40.9 |
|
Investment
grade |
112,145 |
|
|
96.9 |
|
|
95,851 |
|
|
96.8 |
|
3 |
3,323 |
|
|
2.9 |
|
|
2,982 |
|
|
3.0 |
|
4 |
221 |
|
|
0.2 |
|
|
232 |
|
|
0.2 |
|
5 |
18 |
|
|
— |
|
|
20 |
|
|
— |
|
6 |
3 |
|
|
— |
|
|
3 |
|
|
— |
|
Below
investment grade |
3,565 |
|
|
3.1 |
|
|
3,237 |
|
|
3.2 |
|
Total |
$ |
115,710 |
|
|
100.0 |
% |
|
$ |
99,088 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
NAIC Classes |
Fair Value |
|
% of Total |
|
Amortized Cost |
|
% of Total |
1 |
65,546 |
|
|
61.3 |
% |
|
$ |
59,711 |
|
|
61.4 |
% |
2 |
40,028 |
|
|
37.5 |
|
|
$ |
36,349 |
|
|
37.4 |
|
Investment
grade |
105,574 |
|
|
98.8 |
|
|
$ |
96,060 |
|
|
98.8 |
|
3 |
1,049 |
|
|
1.0 |
|
|
$ |
992 |
|
|
1.0 |
|
4 |
71 |
|
|
0.1 |
|
|
$ |
69 |
|
|
0.1 |
|
5 |
150 |
|
|
0.1 |
|
|
$ |
145 |
|
|
0.1 |
|
6 |
4 |
|
|
— |
|
|
$ |
3 |
|
|
— |
|
Below
investment grade |
1,274 |
|
|
1.2 |
|
|
$ |
1,209 |
|
|
1.2 |
|
Total |
106,848 |
|
|
100.0 |
% |
|
$ |
97,269 |
|
|
100.0 |
% |
Sub-prime and Alt-A Mortgage Exposure
Sub-prime lending is the origination of loans to customers with weaker credit profiles. Due to the high
quality of our mortgage-backed securities, and the lack of sub-prime loans in the securities, we do not have a material exposure to sub-prime or Alt-A mortgages in those holdings. Alt-A loans are defined as any security backed by residential
mortgage collateral which is not clearly identifiable as prime or sub-prime.
Commercial Mortgage-backed, Residential Mortgage-backed,
and 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 NAIC classes and vintage year as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
NAIC Classes |
% of total CMBS |
|
|
Vintage |
1 |
$ |
11,234 |
|
|
99.5 |
% |
|
2020 |
$ |
335 |
|
|
3.0 |
% |
2 |
1 |
|
|
— |
|
|
2019 |
1,607 |
|
|
14.2 |
|
3 |
47 |
|
|
0.4 |
|
|
2018 |
1,845 |
|
|
16.3 |
|
4 |
15 |
|
|
0.1 |
|
|
2017 |
1,627 |
|
|
14.4 |
|
5 |
— |
|
|
— |
|
|
2016 and prior |
5,883 |
|
|
52.1 |
|
6 |
— |
|
|
— |
|
|
|
$ |
11,297 |
|
|
100.0 |
% |
|
$ |
11,297 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
NAIC Classes |
% of total CMBS |
|
|
Vintage |
1 |
$ |
11,351 |
|
|
100.0 |
% |
|
2019 |
$ |
1,519 |
|
|
13.4 |
% |
2 |
1 |
|
|
— |
|
|
2018 |
$ |
1,806 |
|
|
15.9 |
|
3 |
1 |
|
|
— |
|
|
2017 |
$ |
1,752 |
|
|
15.4 |
|
4 |
1 |
|
|
— |
|
|
2016 |
$ |
1,832 |
|
|
16.1 |
|
5 |
2 |
|
|
— |
|
|
2015 and prior |
$ |
4,447 |
|
|
39.2 |
|
6 |
— |
|
|
— |
|
|
|
$ |
11,356 |
|
|
100.0 |
% |
|
$ |
11,356 |
|
|
100.0 |
% |
|
|
|
|
|
Selected Financial Data and Management's Discussion and Analysis
Page 17 of 23
Asset backed security (ABS) holdings consist primarily of aircraft leases,
credit card receivables and other asset-backed securities that meet specific criteria, such as credit quality, insurance requirements, or limits on these types of investments.
The following table summarizes our exposure to other ABS holdings by NAIC
classes and vintage year as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
NAIC Classes |
% of total other
ABS |
|
|
Vintage |
1 |
$ |
2,883 |
|
|
70.6 |
% |
|
2020 |
$ |
758 |
|
|
18.6 |
% |
2 |
976 |
|
|
23.9 |
|
|
2019 |
1,264 |
|
|
30.9 |
|
3 |
74 |
|
|
1.8 |
|
|
2018 |
1,094 |
|
|
26.8 |
|
4 |
134 |
|
|
3.3 |
|
|
2017 |
302 |
|
|
7.4 |
|
5 |
18 |
|
|
0.4 |
|
|
2016 and prior |
667 |
|
|
16.3 |
|
6 |
— |
|
|
— |
|
|
|
$ |
4,085 |
|
|
100.0 |
% |
|
$ |
4,085 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
NAIC Classes |
% of total other
ABS |
|
|
Vintage |
1 |
$ |
2,460 |
|
|
81.1 |
% |
|
2019 |
$ |
1,189 |
|
|
39.2 |
% |
2 |
529 |
|
|
17.4 |
|
|
2018 |
926 |
|
|
30.5 |
|
3 |
45 |
|
|
1.5 |
|
|
2017 |
251 |
|
|
8.3 |
|
4 |
— |
|
|
— |
|
|
2016 |
179 |
|
|
5.9 |
|
5 |
— |
|
|
— |
|
|
2015 and prior |
489 |
|
|
16.1 |
|
6 |
— |
|
|
— |
|
|
|
$ |
3,034 |
|
|
100.0 |
% |
|
$ |
3,034 |
|
|
100.0 |
% |
|
|
|
|
|
Non-agency residential mortgage-backed securities (NA RMBS) are backed by pools of residential
mortgage loans made to non-prime borrowers, diversified across geographies.
The following table summarizes our exposure to NA RMBS holdings by NAIC
classes and vintage year as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
NAIC Classes |
% of total NA RMBS |
|
|
Vintage |
1 |
$ |
222 |
|
|
95.3 |
% |
|
2020 |
$ |
— |
|
|
— |
% |
2 |
— |
|
|
— |
|
|
2019 |
— |
|
|
— |
|
3 |
4 |
|
|
1.7 |
|
|
2018 |
— |
|
|
— |
|
4 |
4 |
|
|
1.7 |
|
|
2017 |
— |
|
|
— |
|
5 |
— |
|
|
— |
|
|
2016 and prior |
233 |
|
|
100.0 |
|
6 |
3 |
|
|
1.3 |
|
|
|
$ |
233 |
|
|
100.0 |
% |
|
$ |
233 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
NAIC Classes |
% of total NA RMBS |
|
|
Vintage |
1 |
$ |
291 |
|
|
95.8 |
% |
|
2019 |
$ |
1 |
|
|
0.3 |
% |
2 |
$ |
1 |
|
|
0.3 |
|
|
2018 |
$ |
1 |
|
|
0.3 |
|
3 |
$ |
3 |
|
|
1.0 |
|
|
2017 |
$ |
— |
|
|
— |
|
4 |
$ |
4 |
|
|
1.3 |
|
|
2016 |
$ |
— |
|
|
— |
|
5 |
$ |
1 |
|
|
0.3 |
|
|
2015 and prior |
$ |
302 |
|
|
99.4 |
|
6 |
$ |
4 |
|
|
1.3 |
|
|
|
$ |
304 |
|
|
100.0 |
% |
|
$ |
304 |
|
|
100.0 |
% |
|
|
|
|
|
Selected Financial Data and Management's Discussion and Analysis
Page 18 of 23
Unrealized investment losses of bonds, for investment grade (NAIC classes
1-2) and below investment grade (NAIC classes 3-6) securities by duration are as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
Investment Grade |
|
% of Total |
|
Below Investment
Grade |
|
% of Total |
Twelve months or less
below carrying value |
$ |
66 |
|
|
58.8 |
% |
|
$ |
31 |
|
|
27.6 |
% |
More than twelve months
below carrying value |
10 |
|
|
9.3 |
|
|
5 |
|
|
4.3 |
|
Total |
$ |
76 |
|
|
68.1 |
% |
|
$ |
36 |
|
|
31.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
Investment Grade |
|
% of Total |
|
Below Investment
Grade |
|
% of Total |
Twelve months or less
below carrying value |
$ |
42 |
|
|
44.2 |
% |
|
$ |
7 |
|
|
7.1 |
% |
More than twelve months
below carrying value |
$ |
38 |
|
|
40.0 |
|
|
$ |
8 |
|
|
8.7 |
|
Total |
$ |
80 |
|
|
84.2 |
% |
|
$ |
15 |
|
|
15.8 |
% |
See Note 5 of the audited Statutory Financial Statements for additional
disclosures in regards to unrealized investment losses of bonds, December 31.
Other-than-temporary impairments, by market sector, for impairments included
in the Statutory Statements of Operations, were as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
Impairment |
|
No. of Securities |
|
Impairment |
|
No. of Securities |
Partnerships |
$ |
1 |
|
|
1 |
|
|
$ |
— |
|
|
— |
|
Commercial mortgage
loans |
34 |
|
|
1 |
|
|
$ |
— |
|
|
— |
|
Corporate securities |
254 |
|
|
83 |
|
|
$ |
28 |
|
|
14 |
|
Total |
$ |
289 |
|
|
85 |
|
|
$ |
28 |
|
|
14 |
|
Refer to Note 6 of the audited Statutory Financial Statements for information
regarding the fair value and fair value hierarchy level of our financial instruments.
Mortgage Loans on Real Estate
See Note 5 of the audited Statutory Financial Statements and Schedules for
information regarding Mortgage Loans on Real Estate.
Loan-to-value (LTV) and debt service coverage (DSC) ratios are common
measurements used to assess the risk and quality of mortgage loans. The LTV ratio, calculated at the time of origination, is the percentage of the loan amount relative to the value of the underlying property. The DSC ratio, based upon the most
recently received financial statements from the debtor, is calculated as the amount of the property’s net income divided by the debt service payments.
See Note 5 of the audited Statutory Financial Statements for additional
information relating to LTV and DSC ratios.
Selected Financial Data and Management's Discussion and Analysis
Page 19 of 23
Properties collateralizing mortgage loans are geographically dispersed
throughout the United States as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
Gross Carry Value |
|
% of Total |
|
Gross Carry Value |
|
% of Total |
Mortgage loans by region |
|
|
|
|
|
|
|
East North
Central |
$ |
1,244 |
|
|
8.0 |
% |
|
$ |
1,323 |
|
|
9.3 |
% |
East South
Central |
375 |
|
|
2.4 |
|
|
323 |
|
|
2.3 |
|
Middle
Atlantic |
1,249 |
|
|
8.0 |
|
|
1,174 |
|
|
8.3 |
|
Mountain |
1,506 |
|
|
9.6 |
|
|
1,122 |
|
|
7.9 |
|
New England |
652 |
|
|
4.2 |
|
|
721 |
|
|
5.1 |
|
Pacific |
4,258 |
|
|
27.2 |
|
|
4,143 |
|
|
29.1 |
|
South
Atlantic |
3,599 |
|
|
23.0 |
|
|
3,188 |
|
|
22.4 |
|
West North
Central |
674 |
|
|
4.3 |
|
|
676 |
|
|
4.8 |
|
West South
Central |
1,314 |
|
|
8.4 |
|
|
1,058 |
|
|
7.4 |
|
Total
commercial mortgage loans |
14,871 |
|
|
95.1 |
% |
|
$ |
13,728 |
|
|
96.6 |
% |
Total
residential mortgage loans |
763 |
|
|
4.9 |
% |
|
$ |
489 |
|
|
3.4 |
% |
Total
mortgage loans |
$ |
15,634 |
|
|
100.0 |
% |
|
$ |
14,217 |
|
|
100.0 |
% |
Properties collateralizing commercial mortgage loans are diversified by
property type are as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
Gross Carry Value |
|
% of Total |
|
Gross Carry Value |
|
% of Total |
Mortgage loans by
property type |
|
|
|
|
|
|
|
Industrial |
$ |
3,182 |
|
|
21.4 |
% |
|
$ |
2,733 |
|
|
19.9 |
% |
Retail |
2,765 |
|
|
18.6 |
|
|
$ |
2,749 |
|
|
20.0 |
|
Office |
4,771 |
|
|
32.1 |
|
|
$ |
4,657 |
|
|
33.9 |
|
Apartments |
4,153 |
|
|
27.9 |
|
|
$ |
3,589 |
|
|
26.2 |
|
Total |
$ |
14,871 |
|
|
100.0 |
% |
|
$ |
13,728 |
|
|
100.0 |
% |
Liquidity and Capital Resources
Overview
The Company’s liquidity requirements are generally met through funds provided
by investment income, receipt of insurance premiums, M&E fees and benefit rider income, maturities and sales of investments, reinsurance recoveries, and capital contributions from Allianz SE, as needed.
The Company has access to funding through securities lending under which the
Company lends bonds and receives cash collateral and short term securities in an amount in excess of the fair value of the securities loaned.
The Company is a member of the Federal Home Loan Bank (FHLB) of Des Moines,
which provides access to collateralized borrowings. Funding from the FHLB is collateralized with bonds from the Company’s general account investment portfolio.
Reinsurance may play a key role in funding the Company’s continued growth,
and may be utilized for any product for which there is significant uncertainty related to future claims experience. Moreover, the Company is generally risk adverse for its smaller lines of business, and predictability of future profitability takes
precedence over retaining a large percentage of risk.
The Company does not utilize the capital markets as a source of capital.
Should the need for capital arise, the Company may obtain capital contributions from Allianz SE as an alternative source of funding. If capital infusions are deemed necessary, the Company obtains prior approval by the Department, as appropriate.
The primary uses of funds are policy benefits, commissions, other
product-related acquisition costs, investment purchases, operating expenses, and dividends to AZOA. The Company routinely reviews its sources and uses of funds in order to meet its ongoing obligations.
Selected Financial Data and Management's Discussion and Analysis
Page 20 of 23
Financial Ratings and Strength
•Standard & Poor’s AA (Very Strong)
•Moody’s A1 (Good)
•AM Best A+ (Superior)
Financial strength ratings are based upon an independent review of the
Company, its ultimate parent (Allianz SE), subsidiaries, and the industry in which the Company operates. Each rating agency assigns ratings based on an independent review and takes into account a variety of factors to arrive at its final rating.
Ratings are subject to change and there can be no assurance that the ratings afforded to the Company in the future will be consistent with historical ratings.
Cash Flows
The following table sets forth information from our Statutory Statements of
Cash Flows for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
2018 |
|
Net cash provided by
operating activities |
$ |
3,701 |
|
|
1,511 |
|
|
9,951 |
|
|
Net cash (used in) provided by investing
activities |
(3,240) |
|
|
955 |
|
|
(9,144) |
|
|
Net cash used in
financing and miscellaneous activities |
(1,419) |
|
|
(1,524) |
|
|
(1,214) |
|
|
Net change in cash, cash equivalents,
and short-term investments |
$ |
(958) |
|
|
942 |
|
|
(407) |
|
|
We have the funds necessary to meet the capital requirements of all states in
which we do business, and to support our operations.
The increase in net cash provided by operating activities in 2020 as compared to 2019 is primarily due to
lower net transfers to separate accounts in 2020 compared to 2019, as a result of the one-time transfer in 2019 mentioned below. The decrease was offset by an increase in variable-indexed premiums due to a 2020 sales promotion. The decrease in net cash provided by operating activities in 2019 as compared to 2018 is primarily due to a change in
presentation of assets and liabilities relating to variable-indexed products in 2019. The Company transferred assets from the general account to the separate account to align with state product filing requirements. The decrease was also driven by
higher surrenders and loss-related payments and partially offset by an increase in variable-indexed premiums due to a 2019 sales promotion.
The decrease in the net cash provided by investing activities in 2020 compared to 2019 was driven by transfers
of assets from the separate account in 2019 and lower proceeds from hedging results driven by market impacts. The increase in net cash provided by investing activities activities in 2019 as compared to 2018 is driven by the transfer of assets to the separate account and higher proceeds from positive hedging results.
The decrease in net cash used in financing and
miscellaneous activities was due to net decrease in securities lending payables, partially offset by an increase in divdends to AZOA in 2020. In 2019, the increase in net cash used in financing and miscellaneous activities is primarily due to an
increase in 2019 dividend payment and partially offset by the net decrease in securities lending payables.
Risk-Based Capital
See Note 17 of the audited Statutory Financial Statements for information
regarding the Risk-Based Capital (RBC). The Company's RBC ratio significantly exceeds required minimum thresholds as of December 31, 2020 and 2019.
Commitments
The following table summarizes certain contractual obligations and the
Company’s expected commitments based on policyholder behavior assumptions by period as of December 31, 2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 1 year |
|
After 1 year |
|
After 3 years |
|
After |
|
Total |
|
or less |
|
up to 3 years |
|
up to 5 years |
|
5 Years |
Payments due |
|
|
|
|
|
|
|
|
|
Policyholder
liabilities |
$ |
146,476 |
|
|
8,869 |
|
|
17,265 |
|
|
17,640 |
|
|
102,702 |
|
Mortgage
notes payable |
41 |
|
|
10 |
|
|
23 |
|
|
8 |
|
|
— |
|
Operating
leases |
2 |
|
|
1 |
|
|
1 |
|
|
— |
|
|
— |
|
Total payments
due |
$ |
146,519 |
|
|
8,880 |
|
|
17,289 |
|
|
17,648 |
|
|
102,702 |
|
Selected Financial Data and Management's Discussion and Analysis
Page 21 of 23
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 Annuities and Life segments. We have excluded the separate account liabilities as these
obligations are legally insulated from general account obligations and will be fully funded by cash flows from separate account assets. The obligations have not been discounted to present value. Estimated claim and benefit obligations are based
upon mortality, morbidity and lapse assumptions comparable to historical experience. The results are based on assuming market growth and interest crediting consistent with other valuation assumptions. In contrast to this table, the majority of our
obligations are recorded on the Balance Sheets at current account values or other prescribed measurements that are not directly related to liability cash flows. These obligations do not incorporate an expectation on future market growth, interest
crediting, or future deposits. Therefore, due to the significance of the assumptions used, the amounts presented could materially differ from actual results.
Mortgage notes payable includes contractual principal and interest payments
and therefore exceeds the amount shown in the Balance Sheet. See Note 7 of the audited Statutory Financial Statements for additional information.
Contingencies
See Note 21 of the audited Statutory Financial Statements for information
regarding contingencies.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet transactions, arrangements or
other relationships that management believes would be reasonably likely to have a material effect on the Company’s liquidity or the requirements for capital resources.
The Company utilizes exchange-traded futures to economically hedge certain
product liabilities. Under this kind of transaction, the Company agrees to purchase a specified number of contracts and settles 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 the Company enters into the exchange-traded futures contracts are regulated futures commission’s merchants who are members of a trading exchange.
The Company is exposed to credit-related losses in the event of
non-performance by counterparties under the terms of the futures contracts. The Company minimizes counterparty credit risk by establishing relationships only with counterparties rated BBB+ and higher. Given the credit ratings of the counterparties
with which the Company transacts, the Company does not expect any counterparties to fail to meet their obligations. The Company has also executed Credit Support Annex (CSA) agreements with all active counterparties and requires a CSA from all new
counterparties added to the Company’s counterparty pool. The CSA agreements further limit the Company’s counterparty credit risk by requiring the counterparty to post collateral to a segregated custodial account based on the net exposure to the
Company.
As the Company’s 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. The Company has minimal exposure to credit-related losses in the event of non-performance. The Company is required
to post collateral for any futures, options and swap contracts that are executed. The amount of collateral required is determined by the exchange on which the contract is traded. Refer to Note 5 in the audited Statutory Financial Statements for
additional information regarding derivative collateral posted.
Selected Financial Data and Management's Discussion and Analysis
Page 22 of 23
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. Reference Note 4 of
the audited Statutory Financial Statements for additional details on how we mitigate our market exposure risk and our overall risk management practices.
Sensitivity Analysis
To assess the impact of changes in interest rate and equity markets, we
perform sensitivity tests. Sensitivity tests measure the instantaneous impact of a single hypothetical interest rate or equity price change on our 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 bps. To assess equity risk, we perform a sensitivity test which instantaneously shocks 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 the statutory 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
cause our post-tax income to decrease by $89 as of December 31, 2020.
We also examined the impact on post-tax income due to a hypothetical decrease
in interest rates of 50 bps across all maturities. Under this model, with all other factors being constant, we estimated that such a decline would cause our post-tax income to increase by $28 as of December 31, 2020. Note that the impacts
referenced reflect the net of economic hedge impact and does not include economic impact related to our fixed-income investment portfolio or economic changes in reserve calculations.
Equity Market Risk
One means of assessing exposure to changes in equity market prices is to
estimate the potential changes in post-tax income from a hypothetical change in equity market prices of 15%. Under this model, with all other factors constant, we estimated that a decrease in equity market prices would cause our post-tax income to
decrease by $598, while an increase in equity market prices would cause our post-tax income to increase by $371 based on our equity exposure as of December 31, 2020. Note that the impacts referenced reflect the net of economic hedge impact and does
not include economic impact related to our fixed-income investment portfolio or economic changes in reserve calculations.
Selected Financial Data and Management's Discussion and Analysis
Page 23 of 23
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Statutory Financial Statements
December 31, 2020 and 2019
(With Report of Independent Auditors Thereon)
Report of Independent Auditors
To the Board of Directors of Allianz Life Insurance Company of North America:
We have audited the accompanying statutory financial statements of Allianz Life Insurance Company of North America, which comprise the
statutory statements of admitted assets, liabilities, and capital and surplus as of December 31, 2020 and 2019, and the related statutory statements of operations, capital and surplus, and of cash flow for the years then ended.
Management’s Responsibility for the Financial Statements
Management is responsible for the preparation and fair presentation of the financial statements in accordance with the accounting
practices prescribed or permitted by the Minnesota Department of Commerce. Management is also responsible for the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements
that are free from material misstatement, whether due to fraud or error.
Auditors’ Responsibility
Our responsibility is to express an opinion on the financial statements based on our audits. We conducted our audits in accordance with
auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The
procedures selected depend on our judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, we consider internal control relevant to the
Company's preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal
control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall
presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
Basis for Adverse Opinion on U.S. Generally Accepted Accounting Principles
As described in Note 2 to the financial statements, the financial statements are prepared by the Company on the basis of the accounting
practices prescribed or permitted by the Minnesota Department of Commerce, which is a basis of accounting other than accounting principles generally accepted in the United States of America.
The effects on the financial statements of the variances between the statutory basis of accounting described in Note 2 and accounting
principles generally accepted in the United States of America, although not reasonably determinable, are presumed to be material.
Adverse Opinion on U.S. Generally Accepted Accounting Principles
In our opinion, because of the significance of the matter discussed in the “Basis for Adverse Opinion on U.S. Generally Accepted
Accounting Principles” paragraph, the financial statements referred to above do not present fairly, in accordance with accounting principles generally accepted in the United States of America, the financial position of the Company as of December
31, 2020 and 2019, or the results of its operations or its cash flows for the years then ended.
Opinion on Statutory Basis of Accounting
In our opinion, the financial statements referred to above present fairly, in all material respects, the admitted assets, liabilities and
surplus of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in accordance with the accounting practices prescribed or permitted by the Minnesota Department of Commerce
described in Note 2.
/s/ PricewaterhouseCoopers LLP
Minneapolis, MN
April 2, 2021
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus
December 31, 2020 and 2019
(Dollars in millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Admitted Assets |
2020 |
|
2019 |
Cash and invested
assets: |
|
|
|
|
Bonds |
|
$ |
99,088 |
|
|
97,269 |
|
Stocks |
|
274 |
|
|
181 |
|
Investment
in subsidiaries |
|
1,329 |
|
|
1,347 |
|
Mortgage
loans on real estate |
|
15,634 |
|
|
14,217 |
|
Real estate |
|
69 |
|
|
64 |
|
Cash, cash
equivalents and short-term investments |
|
910 |
|
|
1,868 |
|
Policy loans |
|
255 |
|
|
234 |
|
Derivative
assets |
|
4,114 |
|
|
2,391 |
|
Other
invested assets |
|
3,556 |
|
|
4,299 |
|
Total cash and
invested assets |
|
125,229 |
|
|
121,870 |
|
Investment income due
and accrued |
|
1,040 |
|
|
1,031 |
|
Current federal and
foreign income tax recoverable |
|
200 |
|
|
— |
|
Deferred tax asset, net |
|
273 |
|
|
224 |
|
Other assets |
|
745 |
|
|
721 |
|
Admitted
assets, exclusive of separate account assets |
|
127,487 |
|
|
123,846 |
|
Separate account assets |
|
45,901 |
|
|
34,638 |
|
Total admitted
assets |
|
$ |
173,388 |
|
|
158,484 |
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus
December 31, 2020 and 2019
(Dollars in millions, except share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities and Capital and Surplus |
2020 |
|
2019 |
Policyholder
liabilities: |
|
|
|
|
Life
policies and annuity contracts |
|
$ |
102,549 |
|
|
100,278 |
|
Accident and
health policies |
|
1,912 |
|
|
1,743 |
|
Deposit-type
contracts |
|
4,749 |
|
|
4,936 |
|
Life policy
and contract claims |
|
8 |
|
|
10 |
|
Accident and
health policy and contract claims |
|
18 |
|
|
17 |
|
Other
policyholder funds |
|
117 |
|
|
114 |
|
Total
policyholder liabilities |
|
109,353 |
|
|
107,098 |
|
Interest maintenance
reserve |
|
18 |
|
|
148 |
|
General expenses due and
accrued |
|
157 |
|
|
143 |
|
Due from separate
accounts |
|
(294) |
|
|
(626) |
|
Current income taxes
payable |
|
35 |
|
|
118 |
|
|
|
|
|
|
Borrowed money |
|
1,501 |
|
|
1,002 |
|
Asset valuation reserve |
|
983 |
|
|
895 |
|
Derivative liabilities |
|
3,262 |
|
|
2,049 |
|
Other liabilities |
|
4,811 |
|
|
5,065 |
|
Liabilities,
exclusive of separate account liabilities |
|
119,826 |
|
|
115,892 |
|
Separate account
liabilities |
|
45,901 |
|
|
34,638 |
|
Total
liabilities |
|
165,727 |
|
|
150,530 |
|
Capital and surplus: |
|
|
|
|
Class A,
Series A preferred stock, $1 par value. Authorized, issued, and outstanding, 8,909,195 shares; liquidation preference of $2 and $2 at December 31, 2020 and 2019, respectively |
|
9 |
|
|
9 |
|
Class A, Series B preferred stock, $1
par value. Authorized, 10,000,000 shares; issued and outstanding, 9,994,289 shares; liquidation preference of $10 and $10 at December 31, 2020 and 2019, respectively |
|
10 |
|
|
10 |
|
Common
stock, $1 par value. Authorized, 40,000,000 shares; issued and outstanding, 20,000,001 shares at December 31, 2020 and 2019, respectively |
|
20 |
|
|
20 |
|
Additional paid-in capital |
|
3,676 |
|
|
3,676 |
|
Special
surplus funds |
|
(1,844) |
|
|
— |
|
Unassigned
surplus |
|
5,790 |
|
|
4,239 |
|
Total capital
and surplus |
|
7,661 |
|
|
7,954 |
|
Total
liabilities and capital and surplus |
|
$ |
173,388 |
|
|
158,484 |
|
|
|
|
|
|
See accompanying notes
to statutory financial statements. |
|
|
|
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Statutory Statements of Operations
Years ended December 31, 2020, 2019, and 2018
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
2018 |
Income: |
|
|
|
|
|
|
Premiums and
annuity considerations |
|
$ |
10,346 |
|
|
12,805 |
|
|
11,925 |
|
Consideration
for supplementary contracts |
|
196 |
|
|
224 |
|
|
268 |
|
Net
investment income |
|
4,864 |
|
|
4,839 |
|
|
4,593 |
|
Commissions
and expense allowances on reinsurance ceded |
|
(38) |
|
|
338 |
|
|
163 |
|
Reserve
adjustments related to reinsurance ceded |
|
(7) |
|
|
(9) |
|
|
82 |
|
Fees from
separate accounts |
|
567 |
|
|
613 |
|
|
676 |
|
Other |
|
694 |
|
|
(13) |
|
|
(3) |
|
Total income |
|
16,622 |
|
|
18,797 |
|
|
17,704 |
|
Benefits and other
expenses: |
|
|
|
|
|
|
Policyholder
benefits |
|
1,926 |
|
|
1,809 |
|
|
1,822 |
|
Surrenders |
|
8,417 |
|
|
8,559 |
|
|
7,614 |
|
Change in
aggregate reserves and deposit funds |
|
2,465 |
|
|
1,034 |
|
|
7,299 |
|
Commissions
and other agent compensation |
|
1,139 |
|
|
1,284 |
|
|
1,223 |
|
General and
administrative expenses |
|
600 |
|
|
594 |
|
|
547 |
|
Net
transfers to (from) separate accounts |
|
1,460 |
|
|
5,254 |
|
|
(2,009) |
|
Total benefits
and other expenses |
|
16,007 |
|
|
18,534 |
|
|
16,496 |
|
Income (loss) from operations before federal income taxes and net realized
capital gain (loss)
|
|
615 |
|
|
263 |
|
|
1,208 |
|
Income tax expense
(benefit) |
|
18 |
|
|
773 |
|
|
(51) |
|
Net (loss)
income from operations before net realized capital gain (loss) |
|
597 |
|
|
(510) |
|
|
1,259 |
|
Net realized
capital gain (loss), net of taxes and interest maintenance reserve |
|
142 |
|
|
1,053 |
|
|
(490) |
|
Net income |
|
$ |
739 |
|
|
543 |
|
|
769 |
|
|
|
|
|
|
|
|
See accompanying notes
to statutory financial statements. |
|
|
|
|
|
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Statutory Statements of Capital and Surplus
Years ended December 31, 2020, 2019, and 2018
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
2018 |
Capital and
surplus at beginning of year |
|
$ |
7,954 |
|
|
6,576 |
|
|
6,011 |
|
Change in
accounting principle, net of tax (Note 3) |
|
— |
|
|
— |
|
|
(86) |
|
Change in
reserve on account of change in valuation basis (Note 3) |
|
(1) |
|
|
— |
|
|
342 |
|
Adjusted
balance at beginning of year |
|
7,953 |
|
|
6,576 |
|
|
6,267 |
|
Net income |
|
739 |
|
|
543 |
|
|
769 |
|
Change in
unrealized capital gain (loss) |
|
(61) |
|
|
719 |
|
|
(230) |
|
Change in
net deferred income tax |
|
42 |
|
|
330 |
|
|
(121) |
|
Change in
asset valuation reserve |
|
(88) |
|
|
(131) |
|
|
(38) |
|
Dividends
paid to parent |
|
(750) |
|
|
(325) |
|
|
— |
|
Change in
unamortized gain on reinsurance transactions |
|
(162) |
|
|
248 |
|
|
(76) |
|
Other
changes in capital and surplus |
|
(12) |
|
|
(6) |
|
|
5 |
|
Capital and
surplus at end of year |
|
$ |
7,661 |
|
|
7,954 |
|
|
6,576 |
|
|
|
|
|
|
|
|
See accompanying notes
to statutory financial statements. |
|
|
|
|
|
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Statutory Statements of Cash Flow
Years ended December 31, 2020, 2019, and 2018
(Dollars in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
2018 |
Cash flow from operating
activities: |
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
Premiums and
annuity considerations, net |
|
$ |
10,543 |
|
|
13,030 |
|
|
12,194 |
|
Net
investment income |
|
4,990 |
|
|
5,000 |
|
|
4,652 |
|
Commissions
and expense allowances on reinsurance ceded |
|
36 |
|
|
86 |
|
|
86 |
|
Fees from
separate accounts |
|
567 |
|
|
613 |
|
|
676 |
|
Other |
|
217 |
|
|
71 |
|
|
96 |
|
Cash provided by
operating activities |
|
16,353 |
|
|
18,800 |
|
|
17,704 |
|
Benefits and
expenses paid: |
|
|
|
|
|
|
Benefit and
loss-related payments |
|
9,513 |
|
|
9,469 |
|
|
8,404 |
|
Net transfers
to (from) separate accounts |
|
1,128 |
|
|
5,534 |
|
|
(2,305) |
|
Commissions,
expenses paid, and aggregate write-ins for deductions |
|
1,727 |
|
|
1,881 |
|
|
1,800 |
|
Income tax
paid (benefit received), net |
|
290 |
|
|
338 |
|
|
(79) |
|
Change in
unallocated remittances and items |
|
(6) |
|
|
67 |
|
|
(67) |
|
Cash used in
operating activities |
|
12,652 |
|
|
17,289 |
|
|
7,753 |
|
Net cash
provided by operating activities |
|
3,701 |
|
|
1,511 |
|
|
9,951 |
|
Cash flow from investing
activities: |
|
|
|
|
|
|
Proceeds from
investments sold, matured or repaid: |
|
|
|
|
|
|
Bonds |
|
8,935 |
|
|
15,892 |
|
|
9,476 |
|
Stocks |
|
147 |
|
|
113 |
|
|
172 |
|
Mortgage
loans |
|
1,024 |
|
|
1,356 |
|
|
617 |
|
|
|
|
|
|
|
|
Other
invested assets |
|
60 |
|
|
32 |
|
|
13 |
|
Derivatives |
|
861 |
|
|
1,429 |
|
|
— |
|
Miscellaneous
proceeds |
|
2 |
|
|
1,572 |
|
|
559 |
|
Cash provided by
investing activities |
|
11,029 |
|
|
20,394 |
|
|
10,837 |
|
Cost of
investments acquired: |
|
|
|
|
|
|
Bonds |
|
10,885 |
|
|
15,976 |
|
|
16,310 |
|
Stocks |
|
230 |
|
|
145 |
|
|
175 |
|
Mortgage
loans |
|
2,482 |
|
|
2,283 |
|
|
2,111 |
|
Real estate |
|
10 |
|
|
11 |
|
|
9 |
|
Other
invested assets |
|
156 |
|
|
192 |
|
|
189 |
|
Derivatives |
|
— |
|
|
— |
|
|
547 |
|
Miscellaneous
applications |
|
485 |
|
|
812 |
|
|
611 |
|
Cash used in
investing activities |
|
14,248 |
|
|
19,419 |
|
|
19,952 |
|
Net increase
in policy loans and premium notes |
|
21 |
|
|
20 |
|
|
30 |
|
Net cash (used
in) provided by investing activities |
|
(3,240) |
|
|
955 |
|
|
(9,145) |
|
Cash flow from financing
and miscellaneous activities: |
|
|
|
|
|
|
Change in
borrowed money |
|
500 |
|
|
500 |
|
|
— |
|
Payments on
deposit-type contracts and other insurance liabilities, net of deposits |
|
(1,290) |
|
|
(1,333) |
|
|
(1,250) |
|
Dividends
paid to parent |
|
(750) |
|
|
(325) |
|
|
— |
|
Other cash
provided (used) |
|
121 |
|
|
(366) |
|
|
37 |
|
Net cash used in
financing and miscellaneous activities |
|
(1,419) |
|
|
(1,524) |
|
|
(1,213) |
|
Net change in
cash, cash equivalents, and short-term investments |
|
(958) |
|
|
942 |
|
|
(407) |
|
Cash, cash equivalents,
and short-term investments: |
|
|
|
|
|
|
Beginning of
year |
|
1,868 |
|
|
926 |
|
|
1,333 |
|
End of year |
|
$ |
910 |
|
|
1,868 |
|
|
926 |
|
See accompanying notes to
statutory financial statements. |
|
|
|
|
|
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(1) Organization and Nature of Operations
Allianz Life Insurance Company of North America (the
Company) is a wholly-owned subsidiary of Allianz of America, Inc. (AZOA or parent company), which is a wholly-owned subsidiary of Allianz Europe, B.V. Allianz Europe, B.V. is a wholly-owned subsidiary of Allianz SE. Allianz SE is a European company
registered in Munich, Germany, and is the Company’s ultimate parent. The Company has a wholly-owned life insurance company subsidiary, Allianz Life Insurance Company of New York (AZNY). The Company also wholly owns a captive reinsurer, Allianz Life
Insurance Company of Missouri (AZMO).
The Company is a life insurance company licensed to sell
annuity, group and individual life, and group and individual accident and health policies in the United States, Canada, and several U.S. territories. Based on statutory net premium written, the Company's business is predominately annuity. The
annuity business consists of fixed-indexed, variable-indexed, variable, and fixed annuities. The life business consists of both individual and group life. Life business includes products with guaranteed premiums and benefits and consists
principally of fixed-indexed universal life policies and closed blocks of universal life policies, term insurance policies, and limited payment contracts. Accident and health business is primarily comprised of closed blocks of long-term care (LTC)
insurance. The Company’s primary distribution channels are through independent agents, broker-dealers, banks, and third-party marketing organizations.
After evaluating the Company’s ability to continue as a
going concern, management is not aware of any conditions or events which raise substantial doubts concerning the Company’s ability to continue as a going concern as of the date of filing these Statutory Financial Statements.
(2) Summary of Significant Accounting Policies
(a) Basis of Presentation
The Statutory Financial Statements have been prepared in
accordance with accounting practices prescribed or permitted by the Minnesota Department of Commerce (the Department). The Department recognizes statutory accounting practices prescribed or permitted by the state of Minnesota for determining and
reporting the financial condition and results of operations of an insurance company and its solvency under Minnesota insurance law. The state of Minnesota has adopted the National Association of Insurance Commissioners (NAIC) Accounting Practices and Procedures Manual as its prescribed basis of statutory accounting principles (SAP), without significant modification. The Company has no material statutory accounting practices that differ from those of the Department or NAIC
SAP. These practices differ in some respects from accounting principles generally accepted in the United States of America (U.S. GAAP). The effects of these differences, while not quantified, are presumed to be material to the Statutory Financial
Statements. The more significant of these differences are as follows:
(1) Acquisition costs, such as
commissions and other costs incurred in connection with acquiring new and renewal business, are charged to current operations as incurred. Under U.S. GAAP, acquisition costs that are directly related to the successful acquisition of insurance
contracts are capitalized and charged to operations as the corresponding revenues or future profits are recognized.
(2) Aggregate reserves for life
policies and annuity contracts, excluding variable annuities, are based on statutory mortality and interest assumptions without consideration for lapses or withdrawals. Under U.S. GAAP, aggregate reserves consider lapses and withdrawals.
(3) Certain reinsurance transactions,
primarily used for annuity business, are recognized as reinsurance for statutory purposes only.
(4) Ceded reinsurance recoverable are
netted against their related reserves within Policyholder liabilities, Life policies and annuity contracts and Life policy and contract claims, on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. Under U.S. GAAP,
these ceded reserves are presented on a gross basis as an asset.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(5) The Company reinsures a portion of
its in-force block of business through several reinsurance agreements. Under NAIC SAP, the after-tax gains associated with these indemnity reinsurance transactions are recorded in Unassigned surplus and recognized through income as future earnings
of the books of business emerge. Under U.S. GAAP, the pretax gains associated with such transactions that qualify as reinsurance, are deferred as liabilities and are amortized into operations over the revenue-producing period of the policies.
(6) Bonds are carried at values
prescribed by the NAIC, generally amortized cost, except for those with an NAIC rating of 6, which are reported at the lower of amortized cost or fair value. Under U.S. GAAP, bonds classified as “available-for-sale” are carried at fair value, with
unrealized gains and losses recorded in stockholder’s equity.
(7) Changes in deferred income taxes
are recorded directly to Unassigned surplus. Under U.S. GAAP, these items are recorded as an item of income tax benefit or expense in operations. Moreover, under NAIC SAP, a valuation allowance may be recorded against the deferred tax asset (DTA)
and admittance testing may result in an additional charge to capital and surplus for nonadmitted portions of DTAs. Under U.S. GAAP, a valuation allowance may be recorded against the DTA and reflected as an expense.
(8) Investments in subsidiaries are
carried at net equity values as prescribed by the NAIC. Changes in equity values are reflected in Unassigned surplus within the Statutory Statements of Capital and Surplus as credits or charges to Unassigned surplus. Under U.S. GAAP, wholly owned
subsidiary results are consolidated.
(9) The Company is required to
establish an asset valuation reserve (AVR) liability and an interest maintenance reserve (IMR) liability. The AVR provides for a standardized statutory investment valuation reserve for certain invested assets. Changes in this reserve are recorded
as direct charges or credits to Unassigned surplus. The IMR is designed to defer net realized capital gains and losses resulting from changes in the level of prevailing market interest rates and amortize them into income within the Statutory
Statements of Operations over the remaining life of the investment sold. The IMR represents the unamortized portion of applicable investment gains and losses as of the balance sheet date. There is no such concept under U.S. GAAP.
(10) Canadian asset and liability
amounts are expressed in Canadian dollars without foreign exchange translation into U.S. dollars. A net foreign currency translation adjustment is recorded within the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus
with an offset to Other changes in capital and surplus within the Statutory Statements of Capital and Surplus. Under U.S. GAAP, Canadian assets and liabilities are converted to U.S. dollars, with any translation adjustment recorded to stockholder’s
equity.
(11) Certain assets designated as
“nonadmitted assets” are not recognized and are charged directly to Unassigned surplus within the Statutory Statements of Capital and Surplus. These include, but are not limited to, investments in unaudited subsidiary, controlled, and affiliated
(SCA) entities, electronic data processing (EDP) software, portions of goodwill, furniture and fixtures, prepaid expenses, receivables outstanding greater than 90 days, and portions of DTAs. There is no such concept under U.S. GAAP.
(12) A provision is made for amounts
ceded to unauthorized reinsurers in excess of collateral in the form of a trust or letter of credit through a direct charge to Unassigned surplus within the Statutory Statements of Capital and Surplus. There is no such requirement under U.S. GAAP.
(13) Revenues for universal life
policies and annuity contracts, excluding deposit-type contracts, are recognized as revenue when received within the Statutory Statements of Operations. Under U.S. GAAP, policy and contract fees charged for the cost of insurance, policy
administrative charges, amortization of policy initiation fees, and surrender contract charges are recorded as revenues when earned.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(14) Benefits for universal life
policies and annuity contracts within the Statutory Statements of Operations, excluding deposit-type contracts, consist of payments made to policyholders. Under U.S. GAAP, benefits represent interest credited, and claims and benefits incurred in
excess of the policyholder’s contract balance.
(15) Derivatives are reported at fair
value in accordance with SSAP No. 86, Derivatives (SSAP No. 86) and SSAP No. 108, Derivatives Hedging Variable Annuity Guarantees (SSAP No. 108). See additional information in section (k) of this note and note 5. Changes in the fair value of
derivatives, except those reported under SSAP No. 108, are recorded as direct adjustments to Unassigned surplus as a component of Change in unrealized capital gains (losses) within the Statutory Statements of Capital and Surplus. For derivatives
reported under SSAP No. 108, changes in fair value are recognized as net deferred assets or liabilities within Other assets or Other liabilities, respectively, in the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus,
for fluctuations in fair value that do not offset the changes in the hedged item. The deferred asset or liability is amortized over the timeframe required under SSAP No. 108. Under U.S. GAAP, changes in the fair value of derivatives are recorded in
derivative income (loss) as part of operating income and the hedged derivatives are carried at fair value. In addition, the effective and ineffective portions of a hedge are accounted for separately.
(16) Commissions allowed by reinsurers
on business ceded are reported as income when received within the Statutory Statements of Operations. Under U.S. GAAP, such commissions are deferred and amortized as a component of deferred acquisition costs to the extent recoverable.
(17) The Statutory Financial
Statements do not include a statement of comprehensive income as required under U.S. GAAP.
(18) The Statutory Statements of Cash
Flow do not classify cash flows consistent with U.S. GAAP and a reconciliation of net income to net cash provided from operating activities is not provided.
(19) The calculation of reserves and
transfers in the separate account statement requires the use of a Commissioners Annuity Reserve Valuation Method (CARVM) allowance on annuities for NAIC SAP. There is no such requirement under U.S. GAAP.
(20) Sales inducements and premium
bonuses are included in Life policies and annuity contracts in the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus, and are charged to current operations as incurred. Under U.S. GAAP, deferred sales inducements and
premium bonuses are similarly reserved; however, the costs are capitalized as assets and charged to operations as future profits are recognized in a manner similar to acquisition costs.
(21) Negative cash balances are
presented as a negative asset within the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. These balances are presented as a liability under U.S. GAAP.
(22) Embedded derivatives are not
separated from the host contract and accounted for separately as a derivative instrument. Under U.S. GAAP, entities must separate the embedded derivative from the host contracts and separately account for those embedded derivatives at fair value.
(23) For certain annuity products with
a market value adjustment feature sold to Minnesota residents (MN MVA) and variable-indexed annuities, the Department requires the Company to maintain a separate asset portfolio to back related reserves. These assets and liabilities are required to
be included as part of the Separate account assets and Separate account liabilities presented on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. Under U.S. GAAP, there is no such requirement.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(b) Permitted and Prescribed Statutory Accounting
Practices
The Company is required to file annual statements with
insurance regulatory authorities, which are prepared on an accounting basis permitted or prescribed by such authorities. Prescribed statutory accounting practices include state laws, regulations, and general administrative rules, as well as a
variety of publications of the 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 has no permitted or prescribed practices that differ from NAIC SAP that had an impact on net income or surplus as of December 31, 2020, 2019, and 2018.
The Company’s subsidiary, AZMO, has adopted an accounting
practice that is prescribed by the Department of Insurance, Financial Institutions, and Professional Registration of the State of Missouri (the Missouri Department). The effect of the accounting practice allows a letter of credit to be carried as
an admitted asset. The balance of the letter of credit asset at December 31, 2020 and 2019 was $101 and $109, respectively. Under NAIC SAP, this letter of credit would not be allowed as an admitted asset.
This prescribed practice does not impact the net income of
AZMO and results in increases to surplus of $101 and $109 as of December 31, 2020 and 2019, respectively. The Company’s carrying value of its investment in AZMO per the audited statutory surplus was $350 and $345, and the carrying value of its
investment in AZMO would have been $249 and $236 if AZMO had completed Statutory Financial Statements in accordance with the NAIC SAP as of December 31, 2020 and 2019, respectively. AZMO maintains an adequate amount of surplus such that if it had
not adopted the prescribed practice, surplus would still exceed the risk-based capital requirements.
(c) Use of Estimates
The preparation of Statutory Financial Statements in
conformity with NAIC SAP requires management to make certain estimates and assumptions that affect reported amounts of admitted assets and liabilities, including reporting or disclosure of contingent assets and liabilities as of December 31, 2020
and 2019, and the reported amounts of revenues and expenses during the reporting period. Future events, including changes in mortality, morbidity, interest rates, capital markets, and asset valuations could cause actual results to differ from the
estimates used within the Statutory Financial Statements. Such changes in estimates are recorded in the period they are determined.
(d) Premiums and Annuity Considerations
Life premiums are recognized as income over the premium
paying period of the related policies. Nondeposit-type annuity considerations are recognized as revenue when received. Accident and health premiums are earned ratably over the terms of the related insurance and reinsurance contracts or policies.
(e) Aggregate Reserves for Life Policies and
Annuity Contracts
Reserves are principally calculated as the minimum reserves
permitted by the state where the contract is issued for the year in which the contract is issued.
For the Company’s fixed annuity product lines, reserves are
calculated using CARVM. The Company uses both issue year and change in fund basis for the calculation method, on a curtate basis, using the maximum allowable interest rate. Deferred fixed-interest and fixed-indexed annuities typically have a
two-tier structure to encourage annuitization, or a single-tier structure, which may include a market value adjustment. Either two-tier or single-tier annuities may include bonuses.
For the Company’s variable and variable-indexed annuity
product lines, reserves are calculated using VM-21, Requirements for Principle-Based Reserves for Variable
Annuities (VM-21), effective January 1, 2020. Prior to January 1, 2020, reserves were calculated using Actuarial Guideline XLIII – CARVM for Variable Annuities (AG43) Variable deferred annuities include a wide range of guaranteed minimum death benefits and living benefits (income, accumulation, and withdrawal).
Reserves for immediate annuities are calculated using
current prescribed mortality tables.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
Aggregate reserves for life insurance policies are
principally calculated using the Commissioners Reserve Valuation Method (CRVM). Additional reserves are held for supplemental benefits and for contracts with secondary guarantees, consistent with prescribed regulations and actuarial guidelines.
The Company performs an annual asset adequacy analysis as
required by regulation covering substantially all of its reserves. These tests are not only performed under the required interest rate scenarios, but also under additional stochastically generated interest and equity growth scenarios. Sensitivity
tests, including policy lapse, annuitization, maintenance expenses, and investment return, are performed to evaluate potential insufficiencies in reserve adequacy.The results of these tests and analysis resulted in $0 of additional reserves at
December 31, 2020 and 2019, respectively.
(f) Aggregate Reserves for Accident and Health
Policies
For accident and health business, reserves consist of
active life reserves (mainly reserves for unearned premiums and reserves for contingent benefits on individual LTC business) and claim reserves (the present value of amounts not yet due). Claim reserves represent incurred but unpaid claims under
group policies. For the LTC business, the asset adequacy analysis was performed through a gross premium valuation. At December 31, 2020 and 2019, the results of these tests and analysis supported the establishment of additional reserves of $151 and
$70, respectively.
(g) Deposit-type Contracts
Deposit-type contracts represent liabilities to
policyholders in a payout status, who have chosen a fixed payout option without life contingencies. The premiums and claims related to deposit-type contracts are not reflected in the Statutory Statements of Operations as they do not have insurance
risk. The Company accounts for the contract as a deposit-type contract in the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.
(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 LTC 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. Amounts recoverable from reinsurers represent
account balances and unpaid claims covered under reinsurance contracts. Amounts paid or deemed to have been paid for claims covered by reinsurance contracts are recorded as a reinsurance recoverable and are included in Other assets on the Statutory
Statements of Admitted Assets, Liabilities, and Capital and Surplus.
Included in Unassigned surplus is the gain recognized when
the Company enters into a coinsurance or yearly renewable term (YRT) agreement on existing business. The gain is deferred and amortized into operations on a basis consistent with how the future earnings emerge on the underlying business.
Reserve adjustments related to reinsurance ceded include
reserve increases received from a reinsurer on modified coinsurance ceded.
(j) Investments
Investment values are determined in accordance with methods
prescribed by the NAIC.
Bonds and Stocks
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
The Securities Valuation Office (SVO) of the NAIC evaluates
the credit quality of the Company’s bond investments. Bonds rated at “1” (highest quality), “2” (high quality), “3” (medium quality), “4” (low quality), or “5” (lower quality) are reported at cost adjusted for the amortization of premiums,
accretion of discounts, and any impairment. Bonds rated at “6” (lowest quality) are carried at the lower of amortized cost or fair value with any adjustments to fair value recorded to Unassigned surplus within the Statutory Statements of Capital
and Surplus.
In accordance with its investment policy, the Company
invests primarily in high-grade marketable securities. Dividends are accrued on the date declared and interest is accrued as earned. Premiums or discounts on bonds are amortized using the constant-yield method.
Loan-backed securities and structured securities are
amortized using anticipated prepayments, in addition to other less significant factors. Prepayment assumptions for loan-backed and structured 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 the modified scientific method based on prepayment assumptions and the estimated economic life of the securities. For structured securities,
except for collateralized debt obligations (CDOs) and impaired bonds, when actual prepayments differ significantly from anticipated prepayments, the effective yield is recalculated to reflect actual payments to date and anticipated future payments
retrospectively. Any resulting adjustment is included in Net investment income on the Statutory Statements of Operations. For CDOs and impaired bonds, when adjustments are made for anticipated prepayments and other expected changes in future cash
flows, the effective yield is recalculated using the prospective method as required by Statement of Statutory Accounting Principles (SSAP) No. 43R – Loan Backed and Structured Securities (SSAP No. 43R).
Hybrid securities are investments structured to have
characteristics of both stocks and bonds. The Company records these securities within Bonds on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.
Common stocks, other than investments in subsidiaries and
Federal Home Loan Bank (FHLB) stock, are carried at fair value. Preferred stocks are carried at the lower of cost or fair value. The related unrealized capital gains (losses) are reported in Unassigned surplus, net of federal income taxes within
the Statutory Statements of Capital and Surplus. FHLB stock is carried at cost, which approximates fair value.
Gross realized gains and losses are computed based on the
average amortized cost of all lots held for a particular CUSIP.
The fair value of bonds, and common and preferred stocks 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
Company's internal and external investment managers. The IPV process supports the reasonableness of price overrides and challenges by the internal and external investment managers and reviews pricing for appropriateness. Results of the IPV process
are reviewed by the Company’s Pricing Committee.
The Company reviews its combined investment portfolio,
including subsidiaries, in aggregate each quarter to determine if declines in fair value are other than temporary.
For bonds for which the fair value is less than amortized
cost, 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. For loan-backed securities, the Company must allocate other-than-temporary impairments (OTTI) between interest and noninterest-related declines in fair value. Interest-related impairments are
considered other than temporary when the Company has the intent to sell the investment prior to recovery of the cost of the investment. The Company maintains a prohibited disposal list that restricts the
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
ability of the investment managers to sell securities in a
significant unrealized loss position and requires formal attestations from investment managers regarding their lack of intent to sell certain securities.
The Company evaluates whether equity securities are
other-than-temporarily impaired through a review process which includes, but is not limited to, market analysis, analyzing current events, assessing recent price declines, and management’s judgment related to the likelihood of recovery within a
reasonable period of time.
Impairments considered to be other-than-temporary are
recorded as a reduction of the cost of the security, and a corresponding realized loss is recognized on the Statutory Statements of Operations in the period in which the impairment is determined. Recognition of the realized loss is subject to
potential offset by AVR and IMR.
The Company holds certain cash equivalents which receive
bond treatment based on their underlying securities. These are classified as Other assets receiving bond treatment in Note 5.
Investment in Subsidiaries
Common stock of the Company’s insurance subsidiaries is
carried at SAP capital and surplus, and investments in non-insurance subsidiaries are carried at U.S. GAAP equity value adjusted for certain items that are considered to be non-admitted. Unaudited subsidiaries are fully non-admitted.
Mortgage Loans on Real Estate
Mortgage loans on real estate, including commercial
mortgage loans (CMLs) and residential mortgage loans (RMLs), are carried at the outstanding principal balance, adjusted for any impairment. The fair value of CMLs is calculated by analyzing individual loans and assigning ratings to each loan based
on a combination of loan-to-value ratios and debt service coverage ratios. Fair value is determined based on these factors as well as the contractual cash flows of each loan and the current market interest rates for similar loans. The fair value of
RMLs is calculated by discounting estimated cash flows, with discount rates based on current market conditions. The Company evaluates loans quarterly to assess whether there is an impairment based on the likelihood of receiving all contractual cash
flows. The Company accounts for interest income on impaired loans on a cash basis. Interest accrual is discontinued for impaired loans and interest income is only recognized when received. Payments received on impaired loans are applied to accrued
interest, and payments received in excess of accrued interest are applied to principal.
Real Estate
Real estate represents the Company’s home office property,
and is carried at depreciated cost less encumbrances in accordance with SSAP No. 40 – Real Estate Investments. Real estate income, including income received from home office property, is included in Net investment income on the Statutory Statements of
Operations. Real estate, exclusive of land, is depreciated on a straight-line basis over estimated useful lives ranging from 3 to 40 years. At December 31, 2020 and 2019, accumulated depreciation was $74 and $69, respectively. Furthermore, as of
December 31, 2020 and 2019, real estate was presented net of encumbrances of $41 and $51, respectively, as discussed in Note 7.
Cash and Cash Equivalents
Cash and cash equivalents may include cash on hand, demand
deposits, money market funds, reverse repurchase agreements (repo), and highly liquid debt instruments purchased with an original maturity of three months or less. Due to the short-term nature of these investments, the carrying value is deemed to
approximate fair value.
In the normal course of business, the Company enters into
bilateral and tri-party repos, whereby the Company purchases securities and simultaneously agrees to resell the same securities at a stated price on a specified date in the future, for the purpose of earning a specified rate of return. An affiliate
of the Company serves as the agent in the bilateral agreements and an unaffiliated bank serves as the custodian in the tri-party agreements. The bilateral agreements require purchases of specifically identified securities. If at any time the fair
value of those purchased securities falls below the purchase price, additional collateral in the form of cash or additional securities is required to be transferred to ensure margin maintenance. The tri-party agreements allow for the
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
purchase of certain bonds and structured securities, and
require a minimum of 102% of fair value of the securities purchased to be maintained as collateral.
The Company’s repos are accounted for as collateralized
lending in accordance with SSAP No. 103R – Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities (SSAP No. 103R), whereby the amounts paid for the securities are reported as cash equivalents within Cash and cash
equivalents on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. The difference between the amount paid and the amount at which the securities will be resold is reported as interest income within Net investment
income on the Statutory Statements of Operations.
Policy Loans
Policy loans are supported by the underlying cash value of
the policies. Policy loans are carried at unpaid principal balances plus accrued interest income on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. The unpaid principal balances are not in excess of the cash
surrender values of the related policies.
Other Invested Assets
The Company participates in securities lending arrangements
whereby specific securities are loaned to other institutions. The Company receives collateral from these arrangements including cash and cash equivalents, which can be reinvested based on the Company's discretion, and noncash collateral, which may
not be sold or re-pledged unless the counterparty is in default. The Company accounts for its securities lending transactions as secured borrowings, in which the cash collateral received and the related obligation to return the cash collateral are
recorded in Other invested assets and Other liabilities, respectively, on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. Noncash collateral received is not reflected on the Statutory Statements of Admitted
Assets, Liabilities, and Capital and Surplus. Securities on loan remain on the Company’s Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus, and interest and dividend income earned by the Company on loaned securities is
recognized in Net investment income on the Statutory Statements of Operations.
Company policy requires a minimum of 102% of fair value of
securities loaned under securities lending agreements to be maintained as collateral. The Company's
sources of cash used to return cash collateral is dependent upon the liquidity of current market conditions. The Company has policies in place to manage reinvested collateral at appropriate levels of liquidity.
The Company invests in low income housing tax credit
(LIHTC) investments for tax benefits. In accordance with SSAP No. 93 – Low Income Housing Tax Credit Property
Investments, the LIHTC investments are carried at cost and adjusted for amortization based on the proportion of total tax credits
and other tax benefits expected to be received over the life of the investments. The Company records an asset for the full unfunded investment amount upon entering into a LIHTC agreement; amortization decreases the asset balance over time. A
corresponding liability is recorded for the unfunded commitment balance beginning when the LIHTC investment is initially funded, which decreases as the Company provides capital to fund. The asset and liability are recorded in Other invested assets
and Other liabilities, respectively, on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. The tax benefit is recognized within Income tax expense within the Statutory Statements of Operations. The amortization of
the investment is recorded as Net investment income and any impairments are included in Net realized capital gain (loss) within the Statutory Statements of Operations.
Receivables and payables for securities are carried at
fair value on the trade date and represent a timing difference on securities that are traded at the balance sheet date but not settled until subsequent to the balance sheet date. Receivables and payables for securities are included in Other
invested assets and Other liabilities, respectively, on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.
(k) Derivatives
The Company utilizes derivatives within certain actively
managed investment portfolios for hedging purposes.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
Hedge Accounting
The Company elects hedge accounting under SSAP No. 86 and
SSAP No. 108 for certain qualifying derivative instruments. To qualify for hedge accounting, at inception, the Company formally documents the risk management objective and strategy for undertaking the hedging transaction. The documentation links a
specific derivative to a specific asset or liability on the Statutory Statements of Assets, Liabilities, and Capital and Surplus, identifies how the derivative is expected to offset the exposure to changes in the hedged item's fair value or
variability in cash flows attributable to the designated hedge risk, and the effectiveness testing methods to be used. Hedge effectiveness is formally assessed at inception and on a quarterly basis throughout the life of the designated hedging
relationships.
Hedge effectiveness is assessed using qualitative and
quantitative methods. Qualitative methods may include comparison of critical terms of the derivative to the hedged item. Quantitative methods include analysis of changes in fair value or cash flows associated with the hedge relationship. Hedge
effectiveness may be measured using either the dollar offset method or regression analysis. The dollar offset method compares changes in fair value or cash flows of the hedging instrument with changes in the fair value or cash flows of the hedged
item attributable to the hedged risk. Regression analysis is a statistical technique used to measure the relationships between the fair values or cash flows of a derivative and a hedged item and how each reacts to changes in the designated hedge
risk (i.e., interest rates, foreign currency rates).
A derivative instrument is either classified as an
effective hedge or an ineffective hedge. Entities must account for the derivative at fair value if deemed to be ineffective or becomes ineffective. For those derivatives qualifying as effective for hedge accounting under SSAP No. 86, the change in
the carrying value or cash flow of the derivative shall be recorded consistently with the way that changes in the carrying value or cash flows of the hedged item are recorded. For those derivative qualifying as effective for hedge accounting under
SSAP No. 108, the derivative is carried at fair value.
Foreign Currency Swaps
The Company utilizes foreign currency swaps to hedge cash
flows and applies hedge accounting. Specifically, the Company uses foreign currency swaps to hedge foreign currency and interest rate fluctuations on certain underlying foreign currency denominated fixed-maturity securities. The foreign currency
swaps are reported at amortized cost from the date hedge accounting is designated and deemed to be effective, which is consistent with the accounting for the bonds that are the subject of the hedge accounting transactions.
Interest Rate Swaps on Variable Annuity Insurance
Liabilities
The Company utilizes interest rate swaps (IRS) to hedge the interest rate risk on certain
variable annuity
guarantee benefits. These are accounted for as a cash flow hedge under SSAP No. 86 and a
fair value hedge under SSAP No. 108, as further discussed below.
Prior to January 1, 2020, the Company had IRS that hedge
the interest rate risk on certain variable annuity guarantee benefits held at amortized cost in accordance with SSAP No. 86. The initial book value of the IRS represented the book value created from inception until the designation of hedge
accounting. These IRS were held at amortized cost and changes were recognized to the extent they offset changes in the AG43 reserve for the hedged item due to interest rate movement. The initial book value and subsequent changes due to the hedged
item or realized gains or losses recorded under hedge accounting (hedge adjustment) are amortized over the duration of the hedge program, approximated by AG43 standard scenario revenues. The carrying value of the IRS with hedge adjustment, as well
as settled variation margin payable, were recorded within Other liabilities on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus, with changes in the IRS hedge adjustment recorded within Other Income on the Statutory
Statements of Operations. The carrying value of settled variation margin receivable was recorded within Other assets on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
The table below illustrates the hedge adjustment calculation under SSAP No. 86 for the year ended December 31,
2019:
|
|
|
|
|
|
|
2019 |
Initial book
value of the IRS created from inception until the designation of hedge accounting |
$ |
287 |
|
Amounts
offsetting changes in the AG43 reserve for the hedged item due to interest rate movements |
(62) |
|
Net losses from cumulative IRS sales after designation of hedge accounting (1)
|
608 |
|
Net receivable/payable
interest accrued |
(2) |
|
Cumulative
amortization |
(249) |
|
Carrying value of IRS hedge adjustment (2)
|
$ |
582 |
|
|
|
(1) In 2017, the Company restruck a portion of its IRS portfolio that hedges variable annuity liabilities. The restrike transaction
included selling a portion of the Company's IRS portfolio to consolidate its net positions. As a result of the transaction, the net losses disclosed here were recorded within the IRS hedge adjustment in line with hedge accounting
treatment as discussed above.
|
(2) The carrying value of the IRS hedge adjustment differs from that disclosed in Note 6 as the amount disclosed in Note 6 has been
adjusted for IRS positions no longer held by the Company.
|
Effective January 1, 2020, the Company de-designated its previous hedging relationship under
SSAP No. 86 and simultaneously designated the hedging relationship described above under SSAP No. 108. The remaining balance of the SSAP No. 86 hedge adjustment is recorded within Other liabilities on the Statutory Statements of Admitted Assets,
Liabilities, and Capital and Surplus, and will be amortized over the life of the former hedge program. See further details below.
The table below illustrates the hedge adjustment
calculation under SSAP No. 86:
|
|
|
|
|
|
Hedge adjustment balance
at January 01, 2020 |
582 |
Amount amortized into earnings at December 31,
2020 |
(69) |
|
Hedge adjustment balance
at December 31, 2020 |
$513 |
Effective January 1, 2020, the Company designated the
hedging relationship described above under SSAP No. 108. The hedged item consists of a portion of the Company's variable annuity block of business minimum benefit guarantees that are sensitive to interest rate movement. The hedged portion of the
block is determined on a monthly basis based on the percentage of the economic liability being hedged. The related hedging instrument is a portfolio of interest rate swap derivatives which follows a dynamic hedging strategy. Changes in interest
rates impact the present value of the future product cash flows.
The Company will recognize a net deferred asset or
liability within Other assets or Other liabilities, respectively, on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus for fluctuations in fair value that do not offset the changes in the liability. The deferred
asset or liability will then be amortized over the timeframe required under SSAP No. 108, paragraph 14, which is the Macaulay duration of guarantee benefit cash flows, capped at 10 years.
The hedge strategy is compliant with VM-21 Clearly Defined Hedge Strategy (CDHS)
requirements and meets all the criteria to be defined as an effective hedge relationship as required by SSAP No. 108. The Company entered into this hedging relationship effective January 1, 2020; no changes in hedging strategy have occurred since
inception. Hedge effectiveness is measured in accordance with SSAP No. 108 on a quarterly basis, both prospectively and retrospectively, and remains highly effective as of December 31, 2020.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
In accordance with SSAP No. 108, an amount equal to the net deferred asset and deferred
liability is allocated from Unassigned funds to Special surplus funds on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. As of December 31, 2020, this balance was $1,844. The following table shows the deferred
activity for the year ended December 31, 2020. The deferred balance as of January 1, 2020 represents the fair value of the IRS that were previously off balance sheet under SSAP No. 86.
|
|
|
|
|
|
Net deferred
balance as of January 1, 2020 |
$ |
1,435 |
|
Amortization |
(214) |
|
Additional
amounts deferred |
623 |
|
Net deferred balance as of December
31, 2020 |
$ |
1,844 |
|
The net deferred balance will amortize over the next 10 years, as shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization year |
Deferred assets |
Deferred liabilities |
|
|
|
|
|
2021 |
$ |
(37) |
|
$ |
244 |
|
|
2022 |
(37) |
|
244 |
|
|
2023 |
(37) |
|
244 |
|
|
2024 |
(38) |
|
244 |
|
|
2025 |
(38) |
|
244 |
|
|
2026 |
(38) |
|
243 |
|
|
2027 |
(38) |
|
243 |
|
|
2028 |
(38) |
|
243 |
|
|
2029 |
(38) |
|
243 |
|
|
2030 |
(34) |
|
$ |
25 |
|
|
Total |
$ |
(373) |
|
$ |
2,217 |
|
The company did not have other changes related to open derivatives removed
from SSAP No. 86 and captured in Scope of SSAP No. 108 for the year ended December 31, 2020. As of December 31, 2020, the fair value changes available for application under SSAP No. 108 is $927.
The Company did not have any hedging strategies identified as no longer
highly effective and did not terminate any hedging strategies during the year ended December 31, 2020.
Nonqualifying hedging
Futures and Options Contracts
The Company provides benefits through certain life and
annuity products which are linked to the fluctuation of various market indices, and certain variable annuity contracts that provide minimum guaranteed benefits. The Company has analyzed the characteristics of these benefits and has entered into
over-the-counter (OTC) option contracts, exchange-traded option (ETO) contracts, and exchange-traded futures contracts tied to an underlying index with similar characteristics with the objective to economically hedge these benefits. Management
monitors in-force amounts as well as option and futures contract values to ensure satisfactory matching and to identify unsatisfactory mismatches. If actual persistency deviated, management would purchase or sell option and futures contracts as
deemed appropriate or take other actions.
The OTC option contracts and ETO contracts are reported at
fair value in Derivative assets and Derivative liabilities on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. The fair value of the OTC options is derived internally and deemed by management to be reasonable via
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
performing an IPV process. The process of deriving internal
derivative prices requires the Company to calibrate Monte Carlo scenarios to actual market information. The calibrated scenarios are applied to derivative cash flow models to calculate fair value prices for the derivatives. The fair value of the
ETO contacts is based on quoted market prices. Incremental gains and losses from expiring options are included in Net realized capital gain (loss) on the Statutory Statements of Operations. The liability for the related policyholder benefits is
reported in Life policies and annuity contracts on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. The unrealized gain or loss on open OTC option contracts is recognized as a direct adjustment to Unassigned
surplus within the Statutory Statements of Capital and Surplus. Any unrealized gains or losses on open OTC option contracts are recognized as realized when the contracts mature (see Note 5 for further discussion).
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 as of the end of the reporting period. A derivative asset or liability and an offsetting variation
margin payable or receivable is recorded in Derivative assets or Derivative liabilities in the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus for the outstanding unpaid variation margin representing market movements
on the last trading day of the year.
Gains and losses are not considered realized until the
termination or expiration of the futures contract. Unrealized gains and losses on futures contracts are reflected in the Statutory Statements of Capital and Surplus in Unassigned surplus, within Change in unrealized capital gains (loss). Realized
gains and losses on futures contracts are included in the Statutory Statements of Operations, Net realized capital gain (loss), net of taxes and interest maintenance reserve.
In 2018, NAIC SAP issued an update to SSAP No. 86
clarifying treatment of futures gains and losses, see Note 3.
Interest Rate Swaps, Credit Default
Swaps, Total Return Swaps, and To Be Announced Securities
The Company utilizes IRS, credit default swaps (CDS), total
return swaps (TRS), and To Be Announced (TBA) securities to economically hedge market risks embedded in certain life and annuity products. The IRS, CDS, TRS and TBA securities are reported at fair value in Derivative assets or Derivative
liabilities on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. The fair value of the IRS, CDS, and TBA securities are derived using a third-party vendor software program and deemed by management to be reasonable.
Centrally cleared IRS fair values are obtained from the exchange on which they are traded. The fair value of the TRS is based on counterparty pricing and deemed by management to be reasonable. Changes in unrealized gains and losses on the swaps are
recorded as a direct adjustment to Unassigned surplus within the Statutory Statements of Capital and Surplus. Gains and losses on exchange cleared IRS are recorded as unrealized until the contracts mature or are disposed at which time they are
recorded as realized, subject to offset by IMR.
(l) Corporate-Owned Life Insurance
Corporate-owned life insurance (COLI) is recognized
initially as the amount of premiums paid. Subsequent measurement of the contract is based upon the amount that could be realized assuming the surrender of an individual-life policy (or certificate in a group policy), otherwise known as the cash
surrender value (CSV), in accordance with SSAP No. 21 – Other Admitted Assets (SSAP No. 21). Changes in CSV resulting from subsequent measurement of the contract are recognized as a component of Other income on the Statutory Statements
of Operations. The Company’s COLI policies are reported in Other assets on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.
(m) Borrowed Money
The Company is a member of the FHLB of Des Moines,
primarily for the purpose of participating in the FHLB’s mortgage collateralized loan advance program with short-term and long-term funding facilities. Members are required to purchase and hold a minimum amount of FHLB capital stock plus additional
stock
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
based on outstanding advances. Through its membership, the
Company has issued debt to the FHLB in exchange for cash advances. It is part of the Company’s strategy to utilize funds borrowed from the FHLB for operations and strategic initiatives. The Company’s current borrowings are not subject to prepayment
obligations.
Funds obtained from the FHLB and accrued interest are
included within Borrowed money within the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus in accordance with SSAP No. 15 – Debt and Holding Company Obligations. The collateral pledged to FHLB is reported as
admitted assets within the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus in accordance with admissibility testing under SSAP No. 30 – Unaffiliated Common Stock.
(n) Income Taxes
The Company and its subsidiaries file a consolidated
federal income tax return with AZOA and all of its wholly-owned subsidiaries. The consolidated tax allocation agreement stipulates that each company participating in the return will bear its share of the tax liability pursuant to certain tax
allocation elections under the Internal Revenue Code (IRC) and its related regulations and reimbursement will be in accordance with an intercompany tax reimbursement arrangement. The Company, and its insurance subsidiaries, generally will be paid
for the tax benefit of any of their tax attributes used by any member of the consolidated group.
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 in the Statutory Statements of Admitted Assets, Liabilities, and
Capital and Surplus. Any such change could significantly affect the amounts reported in the Statutory Statements of Operations. Management uses best estimates to establish reserves based on current facts and circumstances regarding tax exposure
items where the ultimate deductibility is open to interpretation. Quarterly, management evaluates the appropriateness of such reserves based on any new developments specific to their fact patterns. Information considered includes results of
completed tax examinations, Technical Advice Memorandums, and other rulings issued by the Internal Revenue Service or the tax courts.
The Company utilizes the asset and liability method of
accounting for income taxes. DTAs and deferred tax liabilities (DTLs), net of the nonadmitted portion 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. Gross DTAs and DTLs are measured using enacted tax rates and are considered for admitted tax asset status according to the admissibility test as set forth by the NAIC. Changes in DTAs and DTLs, including
changes attributable to changes in tax rates, are recognized as a component of Unassigned surplus on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.
(o) Separate Accounts
Separate account assets and liabilities are primarily funds
held for the exclusive benefit of variable and variable-indexed annuity contract holders for which investment income and investment gains and losses accrue directly to and the investment risk is borne by contract holders. Separate account assets
are reported at fair value in accordance with SSAP No. 56 – Separate Accounts (SSAP No. 56), with the exception of certain bonds, cash, cash equivalents, and investment income due and accrued. Certain assets that are allocated to the
index options for the Allianz Index Advantage Variable Annuity (VIA) are invested in bonds, cash, cash equivalents, and investment income due and accrued, and carried at amortized cost in accordance with the product filing requirements in the state
of Minnesota.
Amounts due from separate accounts primarily represent the difference between the surrender
value of the contracts and the Separate account liability as disclosed on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. This receivable represents the surrender fee that would be paid to the Company upon the
surrender of the policy or contract by the policyholder or contract holder as of December 31. Amounts charged to the contract holders for mortality and contract maintenance, and other
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
administrative services fees are included in income within Fees from separate accounts on
the Statutory 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. Transfers to (from)
separate accounts within the Statutory Statements of Operations primarily includes transfers for new premium and annuity considerations, benefit payments, surrender charge wear-off, realized and unrealized investment gains/losses, investment
income, and other contractholder behavior.
(p) Receivables
Receivable balances approximate estimated fair values. This
is based on pertinent information available to management as of year-end, including the financial condition and creditworthiness of the parties underlying the receivables. Any balances outstanding more than 90 days are nonadmitted on the Statutory
Statements of Admitted Assets, Liabilities, and Capital and Surplus.
(q) Reclassifications
Prior year balances have not been reclassified to conform
to the current year presentation.
(3) Accounting Changes and Corrections of Errors
Accounting Changes
Adoption of VM-21 Principle-Based
Reserving Methodology for Variable Annuities
Effective January 1, 2020, the Company adopted VM-21, as
the effective guidance under which the Company's variable and variable-indexed annuities reserves are calculated. Previously, the Company calculated these reserves using guidance found in AG43. VM-21 applies to business issued on or after January
1, 2017. Under VM-21, during 2017, 2018, and 2019, the Company elected to combine contracts subject to AG43 and VM-21 for purposes of calculating reserves. In 2019, the NAIC adopted revisions to both AG43 and VM-21, effective January 1, 2020. The
implementation of the 2019 revisions on January 1, 2020 resulted in a pre-tax increase of $1 to Policyholder liabilities for Life policies and annuity contracts within the Statutory Statements of Admitted Assets, Liabilities, and Capital and
Surplus and the corresponding decrease to surplus for the same amount is recorded through Change in reserve on account of change in valuation basis within the Statutory Statements of Capital and Surplus. The 2019 amendments allow an optional
phase-in of the increase which the Company did not elect.
Change in Reserves on Account of Change in Valuation Basis
In 2018, the Company changed its valuation basis for
certain fixed index annuities with guaranteed lifetime withdrawal benefit (GLWB) streams to utilize Type A rates for when GLWB streams extend into the account value equals zero phase. Previously the Company utilized a combination of Type A and Type
C rates for this benefit stream. The prior period impacts related to this change were recorded in 2018 and resulted in a pre-tax decrease of $342 to Policyholder liabilities for Life policies and annuity contracts within the Statutory Statements of
Admitted Assets, Liabilities, and Capital and Surplus. The corresponding increase to surplus for the same amount is recorded in Change in reserve on account of change in valuation basis within the Statutory Statements of Capital and Surplus.
Attained Age Based Income Payment Rate
Methodology
In 2018, the Company changed its methodology applied to
calculate reserves for attained age-based income payment rates for income policies that have not yet elected payments. The previous methodology calculated reserves for attained age payment rates coinciding with the current policy year and number of
years of deferral. The Company changed its methodology to reflect the current benefit available to the policyholder by utilizing the attained age and policy years of deferral coinciding with the next anniversary. Impacts related to prior periods
were recorded in 2018 and resulted in a pre-tax increase of $147 to Policyholder liabilities for Life policies and annuity contracts within the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. The corresponding
decrease to surplus of $117 is recorded in Change in accounting principle, net of tax within the Statutory Statements of Capital and Surplus.
Variable-Indexed Annuity Basic Adjusted
Reserve Calculation
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
In 2018, the Company changed its methodology used to
calculate the Basic Adjusted Reserve for variable-indexed annuities to utilize the guaranteed cap instead of the projected index option. The prior period impacts of the methodology change were recorded in 2018 and resulted in a pre-tax decrease of
$39 to Policyholder liabilities for Life policies and annuity contracts within the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. The corresponding increase to surplus of $31 is recorded in Change in accounting
principle, net of tax within the Statutory Statements of Capital and Surplus.
Recently Issued Accounting Standards – Adopted in 2020
Effective January 1, 2020, the Company adopted SSAP No.
108, the standard establishes statutory accounting principles to address certain limited derivative transactions hedging variable annuity guarantees subject to fluctuations as a result of interest rate sensitivity. The Company added all applicable
new disclosures required by the standard; see Note 2(k) for further information. There were no impacts to net income or surplus during the year ended December 31, 2020, as a result of this adoption.
In 2016, the NAIC adopted revisions to SSAP No. 51R, Life
Contracts and SSAP No. 54, Individual and Group Accident and Health Contracts, Issue Paper No. 154, Implementation of Principles-Based Reserving. These revisions relate to the adoption of the Valuation Manual and provides for principle-based
reserving for Life and Heath contracts, and are effective January 1, 2017. The Valuation Manual provides the following revisions: 1) VM-20, Requirements for Principle-Based Reserves, for Life Products, includes an optional three-year deferral. The
Company elected the deferral and adopted this update effective January 1, 2020. It applies to business issued on or after this date. 2) VM-21, see details disclosed above. 3) VM-22, Statutory Maximum Valuation Interest Rates for Income Annuities,
was effective January 1, 2018. It applies to annuitizations on contracts issued on or after that date. Because most annuitizations occur years after a contract has been issued, its impact on net income and surplus has not been material. 4.) VM-25,
Health Insurance Reserves Minimum Requirements, and VM-26, Credit Life and Disability Reserve Requirements, are not applicable as the Company does not issue these contracts.
In August 2019, the NAIC adopted SSAP No. 22R, Leases. This
revised standard is a substantive revision, reorganization, and clarification of SSAP 22. It adopts much of the language of US GAAP ASU 2016-02, Leases, but retains operating lease accounting for Statutory accounting. It was effective January 1,
2020, with early adoption permitted. The Company adopted these revisions effective January 1, 2020. There was no impact on net income or surplus during the year ended December 31, 2020, as a result of adopting the revisions.
In March 2020, the NAIC adopted INT 20-01, Reference Rate
Reform. The interpretation adopted the optional guidance outlined in Accounting Standards Update (ASU) 2020-04, Reference Rate Reform, for a limited period of time to ease the potential burden on accounting for reference rate reform. The practical
expedients outlined in the interpretation are for modifications solely related to reference rate reform and optionally suspends assessments for re-measuring a contract and dedesignating a hedge relationship. This interpretation is effective on the
date of adoption and expires on December 31, 2022. The Company adopted the optional guidance in this interpretation effective March 12, 2020. As of December 31, 2020, the Company has not made any modifications to financial assets or liabilities as
a result of reference rate reform.
In May 2020, the NAIC adopted revisions to SSAP No. 26R,
Bonds, which provides clarifying guidance when assessing other than temporary impairments (OTTI) for debt instruments that have been previously modified pursuant to SSAP No. 36, Troubled Debt Restructuring, or SSAP No. 103R, Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities. The revisions to SSAP No. 26R state subsequent OTTI assessments for debt instruments modified under SSAP No. 36 or SSAP No 103 will be based on the modified contractual terms and not revert
back to the original acquisition terms. These revisions were effective May 20, 2020 and were subsequently adopted by the Company. There was no impact on net income or surplus during the year ended December 31, 2020, as a result of adopting the
revisions.
In April, May, June, and August 2020, the NAIC adopted the
following interpretations (INT) in response to the COVID-19 pandemic:
•INT 2020-02, Extension of the 90-Day Rule for the Impact of COVID-19, extends a one-time optional extension of the nonadmission assessment
guidance for premiums and similar receivables due from
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
policyholders or agents. For receivables that were current
prior to the beginning of the declaration of a state of emergency by the U.S. federal government on March 13, 2020 or originated on or after March 13, 2020, insurers may continue to admit assets greater than 90 days past due. This INT is applicable
for the March 31, 2020, June 30, 2020, and September 30, 2020 financial statements and expired on December 30, 2020. This INT did not have an impact to the Company.
•INT 2020-03, Troubled Debt Restructuring Due to COVID-19, follows the inter-agency COVID-19 guidance issued by the federal and state prudential
banking regulators (and concurred by the Financial Accounting Standards Board) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Specifically, a modification of a mortgage loan or bank loan terms does not result in troubled debt
restructuring as long as the modification is in response to COVID-19, the borrower was current at the time of the modification, and the modification is short-term. In addition, insurers are not required to designate mortgage loans or bank loans
with deferrals granted due to COVID-19 as past due or report them as nonaccrual loans. This INT is effective for the period beginning March 1, 2020 and originally expired on December 31, 2020. In January 2021, the provisions in this INT were
extended updating the effective period to be the earlier of January 1, 2022 or the date that is 60 days after the date on which the national emergency declared by the President terminates. The Company implemented a loan modification program that
adhered to the requirements outlined in the INT for investments in commercial and residential mortgage loans.
•INT 2020-04, Mortgage Loan Impairment Assessment Due to COVID-19, defers the impairment assessment for bank loans, mortgage loans, and
investments which predominantly hold underlying mortgage loans and are impacted by forbearance or modifications in response to COVID-19. This INT was applicable for the March 31, 2020, June 30, 2020, and September 30, 2020 financial statements and
expired on December 30, 2020. This INT did not have a material impact to the Company.
•INT 2020-05, Investment Income Due and Accrued. This INT provides temporary relief guidance for assessing the collectability of interest income,
admissibility relief of accrued investment income 90 days past due, and clarifies how interest income should be recognized during a payment holiday. This INT is applicable for the June 30, 2020, and September 30, 2020 financial statements and
expired on December 30, 2020. This INT did not have a material impact to the Company.
•INT 2020-06, Participation in the 2020 TALF Program. This INT provides guidance for reporting Term Asset-Backed Securities Lending Facility
(TALF) loans for the duration of the 2020 TALF program. This INT did not impact the Company as the Company did not participate in this program.
•INT 2020-07, Troubled Debt Restructuring of Certain Debt Investments Due to COVID-19. This INT provides temporary guidance by allowing practical
expedients when assessing whether modifications made to debt securities (under SSAP No. 26R and SSAP No. 43R) due to COVID-19 are insignificant. Specifically, the guidance proposes restructurings in response to COVID-19 are considered to be
insignificant if the restructuring results in a 10% or less shortfall amount in the contractual amount due and does not extend the maturity of the investment by more than 3 years. This INT was effective for the period beginning March 1, 2020 and
originally expired on December 31, 2020. In January 2021, the provisions in this INT were extended updating the effective period to be the earlier of January 1, 2022 or the date that is 60 days after the date on which the national emergency
declared by the President terminates. This INT did not have a material impact to the Company.
•INT 2020-08, COVID-19 Premium Refunds, Rate Reductions and Policyholder Dividends. This INT provides guidance for returns or benefits to
policyholders. This INT did not impact the Company.
These INTs have an immaterial effect on the financial
statements as of December 31, 2020. The Company will continue to monitor these INTs and assess impacts until they are nullified.
In July 2020, the NAIC adopted INT 20-09, Basis Swaps as a
Result of the LIBOR Transition, to address the statutory accounting and reporting requirements for basis swaps issued by central clearing parties solely in response to the market-wide transaction away from the London Interbank Offered Rate (LIBOR)
and toward the Secured Oversight Financing Rate (SOFR). This INT allows basis swaps issued solely in response to reference rate reform to
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
be classified as derivatives used for “hedging” and
reported as admitted assets in the statutory financial statements. The INT is effective July 30, 2020 and was subsequently adopted by the Company. There was no impact on net income or surplus during the year ended December 31, 2020, as a result of
adopting the INT.
In November 2020, the NAIC adopted revisions to SSAP No.
43R, Loan-Backed and Structured Securities. The revisions reflect the updated NAIC designation category for residential and commercial mortgage-backed securities that utilize the financial modeling guidance. The revisions were effective November
12, 2020 and were subsequently adopted by the Company. There was no impact on net income or surplus during the year ended December 31, 2020, as a result of adopting the INT.
Recently Issued Accounting Standards – Adopted in 2019
In August 2019, the NAIC adopted revisions to SSAP No. 43R,
Loan-Backed and Structured Securities. These revisions clarify that when a security has different NAIC designations by lot, the reporting entity shall either report the entire investment in a single reporting line at the lowest NAIC designation
that would apply to a lot, or report the investment separately by purchase lot in the investment schedule. This update only affects investments with multiple lots at different ratings and would not require the entire schedule to be disclosed at a
lot level. These revisions are effective as of September 30, 2019. There was no impact to net income or surplus during the year ended December 31, 2019, as a result of adopting the revised standard.
Recently Issued Accounting Standards –
Adopted in 2018
In 2017, the NAIC adopted revisions to SSAP No. 69,
Statement of Cash Flow, by adopting ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments, in its entirety. The revisions provide guidance on the classification of eight different subject matter topics including: 1) Debt prepayment
or debt extinguishment costs, 2) Settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, 3) Contingent consideration
payments made after a business combination, 4) Proceeds from the settlement of insurance claims, 5) Proceeds from the settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, 6) Distributions received
from equity method investors, 7) Beneficial interests in securitization transactions, and 8) Separately identifiable cash flows and application of the predominance principle. The revisions are effective for fiscal years beginning after December 15,
2017, including interim periods within those fiscal years. The Company elected to apply the cumulative earnings approach in recording distributions from equity method investments in the statements of cash flow upon adoption of the revisions. There
was no impact to net income or surplus during the year ended December 31, 2018 as a result of adopting the revisions.
In 2017, the NAIC adopted revisions to SSAP No. 86. These
revisions clarify that variation margin changes should not be recognized as "settlement" until the derivative contract has terminated and instead should be recognized as an adjustment to the carrying value of the derivative contract as a separate
asset or liability. The revisions are effective January 1, 2018 with prospective application. Upon adoption, the Company reflected a prospective change in variation margin for all futures contracts as unrealized until sale, maturity, or expiration,
resulting in a pre-tax decrease of $8 to net income and no impact to surplus for the year ended December 31, 2018.
Recently Issued Accounting Standards – To Be Adopted
Not applicable.
Corrections of Errors
The Company records correction of errors in accordance with
SSAP No. 3 – Accounting Changes and Correction of Errors (SSAP No. 3). SSAP No. 3 prescribes that the correction of errors in previously issued Statutory Financial Statements will be reported as an adjustment to capital and surplus in
the period the error is detected. These errors are shown within Correction of errors, net of tax, on the Statutory Statements of Capital and Surplus. During the years ended December 31, 2020, 2019, and 2018, there were no Corrections of errors
recorded on the Statutory Statements of Capital and Surplus.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(4) Risk Disclosures
The following is a description of the significant risks
facing the Company and how it attempts to mitigate those risks:
(a) Credit Risk
Credit risk is the risk that issuers of fixed-income
securities, borrowers of mortgages on commercial real estate, or other parties with whom the Company has transactions, such as reinsurers and derivative counterparties, default on their contractual obligations, resulting in unexpected credit
losses.
The Company mitigates this risk by adhering to investment
policies and limits that provide portfolio diversification on an asset class, asset quality, creditor, and geographical basis, and by complying with investment limitations from applicable state insurance laws and regulations. The Company considers
all relevant objective information available in estimating the cash flows related to structured securities. The Company actively monitors and manages exposures, and determines whether any securities are impaired. The aggregate credit risk is
influenced by management’s risk/return preferences, the economic and credit environment, and the ability to manage this risk through liability portfolio management.
For derivative counterparties, the Company mitigates credit
risk by tracking and limiting exposure to each counterparty through limits that are reported regularly and, once breached, restricts further trades; establishing relationships with counterparties rated BBB+ and higher; and monitoring the CDS of
each counterparty as an early warning signal to cease trading when credit default swap spreads imply severe impairment in credit quality.
The Company executes Credit Support Annexes (CSA) with all
active and new counterparties which further limits credit risk by requiring counterparties to post collateral to a segregated account to cover any counterparty exposure. Additionally most transactions are cleared through a clearinghouse thereby
transferring counterparty risk from the bank to the clearinghouse that tends to have stronger credit. This often leads to increased collateralization and lower counterparty risk for the Company.
(b) Credit Concentration Risk
Credit concentration risk is the risk of increased exposure
to significant asset defaults (of a single security issuer); 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.
The Company’s Finance Committee, responsible for
asset/liability management (ALM) issues, recommends an investment policy to the Company’s Board of Directors (BOD) and approves the strategic asset allocation and accompanying investment mandates for an asset manager with respect to asset class.
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. Any exceptions require Chief Risk Officer approval and monitoring by the Risk Committee. Further, the Company performs a quarterly concentration risk calculation to ensure compliance with the State of
Minnesota insurance regulations.
(c) Liquidity Risk
Liquidity risk is the risk that unexpected timing or
amounts of cash needed will require liquidation of assets in a market that will result in a realized loss or an inability to sell certain classes of assets such that an insurer will be unable to meet its obligations and contractual guarantees.
Liquidity risk also includes the risk that in the event of a company liquidity crisis, refinancing is only possible at higher interest rates. Liquidity risk can be
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
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 economic hedging activities;
and (4) establishing liquidity facilities to provide additional liquidity. The Company has established liquidity risk limits, which are approved by the Company’s Risk Committee, and the Company monitors its liquidity risk regularly. The Company
also sets target levels for the liquid securities in its investment portfolio.
(d) Interest Rate Risk
Interest rate risk is the risk that movements in interest
rates or interest rate volatility will cause a decrease in the value of an insurer’s assets relative to the value of its liabilities and/or an unfavorable change in prepayment activity resulting in compressed interest margins.
The Company has an ALM strategy to align cash flows and
duration of the investment portfolio with policyholder liability cash flows and duration. The Company further limits interest rate risk on variable annuity guarantees through interest rate hedges. The Company monitors the economic and accounting
impacts of interest rate sensitivities on assets and liabilities regularly.
(e) Equity Market Risk
Equity market risk is the risk that movements in equity
prices or equity volatility will cause a decrease in the value of an insurer’s assets relative to the value of its liabilities.
The policy value of the fixed-indexed universal life,
fixed-indexed annuity, and variable-indexed annuity products is generally linked to equity market indices. The Company economically hedges this exposure with derivatives.
Variable annuity products guarantee minimum payments
regardless of market movements. The Company has adopted an economic hedging program to manage the equity risk of these products.
The Company monitors the impacts of equity sensitivities on
assets and liabilities regularly.
Basis risk is the risk that variable annuity hedge asset
values change unexpectedly relative to the value of the underlying separate account funds of the variable annuity contracts. Basis risk may arise from the Company’s inability to directly hedge the underlying investment options of the variable
annuity contracts. The Company regularly reviews and synchronizes fund mappings, product design features, hedge design, and manages funds line-up.
(f) Operational Risk
Operational risk is the risk of loss resulting from
inadequate or failed internal processes and systems, from human misbehavior or error, or from external events. Operational risk is comprised of the following seven risk categories: (1) external fraud; (2) internal fraud; (3) employment practices
and workplace safety; (4) clients/third-party, products and business practices; (5) damage to physical assets; (6) business disruption and system failure; and (7) execution, delivery, and process management. Operational risk is comprehensively
managed through a combination of core qualitative and quantitative activities.
The Operational Risk Management framework includes the
following key activities: (1) an Operational Risk Capital Model covering all material types of operational risks, under which the Company quantifies and regularly monitors operational risk; (2) loss data capture to create transparency and gather
information about losses that meet a designated threshold. Business owners are required to identify and resolve the root cause of operational loss events; and (3) an integrated risk and control system, a bottom-up risk assessment process for
significant operational risk scenarios, to proactively manage significant operational risk scenarios throughout the organization.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(g) Regulatory Change Risk
Regulatory change risk is the risk that regulatory changes
and imposed regulation may materially impact the Company's business model, sales levels, company financials and ability to effectively comply with regulations.
The Company actively monitors all regulatory changes and
participates in national and international discussions relating to legal, regulatory, and accounting changes. The Company maintains active membership with various professional and industry trade organizations. A formal process exists to review,
analyze, and implement new legislation as it is enacted.
(h) Rating Agency Risk
Rating agency risk is the risk that rating agencies change
their outlook or rating of the Company or a subsidiary of the Company. The rating agencies generally utilize proprietary capital adequacy models in the process of establishing ratings for the Company. The Company is at risk of changes in these
models and the impact that changes in the underlying business that it is engaged in can have on such models. To mitigate this risk, the Company maintains regular communications with the rating agencies and evaluates the impact of significant
transactions on such capital adequacy models and considers the same in the design of transactions to minimize the adverse impact of this risk. Rating agency capital is calculated and analyzed at least annually. Rating agency risk is also addressed
in the TRA process and on an ad hoc basis as necessary.
(i) Mortality/Longevity Risk
Mortality/longevity risk is the risk that mortality
experience is different than the life expectancy assumptions used by the Company to price its products.
The Company mitigates mortality risk primarily through
reinsurance, whereby the Company cedes a significant portion of its mortality risk to third parties. The Company also manages mortality risk through the underwriting process. Both mortality and longevity risks are managed through the review of life
expectancy assumptions and experience in conjunction with active product management.
(j) Lapse Risk
Lapse risk is the risk that actual lapse experience
evolves differently than the assumptions used for pricing and valuation exercises leading to a significant loss in Company value and/or income.
The Company mitigates this risk by performing sensitivity
analysis at the time of pricing to affect product design, adding Market Value Adjustments and surrender charges when appropriate, regular ALM analysis, and exercising management levers at issue, as well as post-issue as experience evolves.
Policyholder experience is monitored regularly.
(k) Cyber Security Risk
Cyber security risk is the risk of losses due to external
and/or internal attacks impacting the confidentiality, integrity, and/or availability of key systems, data, and processes reliant on digital technology. The Company has implemented preventative, detective, response, and recovery measures including
firewalls, intrusion detection and prevention, advanced malware detection, spyware and anti-virus software, email protection, network and laptop encryption, web content filtering, web application firewalls, and regular scanning of all servers and
network devices to identify vulnerabilities. Controls are implemented to prevent and review unauthorized access.
(l) Reinsurance Risk
Reinsurance risk is the risk that reinsurance companies
default on their obligation where the Company has ceded a portion of its insurance risk. The Company uses reinsurance to limit its risk exposure to certain business lines and to enable better capital management.
Reinsurance contracts do not relieve the Company from its
obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
The Company mitigates this risk by requiring certain
counterparties to meet thresholds related to the counterparty’s credit rating, exposure, or other factors. If the thresholds are not met by those counterparties, they are required to establish a trust or letter of credit backed by assets meeting
certain quality criteria. All arrangements are regularly monitored to determine whether trusts or letters of credit are sufficient to support the ceded liabilities and that their terms are being met. Also, the Company reviews the financial
standings and ratings of its reinsurance counterparties and monitors concentrations of credit risk to minimize its exposure to significant losses from reinsurer insolvencies regularly.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(5) Investments
(a) Bonds, Other Assets Receiving Bond Treatment, and Stocks
At December 31, the amortized cost, gross unrealized gains, gross
unrealized losses, and fair values of investments, excluding investments in affiliates, are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
|
Amortized cost |
|
Gross unrealized gains |
|
Gross unrealized losses |
|
Fair value |
Bonds: |
|
|
|
|
|
|
|
|
U.S.
government |
|
$ |
3,318 |
|
|
300 |
|
|
10 |
|
|
3,608 |
|
Agencies not backed by the full faith and credit of the U.S. government
|
|
3 |
|
|
1 |
|
|
— |
|
|
4 |
|
States and
political subdivisions |
|
9,536 |
|
|
2,335 |
|
|
2 |
|
|
11,869 |
|
Foreign
governments |
|
1,138 |
|
|
125 |
|
|
2 |
|
|
1,261 |
|
Corporate
securities |
|
70,975 |
|
|
12,730 |
|
|
90 |
|
|
83,615 |
|
Mortgage-backed
securities |
|
14,126 |
|
|
1,232 |
|
|
9 |
|
|
15,349 |
|
Collateralized
debt obligations |
|
17 |
|
|
12 |
|
|
— |
|
|
29 |
|
Total bonds |
|
99,113 |
|
|
16,735 |
|
|
113 |
|
|
115,735 |
|
Common stocks |
|
217 |
|
|
18 |
|
|
1 |
|
|
234 |
|
Preferred stocks |
|
41 |
|
|
2 |
|
|
— |
|
|
43 |
|
Total |
|
$ |
99,371 |
|
|
16,755 |
|
|
114 |
|
|
116,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
Amortized cost |
|
Gross unrealized gains |
|
Gross unrealized losses |
|
Fair value |
Bonds: |
|
|
|
|
|
|
|
|
U.S.
government |
|
$ |
3,014 |
|
|
123 |
|
|
8 |
|
|
3,129 |
|
Agencies not backed by the full faith and credit of the U.S. government
|
|
3 |
|
|
— |
|
|
— |
|
|
3 |
|
States and
political subdivisions |
|
9,722 |
|
|
1,486 |
|
|
3 |
|
|
11,205 |
|
Foreign
governments |
|
777 |
|
|
54 |
|
|
1 |
|
|
830 |
|
Corporate
securities |
|
70,048 |
|
|
7,385 |
|
|
68 |
|
|
77,365 |
|
Mortgage-backed
securities |
|
15,313 |
|
|
612 |
|
|
16 |
|
|
15,909 |
|
Collateralized
debt obligations |
|
16 |
|
|
13 |
|
|
— |
|
|
29 |
|
Total bonds |
|
98,893 |
|
|
9,673 |
|
|
96 |
|
|
108,470 |
|
Common stocks |
|
144 |
|
|
10 |
|
|
1 |
|
|
153 |
|
Preferred stocks |
|
29 |
|
|
2 |
|
|
— |
|
|
31 |
|
Total |
|
$ |
99,066 |
|
|
9,685 |
|
|
97 |
|
|
108,654 |
|
At December 31, 2020, amortized cost differed from the
carrying value of bonds on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus due to NAIC-6 rates bonds where the market value was lower than amortized cost. The total unrealized losses recorded by the Company for
these bonds was an insignificant amount as of December 31, 2020. At December 31, 2019, the Company did not have any NAIC-6 rated bonds for which amortized cost differed from carrying value.
The Company had NAIC-6 rated bonds with a statement value
of $3 and $4 as of December 31, 2020 and 2019, respectively. There was no interest due on bonds in default, which was excluded from investment income due and accrued as of December 31, 2020 and 2019.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
At December 31, 2020 and 2019, the Company had hybrid
securities with a carrying value of $30 and $34, respectively.
As of December 31, 2020 and 2019, investments with a
statement value of $23 and $30, respectively, were held on deposit with various insurance departments and in other trusts as required by statutory regulations.
The amortized cost and fair value of bonds and other assets
receiving bond treatment reported in the statutory Annual Statement Schedule D Part 1A at December 31, 2020, by contractual maturity, are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Carrying
value |
|
Fair value |
Due in 1 year or less |
$ |
1,812 |
|
|
$ |
1,828 |
|
Due after 1 year through
5 years |
12,471 |
|
|
13,585 |
|
Due after 5 years
through 10 years |
20,310 |
|
|
23,149 |
|
Due after 10 years
through 20 years |
23,496 |
|
|
29,053 |
|
Due after 20 years |
25,638 |
|
|
31,330 |
|
No maturity date |
1,243 |
|
|
1,412 |
|
Mortgage-backed and other structured securities
|
14,143 |
|
|
15,378 |
|
Total bonds and
other assets receiving bond treatment |
$ |
99,113 |
|
|
$ |
115,735 |
|
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.
Proceeds from sales of bonds includes sales, maturities,
paydowns, and other redemptions of bonds and other assets receiving bond treatment. Proceeds from sales of bonds for the years ended December 31 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
2018 |
Proceeds from sales |
|
$ |
8,677 |
|
|
15,892 |
|
|
9,476 |
|
Gross gains |
|
162 |
|
|
75 |
|
|
94 |
|
Gross losses |
|
28 |
|
|
34 |
|
|
63 |
|
Proceeds from sales of common stocks for the years ended
December 31 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
2018 |
Proceeds from sales |
|
$ |
147 |
|
|
111 |
|
|
172 |
|
Gross gains |
|
3 |
|
|
2 |
|
|
5 |
|
Gross losses |
|
2 |
|
|
2 |
|
|
— |
|
Proceeds from sales of preferred stocks for the years ended
December 31 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
2018 |
Proceeds from sales |
|
$ |
— |
|
|
2 |
|
|
— |
|
Gross gains |
|
— |
|
|
— |
|
|
— |
|
Gross losses |
|
— |
|
|
— |
|
|
— |
|
For the years ended December 31, 2020 and 2019, there were
138 and 93 CUSIPs sold, disposed, or otherwise redeemed as a result of a callable feature, respectively. The aggregate amount of investment income generated as a result of these transactions was $56 and $52 for 2020 and 2019, respectively.
The Company’s bond 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.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(b) Unrealized Investment Losses
To determine whether or not declines in fair value are
other than temporary, the Company performs a quarterly review of its entire combined investment portfolio, including investments held by subsidiaries, using quoted market prices by third-party sources. For further discussion, see Notes 2 and 6.
Unrealized losses and the related fair value of investments
held by the Company for the years ended December 31 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
|
12 months or less |
|
Greater than 12 months |
|
Total |
|
|
Fair value |
|
Unrealized losses |
|
Fair value |
|
Unrealized losses |
|
Fair value |
|
Unrealized losses |
Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government |
|
$ |
374 |
|
|
10 |
|
|
— |
|
|
— |
|
|
374 |
|
|
10 |
|
Agencies
not backed by the full faith and credit of the U.S. government |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Foreign
government |
|
51 |
|
|
2 |
|
|
— |
|
|
— |
|
|
51 |
|
|
2 |
|
States and
political subdivisions |
|
85 |
|
|
2 |
|
|
— |
|
|
— |
|
|
85 |
|
|
2 |
|
Corporate
securities |
|
2,085 |
|
|
78 |
|
|
578 |
|
|
12 |
|
|
2,663 |
|
|
90 |
|
Mortgage-backed
securities |
|
158 |
|
|
5 |
|
|
41 |
|
|
4 |
|
|
199 |
|
|
9 |
|
Total bonds |
|
2,753 |
|
|
97 |
|
|
619 |
|
|
16 |
|
|
3,372 |
|
|
113 |
|
Common stock |
|
7 |
|
|
— |
|
|
9 |
|
|
1 |
|
|
16 |
|
|
1 |
|
Total
temporarily impaired securities |
|
$ |
2,760 |
|
|
97 |
|
|
628 |
|
|
17 |
|
|
3,388 |
|
|
114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
12 months or less |
|
Greater than 12 months |
|
Total |
|
|
Fair value |
|
Unrealized losses |
|
Fair value |
|
Unrealized losses |
|
Fair value |
|
Unrealized losses |
Bonds: |
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
government |
|
$ |
292 |
|
|
6 |
|
|
292 |
|
|
2 |
|
|
584 |
|
|
8 |
|
Agencies
not backed by the full faith and credit of the U.S. government |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Foreign
government |
|
123 |
|
|
1 |
|
|
— |
|
|
— |
|
|
123 |
|
|
1 |
|
States and
political subdivisions |
|
87 |
|
|
3 |
|
|
— |
|
|
— |
|
|
87 |
|
|
3 |
|
Corporate
securities |
|
2,089 |
|
|
27 |
|
|
1,250 |
|
|
41 |
|
|
3,339 |
|
|
68 |
|
Mortgage-backed
securities |
|
1,241 |
|
|
12 |
|
|
140 |
|
|
4 |
|
|
1,381 |
|
|
16 |
|
Total bonds |
|
3,832 |
|
|
49 |
|
|
1,682 |
|
|
47 |
|
|
5,514 |
|
|
96 |
|
Common stock |
|
18 |
|
|
1 |
|
|
6 |
|
|
— |
|
|
24 |
|
|
1 |
|
Total
temporarily impaired securities |
|
$ |
3,850 |
|
|
50 |
|
|
1,688 |
|
|
47 |
|
|
5,538 |
|
|
97 |
|
As of December 31, 2020 and 2019, the number of investment
holdings that were in an unrealized loss position was 472 and 548, respectively, for bonds, and 13 and 19, respectively, for common stocks.
As of December 31, 2020 and 2019, of the total amount of
unrealized losses, $76, or 67.7%, and $80, or 83.2%, respectively, are related to unrealized losses on investment grade securities. Investment grade is defined as a security having an NAIC SVO credit rating of 1 or 2. 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 and does
not consider these investments to be other-than-temporarily impaired.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(c) Realized Investment Gains (Losses)
Net realized capital gains (losses) for the years ended
December 31 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
2018 |
Bonds |
$ |
(120) |
|
|
13 |
|
|
(81) |
|
Stocks |
2 |
|
|
— |
|
|
5 |
|
Mortgage Loans |
(34) |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
Derivatives |
202 |
|
|
1,062 |
|
|
(469) |
|
Other |
(1) |
|
|
(2) |
|
|
(1) |
|
Total
realized capital gains (losses) |
49 |
|
|
1,073 |
|
|
(546) |
|
Income tax benefit
(expense) on net realized gains (losses) |
— |
|
|
11 |
|
|
(4) |
|
Total
realized capital gains (losses), net of taxes |
49 |
|
|
1,084 |
|
|
(550) |
|
Net gains (losses)
transferred to IMR, net of taxes |
(93) |
|
|
31 |
|
|
(60) |
|
Net realized
gains (losses), net of taxes and IMR |
$ |
142 |
|
|
1,053 |
|
|
(490) |
|
(d) Net Investment Income
Major categories of net investment income for the years
ended December 31 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
2018 |
Interest: |
|
|
|
|
|
Bonds |
$ |
4,189 |
|
|
4,319 |
|
|
4,090 |
|
Mortgage
loans on real estate |
647 |
|
|
617 |
|
|
561 |
|
Policy loans |
12 |
|
|
11 |
|
|
11 |
|
Cash, cash
equivalents, and short-term investments |
7 |
|
|
23 |
|
|
25 |
|
Dividends: |
|
|
|
|
|
Stocks |
7 |
|
|
7 |
|
|
7 |
|
Investment
in subsidiaries |
50 |
|
|
67 |
|
|
70 |
|
Rental income on real
estate |
20 |
|
|
13 |
|
|
12 |
|
Derivatives |
(14) |
|
|
(109) |
|
|
(102) |
|
Other |
47 |
|
|
(7) |
|
|
(8) |
|
Gross
investment income |
4,965 |
|
|
4,941 |
|
|
4,666 |
|
Investment expenses |
(138) |
|
|
(146) |
|
|
(126) |
|
Net
investment income before amortization of IMR |
4,827 |
|
|
4,795 |
|
|
4,540 |
|
Amortization of IMR |
37 |
|
|
44 |
|
|
53 |
|
Net
investment income |
$ |
4,864 |
|
|
4,839 |
|
|
4,593 |
|
(e) Mortgage Loans on Real Estate
The Company's investment in mortgage loans on real estate
includes CMLs and RMLs at December 31, 2020 and 2019.
At December 31, 2020 and 2019, the Company's CML portfolio
includes concentrations exceeding 10% for the following states:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
Concentration Amount |
Concentration % |
|
Concentration Amount |
Concentration % |
California |
$ |
3,356 |
|
22.6 |
% |
|
$ |
3,364 |
|
24.5 |
% |
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
The maximum lending rates for CMLs made during 2020 and
2019 were 4.1% and 5.0%, respectively. The minimum lending rates for CMLs made during 2020 and 2019 were 2.2% and 2.8%, respectively. The maximum percentage of any one loan to the value of security at the time of the loan extension exclusive of
insured, guaranteed or purchased money mortgages was 84.8% and 74.6% during 2020 and 2019, respectively.
At December 31, 2020 and 2019, the Company's RML portfolio
includes concentrations exceeding 10% for the following states:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
Concentration Amount |
Concentration % |
|
Concentration Amount |
Concentration % |
California |
$ |
353 |
|
46.3 |
% |
|
$ |
240 |
|
49.2 % |
Florida |
$ |
80 |
|
10.4 |
% |
|
51 |
|
10.4 % |
The maximum lending rates for RMLs made during 2020 and
2019 was 8.3% and 9.1%. The minimum lending rates for RMLs made during 2020 and 2019 was 3.0% and 3.6%. The maximum percentage of any one loan to the value of security at the time of the loan extension exclusive of insured, guaranteed or purchased
money mortgages for RMLs was 93.3% and 94.1% during 2020 and 2019.
As of December 31, 2020 and 2019, there were no taxes,
assessments, or amounts advanced that were excluded from the mortgage loan investment total.
(1) Age Analysis
of Mortgage Loans
The following table presents an age analysis of the
Company's mortgage loan investments as of December 31, 2020 and 2019 by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
Residential |
Commercial |
|
Residential |
Commercial |
Current |
$ |
693 |
|
14,813 |
|
|
481 |
|
13,728 |
|
30-59 Days Past Due |
17 |
|
— |
|
|
— |
|
— |
|
60-89 Days Past Due |
2 |
|
— |
|
|
1 |
|
— |
|
90-179 Days Past Due |
4 |
|
— |
|
|
7 |
|
— |
|
180+ Days Past Due |
47 |
|
58 |
|
|
— |
|
— |
|
Total |
$ |
763 |
|
14,871 |
|
|
489 |
|
13,728 |
|
For mortgage loans investments greater than 90 days past
due and are still accruing interest, the recorded investment and interest accrued as of December 31, 2020 and 2019 is shown below by type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
Residential |
Commercial |
|
Residential |
Commercial |
Accruing Interest 90-179
Days Past Due |
|
|
|
|
|
Recorded
Investment |
$ |
2 |
|
— |
|
|
7 |
|
— |
|
Interest
Accrued |
— |
|
— |
|
|
— |
|
— |
|
Accruing Interest 180+
Days Past Due |
|
|
|
|
|
Recorded
Investment |
— |
|
— |
|
|
— |
|
— |
|
Interest
Accrued |
— |
|
— |
|
|
— |
|
— |
|
There were no mortgage loan investments for which interest
was reduced as of December 31, 2020 and 2019.
As of December 31, 2020 and 2019 there were no RMLs in
which the Company participated as a co-lender in a mortgage loan agreement. As of December 31, 2020 and 2019, for CML investments, the recorded investment for which the Company participated as a co-lender in a mortgage loan agreement was $1,979 and
$1,649, respectively.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(2) Impaired Mortgage
Loans
For the years ended December 31, 2020, and 2019, the
recorded investment in impaired CMLs was $25, and $3, respectively. These amounts also represent the average recorded investment in impaired mortgage loans for the year ended December 31, 2020, and 2019. There was no related allowance for credit
losses on these investments and the Company did not participate as a co-lender in the related mortgage loan agreement. In addition, the impaired CMLs were not in nonaccrual status and no interest income recognized using a cash-basis method of
accounting during the time that the loan was impaired. There was no recorded investment in impaired RMLs for the years ended December 31, 2020, and 2019.
There was $1 interest income recognized on impaired
mortgage loans as of December 31, 2020 and $0 interest income recognized in 2019 and 2018. The Company recognizes interest income on its impaired mortgage loans upon receipt of payment.
There were no mortgage loans derecognized as a result of
foreclosure as of December 31, 2020 and 2019.
(3) Credit Quality Indicators
The Company analyzes certain financing receivables for
credit risk by using specific credit quality indicators. The Company has determined the loan-to-value ratio and the debt service coverage ratio are the most reliable indicators in analyzing the credit risk of its CML portfolio. The loan-to-value
ratio is based on the Company’s internal valuation methodologies, including discounted cash flow analysis and comparative sales, depending on the characteristics of the property being evaluated. The debt service coverage ratio analysis is
normalized to reflect a 25 year amortization schedule.
The credit quality of CMLs as of December 31 is shown
below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Service Coverage Ratios |
|
|
|
|
2020: |
Greater than 1.4x |
|
1.2x – 1.4x |
|
1.0x – 1.2x |
|
Less than 1.0x |
|
Total |
|
Percent of Total |
Loan-to-value ratios: |
|
|
|
|
|
|
|
|
|
|
|
Less than 50% |
$ |
620 |
|
|
52 |
|
|
73 |
|
|
3,992 |
|
|
4,737 |
|
|
31.9 |
% |
50% – 60% |
359 |
|
|
132 |
|
|
770 |
|
|
4,477 |
|
|
5,738 |
|
|
38.6 |
% |
60% – 70% |
582 |
|
|
272 |
|
|
905 |
|
|
2,288 |
|
|
4,047 |
|
|
27.2 |
% |
70% – 80% |
35 |
|
|
102 |
|
|
163 |
|
|
— |
|
|
300 |
|
|
2.0 |
% |
80% – 90% |
— |
|
|
21 |
|
|
— |
|
|
— |
|
|
21 |
|
|
0.1 |
% |
90% – 100% |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
% |
Greater than
100% |
3 |
|
|
25 |
|
|
— |
|
|
— |
|
|
28 |
|
|
0.2 |
% |
Total |
$ |
1,599 |
|
|
604 |
|
|
1,911 |
|
|
10,757 |
|
|
14,871 |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt Service Coverage Ratios |
|
|
|
|
2019: |
Greater than 1.4x |
|
1.2x – 1.4x |
|
1.0x – 1.2x |
|
Less than 1.0x |
|
Total |
|
Percent of Total |
Loan-to-value ratios: |
|
|
|
|
|
|
|
|
|
|
|
Less than 50% |
$ |
4,805 |
|
|
146 |
|
|
39 |
|
|
30 |
|
|
5,020 |
|
|
36.6 |
% |
50% – 60% |
3,805 |
|
|
651 |
|
|
2 |
|
|
142 |
|
|
4,600 |
|
|
33.5 |
% |
60% – 70% |
2,536 |
|
|
1,016 |
|
|
113 |
|
|
33 |
|
|
3,698 |
|
|
26.9 |
% |
70% – 80% |
157 |
|
|
107 |
|
|
16 |
|
|
36 |
|
|
316 |
|
|
2.3 |
% |
80% – 90% |
54 |
|
|
8 |
|
|
— |
|
|
29 |
|
|
91 |
|
|
0.7 |
% |
90% – 100% |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
% |
Greater than
100% |
3 |
|
|
— |
|
|
— |
|
|
— |
|
|
3 |
|
|
— |
% |
Total |
$ |
11,360 |
|
|
1,928 |
|
|
170 |
|
|
270 |
|
|
13,728 |
|
|
100.0 |
% |
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
The Company has determined the delinquency status and the
loan-to-value ratio are the most reliable indicators in analyzing the credit risk of its RML portfolio. The loan-to-value ratio is based on the Company's internal valuation methodologies, including discounted cash flow analysis and comparative
sales, depending on the characteristics of the property being evaluated.
The loan-to-value ratios of RMLs as of December 31 are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
Total |
|
Percent of Total |
|
Total |
|
Percent of Total |
Loan-to-value ratios: |
|
|
|
|
|
|
|
Below 70% |
$ |
165 |
|
|
21.6 |
% |
|
$ |
111 |
|
|
22.7 |
% |
71% to 80% |
381 |
|
49.9 |
% |
|
178 |
|
36.4 |
% |
81% to 90% |
206 |
|
27.0 |
% |
|
175 |
|
35.8 |
% |
91% to 95% |
12 |
|
1.6 |
% |
|
25 |
|
5.1 |
% |
Above 95% |
— |
|
|
— |
% |
|
— |
|
|
— |
% |
Total |
$ |
764 |
|
|
100.0 |
% |
|
$ |
489 |
|
|
100.0 |
% |
(f) Loan-Backed Securities
SSAP No. 43R requires the bifurcation of impairment losses
on loan-backed or structured securities into interest and noninterest-related portions. The noninterest portion is the difference between the present value of cash flows expected to be collected from the security and the amortized cost basis of the
security. The interest portion is the difference between the present value of cash flows expected to be collected from the security and its fair value at the balance sheet date.
The Company had no loan-backed securities recognized in
OTTI for the years ended December 31, 2020, 2019, and 2018.
(g) Derivatives and Hedging Instruments
The Company uses exchange-traded and OTC derivative
instruments 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 that do not qualify for hedge accounting treatment are recorded
at fair value in the Statutory Financial Statements using valuation techniques further discussed in Note 6.
The Company has derivative contracts with financing
premium. The premium cost and fair value of derivative instruments with financing premium is shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
Undiscounted Future Premium Commitments |
Derivative FV with Premium Commitments |
Derivative FV Excluding Impact of Future
Settled Premiums |
As of December 31, 2019 |
$ |
(8) |
|
— |
|
9 |
|
As of December 31, 2020 |
— |
|
— |
|
— |
|
Derivatives held by the Company are designated as either a cash flow hedging
instrument (cash flow hedge) or nonqualified hedging instrument (nonqualifying strategies).
(1) Cash Flow Hedges
Foreign Currency Swaps on Debt Securities
Foreign currency swaps have notional amounts and maturity
dates equal and offsetting to the underlying debt securities and are determined to be highly effective as of December 31, 2020 and 2019.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(2) Fair Value Hedges
Interest Rate Swaps on Variable Annuity Insurance
Liabilities
IRS traded after June 2013 are centrally cleared through an
exchange. For IRS traded prior to June 2013 the IRS exposure was netted with other OTC derivatives upon settlement and were subject to the rules of the International Swaps and Derivatives Association, Inc. agreements. The fair values of the
collateral posted for OTC and exchange traded derivatives are discussed in the derivative collateral management section below.
Prior to January 1, 2020, the Company designated hedge
accounting for these IRS as a cash flow hedge under SSAP No. 86. The amounts previously recorded under the SSAP No. 86 relationship continue to be deferred and amortized over the life of the former hedge program. Effective January 1, 2020, the
Company de-designated its previous hedging relationship under SSAP No. 86 and simultaneously designated the hedging relationship under SSAP No. 108 as a fair value hedge. The relationship is deemed to be highly effective at December 31, 2020.
(3) Nonqualifying Strategies
Futures and Options Contracts
OTC options and ETO are cleared through the Options
Clearing Corporation, which operates under the jurisdiction of both the Securities and Exchange Commission (SEC) and the Commodities Futures Trading Commission. The fair values of the collateral posted for futures, OTC options, and ETO are
discussed in the derivative collateral management section below.
Interest Rate Swaps
The Company can receive the fixed or variable rate; IRS are
traded in varying maturities. The fair values of the collateral posted and variation margin for OTC and centrally cleared IRS are discussed in the derivative collateral management section below.
Credit Default Swaps
The CDS within the investment portfolios assume credit risk
from a single entity or referenced index for the purpose of synthetically replicating investment transactions. The Company can be required to pay or be the net receiver on the contract depending on the net position. Credit events include bankruptcy
of the reference and failure to pay by the reference. The notional amount is equal to the maximum potential future loss amount. The fair value of the collateral posted for centrally cleared CDS is discussed in the derivative collateral management
section below.
Total Return Swaps
The Company engages in the use of OTC TRS, which allow the parties to exchange cash flows based on a variable reference rate such as the three-month LIBOR and
the return of an underlying index. The fair value of the collateral posted for OTC TRS is discussed in the derivative collateral
management section below.
To Be Announced Securities
The Company uses OTC TBA forward contracts to gain exposure
to the investment risk and return of mortgage-backed securities. Typically, the price is agreed upon at the time of the contract and payment for such a contract is made at a specified future date. The fair value of the collateral posted for OTC TBA
securities is discussed in the derivative collateral management section below.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
The following table presents a summary of the aggregate
notional amounts and fair values of the Company’s derivative instruments reported on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus as of December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
|
|
|
Gross Fair Value |
|
|
|
Gross Fair Value |
|
|
Notional (1)
|
|
Assets |
|
Liabilities |
|
Notional (1)
|
|
Assets |
|
Liabilities |
Cash flow hedging
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency swaps |
|
$ |
1,341 |
|
|
56 |
|
|
(76) |
|
|
1,271 |
|
|
92 |
|
|
(16) |
|
IRS(2)
|
|
— |
|
|
— |
|
|
— |
|
|
3,491 |
|
|
— |
|
|
— |
|
Total cash
flow hedging instruments |
|
|
|
$ |
56 |
|
|
(76) |
|
|
|
|
92 |
|
|
(16) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value hedging
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
IRS |
|
$ |
2,709 |
|
|
472 |
|
|
(40) |
|
|
— |
|
|
— |
|
|
— |
|
Total fair
value hedging instruments |
|
|
|
$ |
472 |
|
|
(40) |
|
|
|
|
$ |
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualifying hedging
instruments |
|
|
|
|
|
|
|
|
|
|
|
|
OTC options |
|
$ |
51,430 |
|
|
3,433 |
|
|
(3,013) |
|
|
87,987 |
|
|
2,257 |
|
|
(1,958) |
|
ETO |
|
15,224 |
|
|
136 |
|
|
(96) |
|
|
8,151 |
|
|
31 |
|
|
(41) |
|
TBA securities |
|
1,331 |
|
|
1 |
|
|
(1) |
|
|
1,331 |
|
|
— |
|
|
(1) |
|
IRS |
|
2,631 |
|
|
9 |
|
|
(18) |
|
|
1,049 |
|
|
10 |
|
|
(20) |
|
Futures |
|
19,312 |
|
|
— |
|
|
— |
|
|
26,776 |
|
|
— |
|
|
— |
|
TRS |
|
11,653 |
|
|
7 |
|
|
(18) |
|
|
8,148 |
|
|
1 |
|
|
(13) |
|
Total
nonqualifying hedging instruments |
|
|
|
3,586 |
|
|
(3,146) |
|
|
|
|
2,299 |
|
|
(2,033) |
|
Total derivative
instruments |
|
|
|
$ |
4,114 |
|
|
(3,262) |
|
|
|
|
2,391 |
|
|
(2,049) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) Notional amounts are presented on an absolute basis.
|
(2) The IRS amounts subject to SSAP No. 86 hedge accounting represent amounts that existed when hedge accounting was designated and still exist as of the end of the reporting
period. The fair values for such instruments are not included herein as they are not recorded on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.
|
Derivative Collateral Management
The Company manages derivative collateral for the general
account and separate account combined and separate collateral for exchange-traded and OTC derivatives. The total collateral posted for exchange-traded derivatives at December 31, 2020 and 2019, had a fair value of $2,476 and $2,151, respectively,
and is included in Bonds on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus and recorded at amortized cost. The Company retains ownership of the exchange-traded collateral, but the collateral resides in an account
designated by the exchange. The collateral is subject to specific exchange rules regarding rehypothecation. The total collateral posted for OTC derivatives at December 31, 2020 and 2019, had a fair value of $3,054 and $1,200, respectively, and is
included in Bonds on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. The Company posts collateral to OTC counterparties based upon exposure amounts. The Company retains ownership of the OTC collateral.
(h) Offsetting Assets and Liabilities
The Company elects to disclose derivative assets and
liabilities eligible for offset under SSAP No. 64 – Offsetting and Netting of Assets and Liabilities on a gross basis on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus in accordance with the provisions set
forth in SSAP No. 86. This treatment is consistent with the Company’s historical reporting presentation.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(i) Securities Lending
The Company loaned securities with a carrying value of
$2,212 and $2,322 and a fair value of $2,610 and $2,603 as of December 31, 2020 and 2019, respectively. The aggregate amount of collateral received through securities lending at December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value |
|
|
2020 |
|
2019 |
Cash |
|
|
|
|
Open |
|
2,587 |
|
|
2,337 |
|
30 days or
less |
|
— |
|
|
— |
|
31 to 60
days |
|
— |
|
|
— |
|
61 to 90
days |
|
— |
|
|
— |
|
Greater than
90 days |
|
— |
|
|
— |
|
Subtotal |
|
2,587 |
|
|
2,337 |
|
Securities received |
|
86 |
|
|
328 |
|
Total
collateral received |
|
$ |
2,673 |
|
|
2,665 |
|
The aggregate amount of cash collateral reinvested through
securities lending at December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
|
Amortized cost |
|
Fair value |
|
Amortized cost |
|
Fair value |
Open |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
30 days or less |
|
950 |
|
|
950 |
|
|
1,070 |
|
|
1,070 |
|
31 to 60 days |
|
955 |
|
|
955 |
|
|
548 |
|
|
548 |
|
61 to 90 days |
|
66 |
|
|
66 |
|
|
— |
|
|
— |
|
91 to 120 days |
|
— |
|
|
— |
|
|
66 |
|
|
66 |
|
121 to 180 days |
|
143 |
|
|
143 |
|
|
344 |
|
|
344 |
|
181 to 365 days |
|
473 |
|
|
473 |
|
|
309 |
|
|
309 |
|
Greater than 1 year |
|
— |
|
|
— |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
collateral reinvested |
|
$ |
2,587 |
|
|
2,587 |
|
|
2,337 |
|
|
2,337 |
|
As of December 31, 2020 and 2019, the Company had no
borrowings outstanding from collateral securities lending.
Reinvested collateral is recorded in Other invested assets
on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. The amount and type of reinvested collateral at December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
Cash and cash
equivalents |
$ |
1,630 |
|
|
1,339 |
|
Short-term investments |
957 |
|
|
998 |
|
Total |
$ |
2,587 |
|
|
2,337 |
|
(j) Reverse Repurchase Agreements
The Company participates in both bilateral and tri-party
repos. As of December 31, 2020 and 2019, the Company did not sell or acquire any securities that resulted in default. The Company did not recognize a liability to return cash collateral as of December 31, 2020 and 2019.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
All collateral received, as of December 31, 2020 and 2019,
were bonds with a designated NAIC-1 rating. Further information related to repos for the years ended December 31, 2020 and 2019, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of year end |
|
2020 |
|
2019 |
1. Maturity
|
|
|
|
|
a. Overnight
|
$ |
430 |
|
|
1,482 |
|
b. 2 Days to 1 Week
|
— |
|
|
— |
|
2. Collateral Pledged and Securities Acquired Under Repo
|
|
|
|
a. Cash Collateral Pledged - Secured Borrowing
|
$ |
430 |
|
|
1,482 |
|
b. Fair Value of Securities Acquired Under Repo - Secured Borrowing
|
435 |
|
|
1,494 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Amount |
|
2020 |
|
2019 |
1. Maturity |
|
|
|
|
a. Overnight |
$ |
2,878 |
|
|
1,482 |
|
b. 2 Days to 1
Week |
— |
|
|
|
2. Collateral
Pledged and Securities Acquired Under Repo |
|
|
|
a. Cash
Collateral Pledged - Secured Borrowing |
$ |
2,878 |
|
|
1,482 |
|
b. Fair Value
of Securities Acquired Under Repo - Secured Borrowing |
2,906 |
|
|
1,494 |
|
(k) Non-insurance SCA Investments
A summary of the Company’s SSAP No. 97 – Investments in Subsidiary, Controlled and Affiliated Entities, non-insurance SCA investments, including their respective asset value and NAIC filing information, as of December 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SCA Name |
|
Gross Asset |
|
Non-Admitted Asset |
|
Net Admitted Assets |
|
NAIC Filing Date |
|
NAIC Filing Type |
|
NAIC Filing Balance |
|
Re-submission Required? |
AZLPF |
|
$ |
777 |
|
|
— |
|
|
777 |
|
|
6/10/2020 |
|
S2 |
|
792 |
|
|
N |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
777 |
|
|
— |
|
|
777 |
|
|
XXX |
|
XXX |
|
792 |
|
|
XXX |
(l) FHLB Agreements
The Company held Class A FHLB membership stock of $10 and
$10 at December 31, 2020 and 2019 and activity stock of $60 and $40 at December 31, 2020 and 2019, respectively. The Company has a fully collateralized borrowings with a balance of $1,500 and $1,000 as of December 31, 2020 and 2019 which is
recorded in Borrowed money on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. All FHLB transaction activity occurs in the Company's general account.
Securities collateral pledged to FHLB at December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
Carrying value |
|
$ |
1,336 |
|
|
875 |
|
Fair value |
|
1,736 |
|
|
1,118 |
|
The maximum of collateral pledged to FHLB during the year ended December 31
was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
Carrying value |
|
$ |
1,994 |
|
|
1,745 |
|
Fair value |
|
2,254 |
|
|
2,244 |
|
As of December 31, 2020 and 2019, the Company had $1,500
and $1,000, respectively, in total borrowing capacity under its agreement with the FHLB. The maximum amount of aggregate borrowing from FHLB during the years ended December 31, 2020 and 2019 was $2,000 and $2,000, respectively. Borrowings are not
subject to prepayment penalties. Outstanding borrowings as of December 31, 2020, were issued on various dates ranging from October 17, 2016 to December 18, 2020 and interest rates on those borrowings range from 0.43% to 3.20%. Interest paid on
borrowings was $15 for the year ended December 31, 2020.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(m) Restricted Assets
As of December 31, 2020 and 2019, the Company had the
following restricted assets, including assets pledged to others as collateral:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Restricted |
|
|
|
|
|
Percentage |
|
|
Total general account |
|
Total from prior year |
|
Increase (decrease) |
|
Total current year
admitted restricted |
|
Gross restricted to total assets |
|
Admitted restricted to total admitted assets |
Collateral held under
security lending arrangements |
|
$ |
2,673 |
|
|
2,665 |
|
|
8 |
|
|
2,673 |
|
|
1.5 |
% |
|
1.5 |
% |
FHLB Capital Stock |
|
70 |
|
|
50 |
|
|
20 |
|
|
70 |
|
|
— |
|
|
— |
|
On deposit with states |
|
4 |
|
|
4 |
|
|
— |
|
|
4 |
|
|
— |
|
|
— |
|
On deposit with other
regulatory bodies |
|
19 |
|
|
26 |
|
|
(7) |
|
|
19 |
|
|
— |
|
|
— |
|
Pledged as collateral to
FHLB (including assets backing funding agreements) |
|
1,336 |
|
|
875 |
|
|
461 |
|
|
1,336 |
|
|
0.8 |
|
|
0.8 |
|
Derivative collateral |
|
2,266 |
|
|
2,063 |
|
|
203 |
|
|
2,266 |
|
|
1.3 |
|
|
1.3 |
|
Total restricted
assets |
|
$ |
6,368 |
|
|
5,683 |
|
|
685 |
|
|
6,368 |
|
|
3.6 |
% |
|
3.6 |
% |
(n) Low Income Housing Tax Credits
As of December 31, 2020 the Company had various LIHTC
investments with a range of 5 to 13 remaining years of unexpired tax credits and no required holding period.
The amount of tax credits and other tax benefits recognized
during the years ended December 31, 2020, 2019 and 2018 is $38, $29, and $20, respectively.
The balance of the investment recognized in the Statutory
Statements of Admitted Assets, Liabilities, and Capital and Surplus for the years ended December 31, 2020 and 2019 is $403 and $339, respectively.
Additionally, the Company's LIHTC investments require a
commitment of capital. The Company has open capital commitments of $199 and $171 at December 31, 2020 and 2019, respectively, which is recorded as an unfunded commitment liability of $199 and $147, as of December 31, 2020 and 2019. LIHTC
commitments are considered an open capital commitment beginning when then Company formally commits to fund the LIHTC, but they are not recorded as an unfunded commitment asset and liability until the Company has begun funding the LIHTC.
(o) 5GI Securities
As of December 31, 2020 and 2019, details regarding the
Company's 5GI securities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
Number of Securities |
Aggregate Book Adjusted Carrying Value |
Aggregate Fair Value |
|
Number of Securities |
Aggregate Book Adjusted Carrying Value |
Aggregate Fair Value |
Bonds |
— |
|
$ |
— |
|
— |
|
|
1 |
|
$ |
40 |
|
44 |
|
Loan-backed and
structured securities |
1 |
|
1 |
|
1 |
|
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
1 |
|
$ |
1 |
|
1 |
|
|
1 |
|
$ |
40 |
|
44 |
|
(6) Fair Value Measurements
SSAP No. 100R – Fair Value 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.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
Level 2 – Valuations derived from
techniques that utilize observable inputs, other than quoted prices included in Level 1, which are observable for the asset or liability either directly or indirectly, such as:
(a) Quoted prices for similar assets or liabilities in
active markets.
(b) Quoted prices for identical or similar assets or
liabilities in markets that are not active.
(c) Inputs other than quoted prices that are observable.
(d) Inputs that are derived
principally from or corroborated by observable market data by correlation or other means.
Level 3 – Valuations derived from
techniques in which the significant inputs are unobservable. Level 3 fair values reflect the Company’s own assumptions about the assumptions that market participants would use in pricing the asset or liability (including assumptions about risk).
The Company has analyzed the valuation techniques and
related inputs, evaluated its assets and liabilities reported at fair value, and determined an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Based on the results of this evaluation and
investment class analysis, each financial asset and liability was classified into Level 1, 2, or 3.
The following presents the assets and liabilities measured
at fair value on a recurring basis and their corresponding level in the fair value hierarchy at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
|
Level 1 |
|
Level 2 (a)
|
|
Level 3 |
|
Total |
Assets
at fair value: |
|
|
|
|
|
|
|
|
Bonds |
|
$ |
— |
|
|
4 |
|
|
— |
|
|
4 |
|
Common stocks |
|
$ |
163 |
|
|
— |
|
|
1 |
|
|
164 |
|
|
|
|
|
|
|
|
|
|
Derivative
assets |
|
136 |
|
|
4,036 |
|
|
7 |
|
|
4,179 |
|
Separate
account assets |
|
21,789 |
|
|
11,408 |
|
|
— |
|
|
33,197 |
|
Total assets
reported at fair value |
|
22,088 |
|
|
15,448 |
|
|
8 |
|
|
37,544 |
|
Liabilities
at fair value: |
|
|
|
|
|
|
|
|
Derivative
liabilities |
|
96 |
|
|
3,161 |
|
|
18 |
|
|
3,275 |
|
Separate
account derivative liabilities |
|
— |
|
|
10,332 |
|
|
— |
|
|
10,332 |
|
Total
liabilities reported at fair value |
|
$ |
96 |
|
|
13,493 |
|
|
18 |
|
|
13,607 |
|
|
|
|
|
|
|
|
|
|
(a) The Company does not have any assets or liabilities measured at net asset value (NAV) that are included in Level 2 within this
table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
Level 1 |
|
Level 2 (a)
|
|
Level 3 |
|
Total |
Assets
at fair value: |
|
|
|
|
|
|
|
|
Common stocks |
|
101 |
|
|
— |
|
|
1 |
|
|
102 |
|
Derivative
assets |
|
31 |
|
|
2,394 |
|
|
1 |
|
|
2,426 |
|
Separate
account assets |
|
22,766 |
|
|
3,265 |
|
|
— |
|
|
26,031 |
|
Total assets
reported at fair value |
|
22,898 |
|
|
5,659 |
|
|
2 |
|
|
28,559 |
|
Liabilities
at fair value: |
|
|
|
|
|
|
|
|
Derivative
liabilities |
|
41 |
|
|
2,014 |
|
|
13 |
|
|
2,068 |
|
Separate
account derivative liabilities |
|
— |
|
|
2,531 |
|
|
— |
|
|
2,531 |
|
Total
liabilities reported at fair value |
|
$ |
41 |
|
|
4,545 |
|
|
13 |
|
|
4,599 |
|
|
|
|
|
|
|
|
|
|
(a) The Company does not have any assets or liabilities measured at NAV that are included in Level 2 within this table.
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
The following is a discussion of the methodologies used to
determine fair values for the assets and liabilities listed in the above table. These fair values represent an exit price (i.e., what a buyer in the marketplace would pay for an asset in a current sale or charge to transfer a liability). The
Company has not made changes to valuation techniques in 2020.
(a) Valuation of Bonds and Unaffiliated Stock
The fair value of bonds is based on quoted market prices in
active markets when available. Based on the market data, the securities are categorized into asset class, and based on the asset class of the security, appropriate pricing applications, models and related methodology, and standard inputs are
utilized to determine what a buyer in the marketplace would pay for the security in a current sale. When quoted prices are not readily available or in an inactive market, standard inputs used in the valuation models, listed in approximate order of
priority, include, but are not limited to, benchmark yields, reported trades, Municipal Securities Rulemaking Board reported trades, Nationally Recognized Municipal Securities Information Repository material event notices, broker-dealer quotes,
issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. In some cases, including private placement securities and certain difficult-to-price securities, internal pricing models may be
used that are based on market proxies. Internal pricing models based on market spread and U.S. Treasury rates are used to value private placement holdings. The primarily unobservable input used in the discounted cash flow models for states and
political subdivisions, foreign government, and corporate bonds is a corporate index option adjusted spread (OAS). CDOand certain mortgage-backed securities are priced by a third-party vendor and the Company internally reviews the valuation for
reasonableness. The Company does not have insight into the specific inputs; however, the key unobservable inputs would generally include default rates.
Generally, U.S. Treasury securities and exchange-traded
stocks are included in Level 1. Most bonds for which prices are provided by third-party pricing sources are included in Level 2, because the inputs used are market observable. Bonds for which prices were obtained from broker quotes, certain bonds
without active trading markets and private placement securities that are internally priced are included in Level 3.
The fair value of unaffiliated common stocks is based on
quoted market prices in active markets when available and included in Level 1. When quoted prices are not readily available or in an inactive market, the Company arrives at fair value utilizing internal pricing models based on available market
inputs or obtains valuations from third party brokers or investment managers. Such investments may be categorized in Level 2 or Level 3. The primary unobservable input used to value common stock are indicative quotes received from third-party
vendors.
(b) Valuation of Derivatives
Active markets for OTC options do not exist. The fair value
of OTC options is derived internally, by calculating their expected discounted cash flows, using a set of calibrated, risk-neutral stochastic scenarios, including a market data monitor, a market data model generator, a stochastic scenario
calibrator, and the actual asset pricing calculator. The valuation results are reviewed by Management via the Pricing Committee. OTC options that are internally priced, foreign currency swaps, CDS, TBA securities, and IRS are included in Level 2,
because they use market observable inputs. TRS are included in Level 3 because they use valuation techniques in which significant inputs are unobservable. The fair value of ETOs and futures are based on quoted market prices and are generally
included in Level 1.
Certain derivatives are priced using external third-party
vendors. The Company has controls in place to monitor the valuations of these derivatives. Using market observable inputs, IRS prices are derived from a third-party source and are independently recalculated internally and reviewed for
reasonableness at the position level on a monthly basis. TRS prices are obtained from the respective counterparties. These prices are also internally recalculated and reviewed for reasonableness at the position level on a monthly basis. The Company
does not have insight into the specific inputs used by third-party vendors; however, the key unobservable input would generally include the spread.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(c) Valuation of Separate Account Assets and Separate
Account Derivative Liabilities
Separate account assets and Separate account derivative
liabilities, with the exception of certain bonds, cash, cash equivalents, and investment income due and accrued, are carried at fair value, which is based on the fair value of the underlying assets which are described throughout this note. Funds in
the separate accounts are primarily invested in variable investment option funds with the following investment types: bond, domestic equity, international equity, or specialty. Variable investment option funds are included in Level 1 because their
fair value is based on quoted prices in active, observable markets. 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 bonds, short-term
investments and derivatives, that portion could be classified within Level 2 or Level 3). Certain bonds, cash, and cash equivalents, along with related accrued investment income, carried at amortized cost within the separate account have an
amortized cost of $12,704 and $8,607 as of December 31, 2020 and 2019, respectively, and a fair value of $13,689 and $8,928 as of December 31, 2020 and 2019, respectively. Separate account assets carried at amortized cost are included in the table
in section 6(h) below.
(d) 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2020 |
Transfers into
Level 3 |
Transfers out
of Level 3 |
Total gains
and (losses)
included in
Net Income |
Total gains
and (losses)
included in
Surplus |
Purchases, issuances, sales and settlements |
December 31, 2020 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stocks |
1 |
|
— |
|
— |
|
— |
|
— |
|
— |
|
1 |
|
TRS assets |
1 |
|
— |
|
— |
|
960 |
|
6 |
|
(960) |
|
7 |
|
Total Level 3
Assets |
2 |
|
— |
|
— |
|
960 |
|
6 |
|
(960) |
|
8 |
|
|
|
|
|
|
|
|
|
TRS liabilities |
(13) |
|
— |
|
— |
|
(568) |
|
(5) |
|
568 |
|
(18) |
|
Total Level 3
Liabilities |
$ |
(13) |
|
— |
|
— |
|
(568) |
|
(5) |
|
568 |
|
(18) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1, 2019 |
Transfers into
Level 3 |
Transfers out
of Level 3 |
Total gains
and (losses)
included in
Net Income |
Total gains
and (losses)
included in
Surplus |
Purchases, issuances, sales and settlements |
December 31, 2019 |
|
|
|
|
|
|
|
|
Bonds |
$ |
3 |
|
|
— |
|
(3) |
|
— |
|
— |
|
— |
|
|
|
|
|
|
|
|
|
Common stocks |
2 |
|
— |
|
|
— |
|
— |
|
(1) |
|
1 |
|
TRS assets |
96 |
|
— |
|
— |
|
633 |
|
(95) |
|
(633) |
|
1 |
|
Total Level 3
Assets |
101 |
|
— |
|
— |
|
630 |
|
(95) |
|
(634) |
|
2 |
|
|
|
|
|
|
|
|
|
TRS liabilities |
(23) |
|
— |
|
— |
|
(129) |
|
10 |
|
129 |
|
(13) |
|
Total Level 3
Liabilities |
$ |
(23) |
|
— |
|
— |
|
(129) |
|
10 |
|
129 |
|
(13) |
|
(e) Transfers
The Company reviews its fair value hierarchy
classifications annually. Transfers between levels occur when there are changes in the observability of inputs and market activity.
All transfers into Level 3 were a result of observable
inputs no longer being considered reliable or could no longer be validated against an alternative source. The transfers out of Level 3 were a result of securities no longer being carried at fair value as a result of new availability of reliable
observable inputs or the ability to validate market price of the security against an alternative source.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(f) Sensitivity of Fair Value Measurements to Changes
in Unobservable Inputs
Bonds: The primary unobservable input used in the discounted cash flow models for states and political subdivisions, foreign government, and corporate bonds is a corporate index option
adjusted spread (OAS). The corporate index OAS used is based on a security's sector, rating, and average life. A significant increase (decrease) of the corporate index OAS in isolation could result in a decrease (increase) in fair value.
CDO and certain mortgage-backed securities are priced by a
third-party vendor and the Company internally reviews the valuation for reasonableness. The Company does not have insight into the specific inputs used; however, the key unobservable inputs would generally include default rates. A significant
increase (decrease) in default rates in isolation could result in an decrease (increase) in fair value.
Common stocks: The primary unobservable input used to value common stock are indicative quotes received from third-party vendors. A significant increase (decrease) in the indicative
quotes in isolation could result in a decrease (increase) in fair value.
Derivative assets and liabilities: The TRS are priced by a third-party vendor and the Company internally reviews the valuation for reasonableness. The Company does not have
insight into the specific inputs used; however, the key unobservable input would generally include the spread. For a long position, a significant increase (decrease) in the spread used in the fair value of the TRS in isolation could result in
higher (lower) fair value. For a short position, a significant increase (decrease) in the spread used in the fair value of the TRS in isolation could result in lower (higher) fair value.
(g) Estimates
The Company has been able to estimate the fair value of all
financial assets and liabilities.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(h) Aggregate Fair Value of Financial Instruments
The following tables present the carrying amounts and fair
values of all financial instruments at December 31 (b):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
|
|
|
|
|
Fair Value |
|
|
Aggregate Fair Value |
|
Admitted Assets/
Carrying Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Financial
Assets |
|
|
|
|
|
|
|
|
|
|
Bonds |
|
$ |
115,710 |
|
|
99,088 |
|
|
4,995 |
|
|
93,714 |
|
|
17,001 |
|
Preferred
stocks, unaffiliated |
|
43 |
|
|
41 |
|
|
— |
|
|
— |
|
|
43 |
|
Common
stocks, unaffiliated |
|
234 |
|
|
234 |
|
|
163 |
|
|
— |
|
|
71 |
|
Mortgage
loans on real estate |
|
17,117 |
|
|
15,634 |
|
|
— |
|
|
— |
|
|
17,117 |
|
Cash
equivalents |
|
878 |
|
|
878 |
|
|
448 |
|
|
430 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Derivative
assets |
|
4,179 |
|
|
4,114 |
|
|
136 |
|
|
4,036 |
|
|
7 |
|
Securities
lending reinvested collateral assets |
|
2,587 |
|
|
2,587 |
|
|
— |
|
|
2,587 |
|
|
— |
|
Other
invested assets |
|
757 |
|
|
757 |
|
|
— |
|
|
23 |
|
|
734 |
|
COLI |
|
653 |
|
|
653 |
|
|
— |
|
|
653 |
|
|
— |
|
Separate
account assets |
|
46,886 |
|
|
45,901 |
|
|
22,732 |
|
|
24,154 |
|
|
— |
|
Financial
Liabilities |
|
|
|
|
|
|
|
|
|
|
Deposit-type
contracts |
|
$ |
5,395 |
|
|
4,749 |
|
|
— |
|
|
— |
|
|
5,395 |
|
Other
investment contracts |
|
103,518 |
|
|
95,083 |
|
|
— |
|
|
— |
|
|
103,518 |
|
Borrowed
money |
|
1,516 |
|
|
1,501 |
|
|
— |
|
|
— |
|
|
1,516 |
|
Derivative
liabilities |
|
3,275 |
|
|
3,262 |
|
|
96 |
|
|
3,161 |
|
|
18 |
|
Payable for
securities lending |
|
2,587 |
|
|
2,587 |
|
|
— |
|
|
2,587 |
|
|
— |
|
Payable for
securities |
|
199 |
|
|
199 |
|
|
— |
|
|
— |
|
|
199 |
|
|
|
|
|
|
|
|
|
|
|
|
Separate
account liabilities |
|
46,886 |
|
|
45,901 |
|
|
22,732 |
|
|
24,154 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
(b) The Company does not have any assets or liabilities measured at NAV that are included in Level 2 in this table. In addition,
the Company has no assets or liabilities for which it is not practicable to measure at fair value.
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 |
|
|
|
|
|
|
Fair Value |
|
|
Aggregate Fair Value |
|
Admitted Assets/
Carrying Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
Financial
Assets |
|
|
|
|
|
|
|
|
|
|
Bonds |
|
$ |
106,848 |
|
|
97,269 |
|
|
3,864 |
|
|
87,898 |
|
|
15,086 |
|
Preferred
stocks, unaffiliated |
|
31 |
|
|
29 |
|
|
— |
|
|
— |
|
|
31 |
|
Common
stocks, unaffiliated |
|
152 |
|
|
152 |
|
|
101 |
|
|
— |
|
|
51 |
|
Mortgage
loans on real estate |
|
15,241 |
|
|
14,217 |
|
|
— |
|
|
— |
|
|
15,241 |
|
Cash
equivalents |
|
1,863 |
|
|
1,863 |
|
|
361 |
|
|
1,502 |
|
|
— |
|
Short-term
investments |
|
22 |
|
|
22 |
|
|
— |
|
|
22 |
|
|
— |
|
Derivative
assets |
|
2,426 |
|
|
2,391 |
|
|
31 |
|
|
2,394 |
|
|
1 |
|
Securities
lending reinvested collateral assets |
|
2,337 |
|
|
2,337 |
|
|
— |
|
|
2,337 |
|
|
— |
|
Other
invested assets |
|
655 |
|
|
655 |
|
|
— |
|
|
25 |
|
|
630 |
|
COLI |
|
625 |
|
|
625 |
|
|
— |
|
|
625 |
|
|
— |
|
Separate
account assets |
|
34,959 |
|
|
34,638 |
|
|
23,090 |
|
|
11,869 |
|
|
— |
|
Financial
Liabilities |
|
|
|
|
|
|
|
|
|
|
Deposit-type
contracts |
|
$ |
5,380 |
|
|
4,936 |
|
|
— |
|
|
— |
|
|
5,380 |
|
Other
investment contracts |
|
102,903 |
|
|
93,649 |
|
|
— |
|
|
— |
|
|
102,903 |
|
Borrowed
money |
|
1,006 |
|
|
1,002 |
|
|
— |
|
|
— |
|
|
1,006 |
|
Derivative
liabilities |
|
2,068 |
|
|
2,049 |
|
|
41 |
|
|
2,014 |
|
|
13 |
|
Payable for
securities lending |
|
2,337 |
|
|
2,337 |
|
|
— |
|
|
2,337 |
|
|
— |
|
Payable for
securities |
|
147 |
|
|
147 |
|
|
— |
|
|
— |
|
|
147 |
|
Other
liabilities |
|
(1,436) |
|
|
(241) |
|
|
— |
|
|
(1,436) |
|
|
— |
|
Separate
account liabilities |
|
34,959 |
|
|
34,638 |
|
|
23,090 |
|
|
11,869 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
(b) The Company does not have any assets or liabilities measured at NAV that are included in Level 2 in this table. In addition,
the Company has no assets or liabilities for which it is not practicable to measure at fair value.
|
A description of the Company’s valuation techniques for
financial instruments not reported at fair value and categorized within the fair value hierarchy is shown below:
Valuation of Preferred Stock
The fair value of unaffiliated preferred stocks is based on
quoted market prices in active markets. When available, such investments are included in Level 1. When quoted prices are not readily available or in an inactive market, the Company arrives at fair value utilizing internal pricing models based on
available market inputs. Such investments may be categorized in Level 2 or Level 3.
Valuation of FHLB Stock
FHLB stock, included in Common stocks, is not traded in an
active market and is categorized in Level 3. FHLB stock is carried at cost, which approximates fair value unless it is impaired, based on provisions within the Company’s FHLB agreement that allow for return of outstanding shares of FHLB stock at
the Company’s cost basis.
Valuation of Mortgage Loans on Real Estate
The fair value of commercial mortgage loans on real estate
is calculated by analyzing individual loans and assigning ratings to each loan based on a combination of loan-to-value ratios and debt service coverage ratios. Fair value is determined based on these factors as well as the contractual cash flows of
each loan and the current market interest rates for similar loans. The fair value of residential mortgage loans on real estate is calculated by discounting estimated cash flows, with discount rates based on current market conditions.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
Valuation of Cash Equivalents
Cash equivalents are comprised of money market mutual
funds, cash equivalent bonds, and reverse repurchase agreements. The fair value of money market mutual funds are based on quoted market prices in active markets and included in Level 1. Reverse repurchase prices are provided by third-party pricing
sources and included in Level 2, because the inputs used to determine fair value are market observable.
Valuation of Short-term Investments
Short-term investments are comprised of bonds due in one
year or less. The fair value of bonds is determined in line with bonds above.
Valuation of Securities Lending Reinvested Collateral Assets
Collateral held from securities lending agreements is
primarily comprised of short-term and long-term highly liquid fixed-maturity securities. Fair values are determined and classified within the fair value hierarchy in a manner consistent with the method utilized to determine the fair value of
similar securities (fixed-income securities, equity securities, cash and cash equivalents) held within the Company’s general account investment portfolio.
Valuation of Other Invested Assets
Other invested assets include LIHTC investments, limited
partnership investments, loans to affiliates, and restricted stock unit (RSU) assets. As there is no observable market data on which to calculate fair value of the LIHTC investment balances, the fair value is set equal to carrying value. Limited
partnership investments are recorded using the cost method in line with SSAP No. 48 – Joint Ventures,
Partnerships and Limited Liability Companies using unobservable inputs. Loans to affiliates are carried at cost; due to the lack of
an active market, the current carrying value is the only market price at which the transaction could be settled, the Company believes cost approximates fair value. Due to the use of unobservable inputs, LIHTC investments, limited partnership
investments, and loans to affiliates are categorized as Level 3. RSU assets tied to the share price of Allianz SE stock but does not participate in an active market; given this, it is categorized as Level 2.
Valuation of COLI
The COLI policies held by the Company are carried at their respective cash surrender values,
which approximates fair value. The cash surrender value of the policies is based on the value of the underlying assets, which are regularly priced utilizing observable inputs. The COLI asset is included within Other assets on the Statutory
Statements of Admitted Assets, Liabilities, and Capital and Surplus. At December 31, 2020 and 2019, the cash surrender value in an investment vehicle is $653 and $625, respectively, and is allocated into the following categories based on primary
underlying investment characteristics:
|
|
|
|
|
|
|
|
|
|
2020 |
2019 |
Bonds |
80.0 |
% |
64.0 |
% |
Stocks |
20.0 |
% |
36.0 |
% |
Valuation of Deposit-Type Contracts
Fair values of deposit-type contracts are based on
discounted cash flows using internal inputs, including the discount rate and consideration of the Company’s own credit standing and a risk margin for actuarial inputs.
Valuation of Other Investment Contracts
Other investment contracts are included within Life
policies and annuity contracts within the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. Other investment contracts include certain reserves related to deferred annuities and other payout annuities that may include
life contingencies, but do not have significant mortality risk due to substantial periods certain. Fair values are based on discounted cash flows using internal inputs, including the discount rate and consideration of the Company’s own credit
standing and a risk margin for market inputs.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
Valuation of Borrowed Money
The fair value of the FHLB borrowing is calculated on a
discounted cash flow basis. Each position includes a monthly interest rate, a maturity payment amount, and a maturity date. The interest and maturity payments are projected as of the valuation date, and the expected cash flows are discounted using
the valuation date swap curve.
Valuation of Payable for Securities Lending
Securities lending payable is set equal the to the cash
collateral received. Due to the short-term nature of these loans, the carrying value is deemed to approximate fair value.
Valuation of Payable for Securities
Included in Payable for securities is the LIHTC investments
unfunded commitment liability. As there is no observable market data on which to calculate fair value of the LIHTC investment unfunded commitment asset and liability, fair value is set equal to carrying value, and the balance is categorized as
Level 3.
Valuation of Other Liabilities
Prior to the adoption of SSAP No. 108 as of January 1,
2020, other liabilities included the IRS hedge adjustment for certain variable annuity guarantee benefits. The carrying value was equal to the initial book value of the IRS created from inception until the designation of hedge accounting in
addition to subsequent changes due to the hedged item or realized gains or losses recorded under hedge accounting. The fair value represents the fair value of the IRS that are not recorded on the Statutory Statements of Admitted Assets,
Liabilities, and Capital and Surplus due to the hedge accounting designation, and is determined in line with item (b) above. See Note 2(k) for further discussion of the Company's hedge accounting treatment.
Valuation of Separate Account Liabilities
The fair value of separate account liabilities approximates
the fair value of separate account assets.
(7) Mortgage Notes Payable
In 2004, the Company obtained an $80 mortgage loan from an
unrelated third-party for the Company’s headquarters. In 2005, the Company agreed to enter into a separate loan agreement with the same counterparty in conjunction with the construction of an addition to the Company’s headquarters of $65. This loan
was funded in 2006 and combined with the existing mortgage. As of December 31, 2020 and 2019, the combined loan had a balance of $41 and $51, respectively, and is reported within Real estate on the Statutory Statements of Admitted Assets,
Liabilities, and Capital and Surplus. This 20 year, fully amortizing loan has an interest rate of 5.52%, with a maturity date of August 1, 2024. The level principal and interest payments are made monthly. The loan allows for prepayment; however, it
is accompanied by a make-whole provision.
Interest expense for all loans is $3, $3, and $4, in 2020,
2019, and 2018, respectively, and is presented in Net investment income on the Statutory Statements of Operations.
The future principal payments required under the loan are
as follows:
|
|
|
|
|
|
2021 |
$ |
10 |
|
2022 |
11 |
|
2023 |
12 |
|
2024 |
8 |
|
2025 |
— |
|
2026 and beyond |
— |
|
Total |
$ |
41 |
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(8) Electronic Data Processing Equipment and Software (EDP)
EDP at December 31 and the changes in the balance for the years then ended are
as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
|
|
|
|
|
|
|
Servers,
computers and peripherals depreciation |
— |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
amortization |
7 |
|
|
8 |
|
|
|
|
|
Net EDP balance, by
major classes of assets: |
|
|
|
Servers,
computers and peripherals |
2 |
|
|
1 |
|
Software |
38 |
|
|
31 |
|
Net EDP balance |
40 |
|
|
32 |
|
Nonadmitted |
(38) |
|
|
(31) |
|
Net admitted
EDP balance |
$ |
2 |
|
|
1 |
|
The Company has a gross EDP asset of $73 and $63 and
accumulated depreciation and amortization of $(71) and $(62) at December 31, 2020 and 2019, respectively. Servers, computers and peripherals are depreciated over the lesser of their useful life or three years and the net balance is nonadmitted.
Software is amortized over the lesser of their useful life or five years. Nonoperating software is nonadmitted and operating software is admitted to the extent it meets the criteria defined in SSAP No. 16R - Electronic Data Processing Equipment and
Software.
(9) Income Taxes
(a) Deferred Tax Assets and Liabilities
The components of the net DTA or net DTL are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
|
Ordinary |
|
Capital |
|
Total |
Total gross deferred tax assets
|
$ |
911 |
|
|
52 |
|
|
963 |
|
Statutory valuation allowance adjustments
|
— |
|
|
— |
|
|
— |
|
Adjusted gross deferred tax assets
|
911 |
|
|
52 |
|
|
963 |
|
Deferred tax assets nonadmitted
|
— |
|
|
— |
|
|
— |
|
Subtotal net admitted deferred tax assets
|
911 |
|
|
52 |
|
|
963 |
|
Deferred tax liabilities
|
(684) |
|
|
(6) |
|
|
(690) |
|
Net admitted deferred tax assets (liabilities)
|
$ |
227 |
|
|
46 |
|
|
273 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
Ordinary |
|
Capital |
|
Total |
Total gross deferred tax assets
|
$ |
922 |
|
|
21 |
|
|
943 |
|
Statutory valuation allowance adjustments
|
— |
|
|
— |
|
|
— |
|
Adjusted gross deferred tax assets
|
922 |
|
|
21 |
|
|
943 |
|
Deferred tax assets nonadmitted
|
— |
|
|
— |
|
|
— |
|
Subtotal net admitted deferred tax assets
|
922 |
|
|
21 |
|
|
943 |
|
Deferred tax liabilities
|
(713) |
|
|
(6) |
|
|
(719) |
|
Net admitted deferred tax assets (liabilities)
|
$ |
209 |
|
|
15 |
|
|
224 |
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
Ordinary |
|
Capital |
|
Total |
Total gross deferred tax assets
|
$ |
(11) |
|
|
31 |
|
|
20 |
|
Statutory valuation allowance adjustments
|
— |
|
|
— |
|
|
— |
|
Adjusted gross deferred tax assets
|
(11) |
|
|
31 |
|
|
20 |
|
Deferred tax assets nonadmitted
|
— |
|
|
— |
|
|
— |
|
Subtotal net admitted deferred tax assets
|
(11) |
|
|
31 |
|
|
20 |
|
Deferred tax liabilities
|
29 |
|
|
(1) |
|
|
28 |
|
Net admitted deferred tax assets (liabilities)
|
$ |
18 |
|
|
30 |
|
|
48 |
|
The amount of admitted adjusted gross DTAs allowed under each component of
SSAP No. 101 – Income Taxes (SSAP No. 101) as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
|
Ordinary |
|
Capital |
|
Total |
Federal income taxes paid
in prior years recoverable through loss carrybacks (11.a) |
$ |
— |
|
|
3 |
|
|
3 |
|
Adjusted gross DTAs expected to be realized after application of the threshold
limitations
|
— |
|
|
— |
|
|
— |
|
Lesser of 11.b.i or 11.b.ii:
|
— |
|
|
— |
|
|
— |
|
Adjusted gross DTAs expected to be realized following the balance sheet date
(11.b.i.)
|
419 |
|
|
49 |
|
|
468 |
|
Adjusted gross DTAs allowed per limitation threshold (11.b.ii)
|
N/A |
|
N/A |
|
1,108 |
|
Lesser of 11.b.i or 11.b.ii
|
419 |
|
|
49 |
|
|
468 |
|
Adjusted gross DTAs offset by gross DTLs (11.c)
|
492 |
|
|
— |
|
|
492 |
|
Deferred tax assets admitted
|
$ |
911 |
|
|
52 |
|
|
963 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
Ordinary |
|
Capital |
|
Total |
Federal income taxes paid
in prior years recoverable through loss carrybacks (11.a) |
$ |
— |
|
|
5 |
|
|
5 |
|
Adjusted gross DTAs expected to be realized after application of the threshold
limitations
|
— |
|
|
— |
|
|
— |
|
Lesser of 11.b.i or 11.b.ii:
|
— |
|
|
— |
|
|
— |
|
Adjusted gross DTAs expected to be realized following the balance sheet date
(11.b.i.)
|
473 |
|
|
16 |
|
|
489 |
|
Adjusted gross DTAs allowed per limitation threshold (11.b.ii)
|
N/A |
|
N/A |
|
1,159 |
|
Lesser of 11.b.i or 11.b.ii
|
473 |
|
|
16 |
|
|
489 |
|
Adjusted gross DTAs offset by gross DTLs (11.c)
|
449 |
|
|
— |
|
|
449 |
|
Deferred tax assets admitted
|
$ |
922 |
|
|
21 |
|
|
943 |
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
Ordinary |
|
Capital |
|
Total |
Federal income taxes paid
in prior years recoverable through loss carrybacks (11.a) |
$ |
— |
|
|
(2) |
|
|
(2) |
|
Adjusted gross DTAs expected to be realized after application of the threshold
limitations
|
— |
|
|
— |
|
|
— |
|
Lesser of 11.b.i or 11.b.ii:
|
— |
|
|
— |
|
|
— |
|
Adjusted gross DTAs expected to be realized following the balance sheet date
(11.b.i.)
|
(54) |
|
|
33 |
|
|
(21) |
|
Adjusted gross DTAs allowed per limitation threshold (11.b.ii)
|
N/A |
|
N/A |
|
(52) |
|
Lesser of 11.b.i or 11.b.ii
|
(54) |
|
|
33 |
|
|
(21) |
|
Adjusted gross DTAs offset by gross DTLs (11.c)
|
43 |
|
|
— |
|
|
43 |
|
Deferred tax assets admitted
|
$ |
(11) |
|
|
31 |
|
|
20 |
|
Ratios used for threshold limitation as of December 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
|
|
|
2020 |
|
2019 |
|
Change |
Ratio percentage used to
determine recovery period and threshold limitation amount |
705 |
% |
|
756 |
% |
|
(51) |
% |
Amount of adjusted
capital and surplus used to determine recovery period threshold limitation |
$ |
7,386 |
|
|
7,729 |
|
|
(343) |
|
Impact of tax planning strategies on the determination of net admitted
adjusted gross DTAs is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
|
Ordinary |
|
Capital |
|
Total |
Net admitted adjusted gross DTAs - (percentage of total net admitted adjusted
gross DTAs)
|
— |
% |
|
93.7 |
% |
|
93.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
Ordinary |
|
Capital |
|
Total |
Net admitted adjusted gross DTAs - (percentage of total net admitted adjusted
gross DTAs)
|
— |
% |
|
77.6 |
% |
|
77.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change |
|
Ordinary |
|
Capital |
|
Total |
Net admitted adjusted gross DTAs - (percentage of total net admitted adjusted
gross DTAs)
|
— |
% |
|
16.1 |
% |
|
16.1 |
% |
The Company’s tax planning strategies do not include the use of reinsurance.
(b) Unrecognized Deferred Tax Liabilities
There are no temporary differences for which DTLs are not recognized.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(c) Current and Deferred Income Taxes
The significant components of income taxes incurred (i.e.
Current income tax expense) include:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
2020-2019
Change |
|
2019-2018
Change |
|
2020 |
|
2019 |
|
2018 |
|
|
Current year federal
tax expense (benefit) - ordinary income |
$ |
18 |
|
|
773 |
|
|
(51) |
|
|
(755) |
|
|
824 |
|
Current year foreign
tax expense (benefit) - ordinary income |
— |
|
|
— |
|
|
— |
|
|
— |
|
|
— |
|
Subtotal |
18 |
|
|
773 |
|
|
(51) |
|
|
(755) |
|
|
824 |
|
Current year tax
expense - net realized capital gains (losses) |
— |
|
|
(11) |
|
|
4 |
|
|
11 |
|
|
(15) |
|
Federal and foreign
income taxes incurred |
$ |
18 |
|
|
762 |
|
|
(47) |
|
|
(744) |
|
|
809 |
|
DTAs and DTLs consist of the following major components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
Deferred tax assets |
|
2020 |
|
2019 |
|
Change |
Ordinary: |
|
|
|
|
|
|
Unrealized
losses |
|
$ |
— |
|
|
11 |
|
|
(11) |
|
Deferred
acquisition costs |
|
169 |
|
|
153 |
|
|
16 |
|
Expense
accruals |
|
63 |
|
|
72 |
|
|
(9) |
|
Policyholder
reserves |
|
666 |
|
|
676 |
|
|
(10) |
|
Fixed assets |
|
— |
|
|
— |
|
|
— |
|
Nonadmitted
assets |
|
13 |
|
|
10 |
|
|
3 |
|
Subtotal |
|
911 |
|
|
922 |
|
|
(11) |
|
Statutory
valuation allowance adjustment |
|
— |
|
|
— |
|
|
— |
|
Nonadmitted
ordinary deferred tax assets |
|
— |
|
|
— |
|
|
— |
|
Admitted
ordinary tax assets |
|
911 |
|
|
922 |
|
|
(11) |
|
|
|
|
|
|
|
|
Capital: |
|
|
|
|
|
|
Impaired
assets |
|
51 |
|
|
20 |
|
|
31 |
|
Unrealized
losses |
|
1 |
|
|
1 |
|
|
— |
|
Subtotal |
|
52 |
|
|
21 |
|
|
31 |
|
Statutory
valuation allowance adjustment |
|
— |
|
|
— |
|
|
— |
|
Nonadmitted
capital deferred tax assets |
|
— |
|
|
— |
|
|
— |
|
Admitted capital
deferred tax assets |
|
52 |
|
|
21 |
|
|
31 |
|
Admitted
deferred tax assets |
|
$ |
963 |
|
|
943 |
|
|
20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
Deferred tax
liabilities |
|
2020 |
|
2019 |
|
Change |
Ordinary: |
|
|
|
|
|
|
Investments |
|
$ |
(54) |
|
|
(56) |
|
|
2 |
|
Fixed assets |
|
(5) |
|
|
(5) |
|
|
— |
|
Policyholder
reserves |
|
(445) |
|
|
(534) |
|
|
89 |
|
Software
capitalization |
|
(7) |
|
|
(5) |
|
|
(2) |
|
Unrealized
gains |
|
(79) |
|
|
(113) |
|
|
34 |
|
Other |
|
(94) |
|
|
— |
|
|
(94) |
|
Subtotal |
|
(684) |
|
|
(713) |
|
|
29 |
|
|
|
|
|
|
|
|
Capital: |
|
|
|
|
|
|
Unrealized
gains |
|
(6) |
|
|
(6) |
|
|
— |
|
|
|
|
|
|
|
|
Subtotal |
|
(6) |
|
|
(6) |
|
|
— |
|
Deferred tax liabilities |
|
$ |
(690) |
|
|
(719) |
|
|
29 |
|
Net deferred tax
assets (liabilities) |
|
$ |
273 |
|
|
224 |
|
|
49 |
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
The realization of the DTAs is dependent upon the Company’s
ability to generate sufficient taxable income in future periods. Based on historical results and the prospects for future current operations, management anticipates that it is more likely than not that future taxable income will be sufficient for
the realization of the remaining DTAs.
The Coronavirus Aid, Relief, and Economic Security Act,
(CARES Act of 2020) was enacted on March 27, 2020, thereby allowing net operating losses (NOLs) arising in tax years beginning after December 31, 2017, and before January 1, 2021 (e.g., NOLs incurred in 2018, 2019, or 2020 by a calendar-year
taxpayer) to be carried back to each of the five tax years preceding the tax year of such loss.
In computing taxable income, life insurance companies are
allowed a deduction attributable to their life insurance and accident and health reserves. The Tax Act of 2017 significantly changed the methodology by which these reserves are computed for tax purposes. The changes are effective for tax years
beginning after 2017 and are subject to a transition rule that spreads the additional income tax liability over the subsequent eight years beginning in 2018. Due to complexities in the new methodology and limited guidance from the Internal Revenue
Service and U.S. Treasury, the Company has recorded provisional amounts for the deferred tax revaluation associated with the changes in the computation of life insurance tax reserves based on information available at December 31, 2017. Pursuant to
Interpretation of the SAP Working Group 18-01: Updated Tax Estimates under the Tax Cuts and Jobs Act, provisional tax computations related to these amounts were reasonably estimated as of December 31, 2017 and have been adjusted based on
guidance received from Internal Revenue Service and U.S. Treasury. Adjusted amounts are reflected in the Company's results of operations for the years ended December 31, 2020, 2019, and 2018.
The Change in net deferred income tax is comprised of the
following (this analysis is exclusive of the nonadmitted DTAs as the Change in nonadmitted assets is reported separately from the Change in net deferred income tax in the Unassigned surplus section of the Statutory Statements of Capital and
Surplus):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31 |
|
|
|
2020 |
|
2019 |
|
Change |
Net deferred tax assets (liabilities)
|
$ |
273 |
|
|
224 |
|
|
49 |
|
Statutory valuation allowance adjustment
|
|
|
— |
|
|
— |
|
Net deferred tax assets (liabilities) after statutory valuation allowance
|
273 |
|
|
224 |
|
|
49 |
|
Tax effect of unrealized gains (losses)
|
153 |
|
|
160 |
|
|
(7) |
|
Statutory valuation allowance adjustment allocated to unrealized gains (losses)
|
— |
|
|
— |
|
|
— |
|
Change in net deferred income tax
|
|
|
|
|
$ |
42 |
|
(d) Reconciliation of Federal Income Tax Rate to Actual
Effective Rate
The provision for federal income taxes incurred is different from that which
would be obtained by applying the statutory federal income tax rate to income before income taxes. The significant items causing this difference are as follows:
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020 |
|
December 31, 2019 |
|
December 31, 2018 |
Federal income
tax rate |
21.0 |
% |
|
21.0 |
% |
|
21.0 |
% |
Amortization of
IMR |
(1.3) |
|
|
(3.6) |
|
|
(0.9) |
|
Dividends
received deduction |
(1.7) |
|
|
(4.2) |
|
|
(0.8) |
|
Nondeductible
expenses |
— |
|
|
0.9 |
|
|
0.2 |
|
Affiliated LLC
income |
(2.4) |
|
|
— |
|
|
— |
|
COLI |
(1.0) |
|
|
(5.5) |
|
|
0.3 |
|
Tax hedges |
0.2 |
|
|
65.8 |
|
|
(6.5) |
|
Tax hedge
reclassification |
6.8 |
|
|
84.7 |
|
|
(8.2) |
|
Tax credits |
(7.2) |
|
|
(13.6) |
|
|
(2.1) |
|
Prior period
adjustments |
(0.6) |
|
|
(0.4) |
|
|
(0.4) |
|
Change in
deferred taxes on impairments |
(5.0) |
|
|
3.6 |
|
|
(1.5) |
|
Change in
deferred taxes on nonadmitted assets |
(0.6) |
|
|
(0.7) |
|
|
0.1 |
|
Reinsurance |
(5.5) |
|
|
19.8 |
|
|
(1.3) |
|
Change in
valuation |
— |
|
|
— |
|
|
5.9 |
|
NOL Carryback
Benefit |
(12.2) |
|
|
— |
|
|
— |
|
Tax
Contingencies |
5.5 |
|
|
— |
|
|
— |
|
Realized Capital
Gains Tax |
(0.1) |
|
|
— |
|
|
— |
|
Other |
— |
|
|
0.6 |
|
|
(0.1) |
|
Effective tax
rate |
(4.1) |
% |
|
168.4 |
% |
|
5.7 |
% |
|
|
|
|
|
|
Federal and foreign income taxes incurred (1)
|
2.9 |
% |
|
293.7 |
% |
|
(4.3) |
% |
Realized Capital
Gains Tax |
(0.1) |
|
|
— |
|
|
— |
|
Change in net
deferred tax |
(6.9) |
|
|
(125.3) |
|
|
10.0 |
|
Effective tax
rate |
(4.1) |
% |
|
168.4 |
% |
|
5.7 |
% |
|
|
|
|
|
|
(1) Prior to 2020, tax on capital gains (losses) was excluded from federal and foreign income taxes incurred and detailed in Note
5(c).
|
(e) Carryforwards, Recoverable Taxes, and IRC
Section 6603 Deposits
As of December 31, 2020, there are no operating losses or tax credit carryforwards available for tax purposes.
There are no Federal income
taxes available for recoupment in the event of future net losses.
There are no aggregate deposits admitted under Section 6603
of the IRC.
The Company had tax contingencies computed in accordance
with SSAP No. 5R, Liabilities, Contingencies and Impairment of Assets, and SSAP No. 101 as of December 31, 2020 and 2019. The Company does not believe the tax contingencies will significantly increase within 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, 2020, 2019, and 2018 the Company recognized expenses of $9, $0, and $(1) in interest and penalties, respectively. The Company had $9 and $1 for
the unrecognized tax benefits and related accrued interest at December 31, 2020 and 2019, respectively.
(f) Consolidated Federal Income Tax Return
The Company is included in the consolidated group for which
AZOA files a federal income tax return on behalf of all group members. As a member of the AZOA consolidated group, the Company is no longer subject to US Federal and non-US income tax examinations for years prior to 2016, though examinations of
combined returns filed by AZOA, which include the Company by certain US state and local tax authorities, may still be conducted for 2008 and subsequent years. The last Internal Revenue Service (IRS) examination of AZOA involved the federal income
tax returns filed by AZOA for the 2015 tax year, which included carrybacks to the 2012 tax year. This examination concluded in October 2018 with the IRS only making one immaterial
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
adjustment that increased the Company's tax liability for
2012 by approximately $1. The IRS has also initiated an examination of AZOA's 2017 and 2018 income tax returns, which is expected to close by the end of 2021.
As of December 31, 2020, the companies included in the
consolidated group for which AZOA files a federal income tax return is included below:
|
|
|
|
|
|
Members of Consolidated Tax Group |
Allianz Life Insurance Company of North America |
Allianz Life Insurance Company of Missouri |
Allianz Life Insurance
Company of New York |
Allianz Underwriters
Insurance Company |
AZOA Services Corporation |
AGCS Marine Insurance
Company |
Allianz Global Risks US
Insurance Company |
William H. McGee &
Co., Inc. |
Allianz Reinsurance of
America, Inc. |
Fireman’s Fund Insurance
Company |
Allianz Technology of
America, Inc. |
Fireman’s Fund Indemnity
Corporation |
Allianz Renewable Energy
Partners of America LLC |
National Surety
Corporation |
Allianz Renewable Energy
Partners of America 2 LLC |
Chicago Insurance Company |
PFP Holdings, Inc. |
Interstate Fire &
Casualty Company |
AZL PF Investments, Inc. |
Associated Indemnity
Corporation |
Dresdner Kleinwort
Pfandbriefe Investments II, Inc. |
American Automobile
Insurance Company |
Allianz Fund Investments,
Inc. |
The American Insurance
Company |
Yorktown Financial
Companies, Inc. |
Allianz Risk Transfer,
Inc. |
Questar Capital
Corporation |
Allianz Risk Transfer
(Bermuda), Ltd. |
Questar Asset Management,
Inc. |
|
Questar Agency, Inc. |
|
(10) 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, 2020 are appropriate, uncertainties in the reserving process could cause 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.
Activity in the accident and health claim reserves is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
2018 |
Balance at
January 1, net of reinsurance recoverables of $654, $574, and $447, respectively |
|
$ |
335 |
|
|
299 |
|
|
224 |
|
|
|
|
|
|
|
|
Incurred related to: |
|
|
|
|
|
|
Current year |
|
139 |
|
|
143 |
|
|
129 |
|
Prior years |
|
(46) |
|
|
(24) |
|
|
16 |
|
Total incurred |
|
93 |
|
|
119 |
|
|
145 |
|
Paid related to: |
|
|
|
|
|
|
Current year |
|
7 |
|
|
7 |
|
|
4 |
|
Prior years |
|
84 |
|
|
76 |
|
|
66 |
|
Total paid |
|
91 |
|
|
83 |
|
|
70 |
|
Balance at
December 31, net of reinsurance recoverables of $665, $654, and $574, respectively |
|
$ |
337 |
|
|
335 |
|
|
299 |
|
Prior year incurred claim reserves for 2020 and 2019 were
favorable as a result of re-estimation of unpaid claims and claim adjustment expenses, principally on the individual LTC line of business. Prior year incurred claim reserves for 2018 were unfavorable attributable to assumption updates and the
establishment of a claims adjustment expense on the individual LTC line of business.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(11) 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 by ceding risks under yearly
renewal term, coinsurance, and modified coinsurance.
The Company monitors the financial exposure and financial
strength of the reinsurers on an ongoing basis. The Company attempts to mitigate risk by securing recoverable balances with various forms of collateral, including arranging trust accounts and letters of credit with certain reinsurers.
The effect of reinsurance on reserves, deposit-type
contracts, and claims, for amounts recoverable from other insurers, was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31, |
Reduction in: |
|
2020 |
|
2019 |
Aggregate
reserves |
|
$ |
6,636 |
|
|
6,620 |
|
Deposit-type
contracts |
|
99 |
|
|
107 |
|
Policy and
contract claims |
|
29 |
|
|
24 |
|
Reinsurance reserves, recoverables, and receivables at
December 31, 2020 and 2019, are covered by collateral of $6,140 and $4,084, respectively, in addition to the letter of credit on behalf of AZMO, as noted in Note 2.
Life insurance, annuities, and accident and health business assumed from and
ceded to other companies are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended |
|
Direct amount |
|
Ceded to other companies |
|
Assumed from other companies |
|
Net amount |
December 31, 2020 |
|
|
|
|
|
|
|
|
Life
insurance in-force |
|
$ |
53,399 |
|
|
34,345 |
|
|
54 |
|
|
19,108 |
|
Premiums: |
|
|
|
|
|
|
|
|
Life |
|
1,200 |
|
|
88 |
|
|
1 |
|
|
1,113 |
|
Annuities |
|
9,473 |
|
|
398 |
|
|
— |
|
|
9,075 |
|
Accident and
health |
|
170 |
|
|
68 |
|
|
56 |
|
|
158 |
|
Total premiums |
|
$ |
10,843 |
|
|
554 |
|
|
57 |
|
|
10,346 |
|
|
|
|
|
|
|
|
|
|
December 31, 2019 |
|
|
|
|
|
|
|
|
Life
insurance in-force |
|
$ |
45,817 |
|
|
30,060 |
|
|
58 |
|
|
15,815 |
|
Premiums: |
|
|
|
|
|
|
|
|
Life |
|
989 |
|
|
88 |
|
|
1 |
|
|
902 |
|
Annuities |
|
12,135 |
|
|
387 |
|
|
— |
|
|
11,748 |
|
Accident and
health |
|
172 |
|
|
70 |
|
|
53 |
|
|
155 |
|
Total premiums |
|
$ |
13,296 |
|
|
545 |
|
|
54 |
|
|
12,805 |
|
|
|
|
|
|
|
|
|
|
December 31, 2018 |
|
|
|
|
|
|
|
|
Life
insurance in-force |
|
$ |
41,321 |
|
|
27,914 |
|
|
65 |
|
|
13,472 |
|
Premiums: |
|
|
|
|
|
|
|
|
Life |
|
895 |
|
|
84 |
|
|
1 |
|
|
812 |
|
Annuities |
|
11,318 |
|
|
358 |
|
|
— |
|
|
10,960 |
|
Accident and
health |
|
176 |
|
|
73 |
|
|
50 |
|
|
153 |
|
Total premiums |
|
$ |
12,389 |
|
|
515 |
|
|
51 |
|
|
11,925 |
|
The Company holds securities backing term life and
universal life with secondary guarantees ceded reserves in compliance with Actuarial Guideline 48. As of December 31, 2020 and 2019, the Company had 7 reinsurance contracts in which risks under covered policies have been ceded. The Company held
primary securities in an amount at least equal to the required level of primary securities for all of these contracts.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
There are no nonaffiliated reinsurers owned in excess of
10% or controlled, either directly or indirectly, by the Company or by a representative, officer, trustee, or director of the Company.
There are no policies issued by the Company that have been
reinsured with a company chartered in a country other than the United States that is owned in excess of 10% or controlled directly or indirectly by an insured, a beneficiary, a creditor, or any other person not primarily engaged in the insurance
business.
The Company does not have any reinsurance agreements in
effect under which the reinsurer may unilaterally cancel any reinsurance for reasons other than for nonpayment of premium or other similar credits.
The Company does not have reinsurance agreements in effect
such that the amount of losses paid or accrued through the statement date may result in a payment to the reinsurer of amounts that, in aggregate and allowing for offset of mutual credits from other reinsurance agreements with the same reinsurer,
exceed the total direct premium collected under the reinsured policies.
The Company did not write off any uncollectible
recoverables during 2020, 2019, and 2018.
During the year ended December 31, 2019, the Company
entered into a new reinsurance agreement that included policies or contracts that were in-force or which had existing reserves established by the Company as of the effective date of the agreement. The agreement resulted in a reduction in
Policyholder liabilities, life policies, and annuity contracts in the amount of $512 as of December 31, 2019.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(12) Annuity Actuarial Reserves and Deposit Liabilities by Withdrawal Characteristics
Information regarding the Company’s annuity actuarial reserves and deposit
liabilities by withdrawal characteristics at December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
Percentage of total |
|
2019 |
|
Percentage of total |
Subject to discretionary
withdrawal: |
|
|
|
|
|
|
|
|
With market
value adjustment |
|
$ |
43,198 |
|
|
31 |
% |
|
$ |
39,602 |
|
|
29 |
% |
At book
value less current surrender charges of 5% or more |
|
36,364 |
|
|
26 |
|
|
37,347 |
|
|
28 |
|
At market
value |
|
21,361 |
|
|
14 |
|
|
22,389 |
|
|
16 |
|
Total with
adjustment or at market value |
|
100,923 |
|
|
71 |
|
|
99,338 |
|
|
73 |
|
At book
value without adjustment (minimal or no charge or adjustment) |
|
30,641 |
|
|
22 |
|
|
27,684 |
|
|
21 |
|
Not subject
to discretionary withdrawal |
|
8,133 |
|
|
6 |
|
|
7,692 |
|
|
6 |
|
Total gross |
|
139,697 |
|
|
100 |
% |
|
134,714 |
|
|
100 |
% |
Reinsurance ceded |
|
2,523 |
|
|
|
|
2,578 |
|
|
|
Total net |
|
$ |
137,174 |
|
|
|
|
$ |
132,136 |
|
|
|
Amount included in At
book value less current charges of 5% or more that will move to At book value without adjustment in the year after the statement date: |
|
$ |
6,776 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of total annuity actuarial
reserves and deposit fund liabilities: |
|
2020 |
|
2019 |
Life, Accident and
Health Annual Statement: |
|
|
|
|
Annuities, net
(excluding supplementary contracts with life contingencies) |
|
$ |
95,185 |
|
|
93,752 |
|
Supplemental
contracts with life contingencies, net |
|
2,091 |
|
|
2,070 |
|
Deposit-type
contracts |
|
4,749 |
|
|
4,936 |
|
Subtotal |
|
102,025 |
|
|
100,758 |
|
Separate Accounts Annual
Statement: |
|
|
|
|
Annuities, net
(excluding supplementary contracts with life contingencies) |
|
35,137 |
|
|
31,348 |
|
Supplemental
contracts with life contingencies, net |
|
11 |
|
|
30 |
|
Subtotal |
|
35,148 |
|
|
31,378 |
|
Total
annuity actuarial reserves and deposit fund liabilities |
|
$ |
137,174 |
|
|
132,136 |
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(13) Life Actuarial Reserves by Withdrawal Characteristics
Information regarding the Company’s life actuarial reserves
by withdrawal characteristics at December 31 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
General Account |
Account value |
Cash value |
Reserve |
Subject to discretionary withdrawal, surrender values, or policy loans: |
|
|
|
|
|
|
|
Universal
life |
$ |
845 |
|
844 |
|
851 |
|
Universal
life with secondary guarantees |
61 |
|
54 |
|
158 |
|
|
|
|
|
|
|
|
|
Indexed life |
5,458 |
|
4,701 |
|
4,738 |
|
Other
permanent cash value life insurance |
115 |
|
115 |
|
115 |
|
|
|
|
|
Variable
universal life |
3 |
|
3 |
|
3 |
|
|
|
|
|
Not subject to
discretionary withdrawal or no cash values: |
|
|
|
Term policies
without cash value |
XXX |
XXX |
204 |
|
|
|
|
|
Disability,
active lives |
XXX |
XXX |
48 |
|
Disability,
disabled lives |
XXX |
XXX |
6 |
|
Miscellaneous
reserves |
XXX |
XXX |
54 |
|
Total gross |
6,482 |
|
5,717 |
|
6,177 |
|
Reinsurance
ceded |
645 |
|
644 |
|
904 |
|
Total net |
$ |
5,837 |
|
5,073 |
|
5,273 |
|
|
|
|
|
|
2019 |
General Account |
Account value |
Cash value |
Reserve |
Subject to
discretionary withdrawal, surrender values, or policy loans: |
|
|
|
|
|
|
|
Universal
life |
$ |
875 |
|
874 |
|
882 |
|
Universal life with secondary
guarantees |
62 |
|
54 |
|
162 |
|
|
|
|
|
|
|
|
|
Indexed life |
4,496 |
|
3,872 |
|
3,913 |
|
Other permanent cash value life
insurance |
122 |
|
122 |
|
122 |
|
|
|
|
|
Variable
universal life |
3 |
|
3 |
|
3 |
|
|
|
|
|
Not subject to discretionary withdrawal or
no cash values: |
|
|
|
Term policies
without cash value |
XXX |
XXX |
209 |
|
|
|
|
|
Disability, active lives |
XXX |
XXX |
49 |
|
Disability,
disabled lives |
XXX |
XXX |
7 |
|
Miscellaneous reserves |
XXX |
XXX |
56 |
|
Total gross |
5,558 |
|
4,925 |
|
5,401 |
|
Reinsurance ceded |
671 |
|
671 |
|
945 |
|
Total net |
$ |
4,886 |
|
4,254 |
|
4,456 |
|
|
|
|
|
The Company does not have any Life policies with
guarantees in the separate account. |
|
|
|
|
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
Separate Account
Nonguaranteed |
Account value |
Cash value |
Reserve |
Subject to
discretionary withdrawal, surrender values, or policy loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
universal life |
$ |
19 |
|
18 |
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross |
19 |
|
18 |
|
18 |
|
Reinsurance
ceded |
— |
|
— |
|
— |
|
Total net |
$ |
19 |
|
18 |
|
18 |
|
|
|
|
|
|
2019 |
Separate Account
Nonguaranteed |
Account Value |
Cash Value |
Reserve |
Subject to discretionary withdrawal, surrender values, or policy loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Variable
universal life |
$ |
18 |
|
17 |
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross |
18 |
|
17 |
|
17 |
|
Reinsurance
ceded |
— |
|
— |
|
— |
|
Total net |
$ |
18 |
|
17 |
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of total life actuarial reserves: |
2020 |
2019 |
Life, Accident,
and Health Annual Statement: |
|
|
Life
insurance, net |
$ |
5,210 |
|
$ |
4,392 |
|
|
|
|
Disability,
active lives, net |
47 |
|
48 |
|
Disability,
disabled lives, net |
1 |
|
2 |
|
Miscellaneous
reserves, net |
14 |
|
15 |
|
Subtotal |
5,273 |
|
4,456 |
|
Separate
Accounts Annual Statement: |
|
|
Life
insurance, net |
18 |
|
17 |
|
Subtotal |
18 |
|
17 |
|
Total life
actuarial reserves |
$ |
5,291 |
|
$ |
4,473 |
|
(14) Separate Accounts
The Company’s separate accounts represent funds held for
the benefit of contract holders entitled to payments under variable annuity contracts, variable life policies and market value adjusted annuity contracts issued through the Company’s separate accounts and underwritten by the Company.
Information regarding the Company’s separate accounts for the years ended
December 31 is as follows:
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
Indexed |
Nonindexed guaranteed reserve interest less than or equal to 4% |
Non guaranteed separate accounts |
Total |
|
Indexed |
Nonindexed guaranteed reserve interest less than or equal to 4% |
Non guaranteed separate accounts |
Total |
Premiums,
considerations, or deposits |
$ |
— |
|
— |
|
4,149 |
|
4,149 |
|
|
$ |
— |
|
— |
|
1,277 |
|
1,277 |
|
Reserves for
account, with assets at fair value |
|
|
21,574 |
|
21,574 |
|
|
— |
|
2 |
|
22,457 |
|
22,459 |
|
Reserves for
account, with assets at amortized cost |
— |
|
— |
|
13,592 |
|
13,592 |
|
|
— |
|
— |
|
8,936 |
|
8,936 |
|
Total reserves |
— |
|
— |
|
35,166 |
|
35,166 |
|
|
— |
|
2 |
|
31,393 |
|
31,395 |
|
By withdrawal
characteristics: |
|
|
|
|
|
|
|
|
|
At book value
without MV adjustment and with current surrender charge of 5% or more |
— |
|
— |
|
12,643 |
|
12,643 |
|
|
— |
|
— |
|
8,535 |
|
8,535 |
|
At fair value |
|
|
21,535 |
|
21,535 |
|
|
— |
|
2 |
|
22,427 |
|
22,429 |
|
At book value
without MV adjustment and with current surrender charge of less than 5% |
— |
|
— |
|
959 |
|
959 |
|
|
— |
|
— |
|
401 |
|
401 |
|
Subtotal |
— |
|
— |
|
35,137 |
|
35,137 |
|
|
— |
|
2 |
|
31,363 |
|
31,365 |
|
Not subject
to discretionary withdrawal |
— |
|
— |
|
29 |
|
29 |
|
|
— |
|
— |
|
30 |
|
30 |
|
Total |
$ |
— |
|
— |
|
35,166 |
|
35,166 |
|
|
$ |
— |
|
2 |
|
31,393 |
|
31,395 |
|
As of December 31, 2020 and 2019, the Company’s separate
accounts included legally insulated assets and non-insulated assets attributed to the following products/transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
Product/transaction |
|
Legally insulated |
Not legally insulated |
|
Legally insulated |
Not legally insulated |
Variable Annuities |
|
$ |
21,602 |
|
— |
|
|
22,607 |
|
— |
|
Variable Life |
|
19 |
|
— |
|
|
18 |
|
— |
|
Variable Annuities
(Non-Unitized Insulated) |
|
998 |
|
— |
|
|
387 |
|
— |
|
Variable Annuities
(Non-Unitized Non-Insulated) |
|
— |
|
23,244 |
|
|
— |
|
11,586 |
|
Variable Annuities (MN
MVA) |
|
— |
|
38 |
|
|
— |
|
37 |
|
Fixed Annuities (MN MVA) |
|
— |
|
— |
|
|
— |
|
3 |
|
Total |
|
$ |
22,619 |
|
23,282 |
|
|
23,012 |
|
11,626 |
|
In 2019, the Company transferred approximately $6.7 billion
of assets from the general account to the non-insulated separate account, to align the presentation of assets and liabilities relating to Variable Index Advantage products with the new method required per the state product filings.
The Company’s separate account liabilities contain
guaranteed benefits. The liabilities for guaranteed benefits are supported by the Company’s general account assets. To compensate the general account for the risk taken, the separate account paid risk charges of $180, $204, $212, $221, and $220
during the past five years, respectively. The general account of the Company paid $19, $16, $5, $0, and $33 towards separate account guarantees during the past five years, respectively.
A reconciliation of net transfers to (from) separate
accounts for the years ended December 31 is included in the
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
following table:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 |
|
2019 |
|
2018 |
Transfers as
reported in the Summary of Operations of the Separate Accounts Annual Statement: |
|
|
|
|
|
Transfers to
separate accounts |
$ |
4,149 |
|
|
1,277 |
|
|
638 |
|
Transfers
from separate accounts |
(2,689) |
|
|
3,975 |
|
|
(2,649) |
|
Net transfers
to (from) separate accounts |
1,460 |
|
|
5,252 |
|
|
(2,011) |
|
Reconciling adjustments: |
|
|
|
|
|
Other
adjustments |
— |
|
|
2 |
|
|
2 |
|
Transfers as reported in
the Statutory Statements of Operations |
$ |
1,460 |
|
|
5,254 |
|
|
(2,009) |
|
(15)Related-Party Transactions
(a) Organization Changes
On October 11, 2018, the Company announced the decision to
sell the Questar Capital and Asset Management representative network to an unaffiliated wealth management firm. The closing date of the sale was March 1, 2019.
The Company legally dissolved and terminated its
subsidiary, Allianz Annuity Company of Missouri (AAMO), by voluntary action on February 24, 2020. Upon termination, AAMO paid an insignificant dividend to the Company.
On July 1 2020, American Financial Marketing, LLC, Ann
Arbor Annuity Exchange, LLC, GamePlan Financial Marketing, LLC, and The Annuity Store Financial & Insurance Services, LLC, all of which are wholly owned subsidiaries of TruChoice Financial Group, LLC (TruChoice), which is a wholly owned
subsidiary of AIIG, which is a wholly owned subsidiary of the Company, merged into TruChoice. TruChoice was the surviving entity.
Allianz Investment Management U.S. LLC, a Minnesota limited
company was formed on October 11, 2020. Allianz Life is its direct parent.
(b) Related-Party Invested Assets
The Company has an agreement to lend AZOA $39. The
remaining loan balance was $39 as of December 31, 2020 and 2019 and is included in Other invested assets on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus. Repayment of this loan will begin in 2021 and has a final
maturity date of August 31, 2021. The interest rate is a fixed rate of 1.61%. Interest income earned and accrued had an immaterial impact to the Company during 2020, 2019, and 2018, respectively.
The Company has an investment in a limited partnership that
is managed by its affiliate Pacific Investment Management Company (PIMCO). The total committed capital for this investment is $85 of which $45 and $9 is unfunded as of December 31, 2020 and 2019, respectively. As of December 31, 2020 and 2019, the
fair value of the investment is $35 and $47 respectively, and is recorded in Other invested assets on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.
The Company has a seed money investment in exchange traded
funds that are managed by a related party, AIM. The Company reported a balance of $58 as of December 31, 2020 related to the seed money investment within Stocks on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.
There is no additional commitment related to these investments.
On January 22, 2018, the Company formed TruChoice Financial
Group, LLC (TruChoice), a noninsurance subsidiary. TruChoice is a wholly owned subsidiary of Allianz Individual Insurance Group, LLC (AIIG), and was capitalized through an initial cash contribution of $2 from AIIG. In addition, AIIG contributed
100% of the membership interests it held in the following Field Marketing Organizations: American Financial Marketing,
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
LLC (AFM), GamePlan Financial Marketing (GamePlan), The
Annuity Store Financial and Insurance Services, LLC, and Ann Arbor Annuity Exchange, LLC, in exchange for 100% of the membership interest of TruChoice.
(c) Service Fees
The Company incurred fees for services provided by
affiliated companies of 183, $157, and $129 in 2020, 2019, and 2018, respectively. The Company’s liability for these expenses was 37 and $30 at December 31, 2020 and 2019, respectively, and is included in Other liabilities on the Statutory
Statements of Admitted Assets, Liabilities, and Capital and Surplus. In the normal course of business, the outstanding amount is settled in cash.
The Company earned revenues for various services provided
to affiliated companies and subsidiaries of $59, $54, and $60 in 2020, 2019, and 2018, respectively. The receivable for these revenues was $6 and $6 for 2020 and 2019, respectively, and is included in Other assets on the Statutory Statements of
Admitted Assets, Liabilities, and Capital and Surplus. In the normal course of business, the outstanding amount is settled in cash.
The Company has agreements with its affiliates PIMCO,
Oppenheimer Capital LLC (OpCap), and with certain other related parties whereby (1) specific investment options managed by PIMCO and OpCap are made available through the Company's separate accounts to holders of the Company's variable annuity
products, and (2) the Company receives compensation for providing administrative and recordkeeping services relating to the investment options managed by PIMCO and OpCap. Income recognized by the Company from these affiliates for distribution and
in-force related costs as a result of providing investment options to the contractholders was $7, $8, and $10 during 2020, 2019, and 2018, respectively, which is included in Fees from separate accounts on the Statutory Statements of Operations. At
December 31, 2020 and 2019, $1 and $1, respectively, were included for related receivables of these fees in Other assets on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.
The Company has incurred commission expense related to the
distribution of variable annuity products from Allianz Life Financial Services, LLC (ALFS) in the amount of $320, $285, and $222 for the years ended December 31, 2020, 2019, and 2018, respectively. The Company has an agreement with ALFS, whereby
interest receivable is assigned to the company and 12b-1 fee receivables are assigned to the Company and AZNY. The Company has also agreed with AZNY to share in reimbursing ALFS for direct and indirect expenses incurred in performing services for
the Company and AZNY. In the event that assigned receivables exceed expenses, ALFS records a dividend-in-kind to the Company and a loss on the transaction with AZNY. The Company recorded a net (expense) revenue from this agreement of $(20), $2, and
$10 for the years ended December 31, 2020, 2019, and 2018, respectively.
(d) Dividends to
Parent
The Company paid cash dividends to AZOA of $750, $325, and
$0 in 2020, 2019, and 2018, respectively. Based on the ordinary dividend limitations set forth under Minnesota Insurance Law, the dividends paid in 2020 were considered as extraordinary and dividends paid in 2019 were considered ordinary.
(e) Capital
Contributions and Dividends with Subsidiaries
During the years ended December 31, the Company received
dividends from its subsidiaries as follows:
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2020 |
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2019 |
|
2018 |
Allianz Investment
Management, LLC |
|
$ |
51 |
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|
56 |
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|
60 |
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ALFS |
|
— |
|
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2 |
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10 |
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AZL PF Investments, Inc. |
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50 |
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— |
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— |
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Yorktown |
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— |
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9 |
|
|
— |
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$ |
101 |
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|
67 |
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|
70 |
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ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
During the years ended December 31, the Company made
capital contributions to subsidiaries as follows:
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2020 |
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2019 |
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2018 |
Yorktown |
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$ |
— |
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|
1 |
|
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6 |
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Allianz Investment
Management U.S. LLC (AIM US) |
|
1 |
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— |
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— |
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InForce Solutions, LLC (1)
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— |
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— |
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3 |
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ALFS |
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20 |
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8 |
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— |
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$ |
21 |
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9 |
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9 |
|
(1) InForce Solutions, LLC is a wholly owned subsidiary of AIIG, which is a wholly owned subsidiary of the Company; this capital
contribution took the form of intercompany debt forgiveness.
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(f) Reinsurance
The Company wholly-owns AZMO, a Special Purpose Life
Reinsurance Captive Insurance Company domiciled in Missouri. The Company cedes to AZMO, and AZMO provides reinsurance on a coinsurance basis and modified coinsurance basis, a 100% quota share of the Company’s net liability of level term life
insurance policies and certain universal life insurance policies written directly by the Company. The total premium and associated reserve amounts ceded from the Company to AZMO for the years ended December 31, 2020, 2019, and 2018 were $3, $6, and
$7, respectively. The Company recorded a ceding commission of $1 for 2020, 2019, and 2018, respectively. In addition, the Company recorded a deferred gain of $97 upon execution of the reinsurance agreement in 2009, of which $2 was amortized in
2020, 2019, and 2018, respectively, and included in Commissions and expense allowances on reinsurance ceded on the Statutory Statements of Operations.
In 2017, the Company entered into a reinsurance agreement
with an affiliate, a wholly-owned subsidiary of Allianz SE. The Company ceded on a combined funds withheld coinsurance and modified coinsurance basis, a 60% quota share of the Company's net liability of certain fixed-indexed annuity policies
written directly by the Company. On May 31, 2018, the Company ceased ceding business to the affiliate and recaptured all previously ceded risks. For the years ended December 31, 2020 and 2019 , the Company did not cede any premiums or commissions
to the affiliate. The Company ceded premiums of $134 to the affiliate during 2018. Additionally, the Company recorded ceding commissions of $13 included in Commissions and expense allowances on reinsurance ceded on the Statutory Statements of
Operations during 2018. The Company did not cede any reserves as of December 31, 2020 and 2019 to the affiliate.
The Company has reinsurance recoverables and receivables
related to reinsurance agreements with affiliated entities. Total affiliated reinsurance recoverables and receivables were $1 and $2 as of December 31, 2020 and 2019, respectively, and are included in Other assets on the Statutory Statements of
Admitted Assets, Liabilities, and Capital and Surplus.
(g) Line of Credit Agreement
The Company has a line of credit agreement with its
subsidiary, AZNY, to provide liquidity, as needed. The Company’s lending capacity under the agreement is limited to 5% of the general account admitted assets of AZNY as of the preceding year end. The Company provided $25 to AZNY under the terms of
this agreement on March 17, 2020. The full amount was repaid on April 15, 2020. There was no outstanding balance under the line of credit agreement as of December 31, 2020 and 2019.
(16) Employee Benefit Plans
The Company participates in the Allianz Asset Accumulation
Plan (AAAP), a defined contribution plan sponsored by Allianz of America Corporation (AZOAC). Eligible employees are immediately enrolled in the AAAP on their first day of employment. The AAAP will accept participants’ pretax, Roth 401(k), and/or
after-tax contributions up to 80% of the participants’ eligible compensation, although contributions remain subject to annual limitations set by the Internal Revenue Service. The Company matches up to a maximum of 7.5% of the employees’ eligible
compensation. Participants are 100% vested in the Company’s matching contribution after three years of service.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and 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. All legal fees are paid by the Company. It is the Company’s policy to fund the AAAP costs
as incurred. The Company has expensed $13, $13, and $12 in 2020, 2019, and 2018, respectively, toward the AAAP matching contributions and administration expenses.
A defined group of highly compensated employees is
eligible to participate in the AZOAC Deferred Compensation Plan. The purpose of the plan is to provide tax planning opportunities, as well as supplemental funds upon retirement. The plan is unfunded, meaning no assets of the Company have been
segregated or defined to represent the liability for accrued assets under the plan. Employees are 100% vested upon enrollment in the plan for funds they have deferred. Employees’ funds are invested on a pay period basis and are immediately vested.
Participants and the Company share the administrative fee. The accrued liability of $61 and $56 as of December 31, 2020 and 2019, respectively, is recorded in Other liabilities on the Statutory Statements of Admitted Assets, Liabilities, and
Capital and Surplus.
The Company sponsors a nonqualified deferred compensation
plan for a defined group of agents. The Company can make discretionary contributions to the plan in the form and manner the Company determines reasonable. Discretionary contributions are currently determined based on production. The accrued
liability of $66 and $71 as of December 31, 2020 and 2019, respectively, is recorded in Other liabilities on the Statutory Statements of Admitted Assets, Liabilities, and Capital and Surplus.
The Company participates in a stock-based compensation plan
sponsored by Allianz SE, which awards certain employees Restricted Stock Units (RSU) that are tied to Allianz SE stock. Allianz SE determines the number of RSU granted to each participant. The Company records expense equal to the change in fair
value of the units during the reporting period, which includes the Company's estimate of the number of awards expected to be forfeited. A change in value of $5, $10, and $5 was recorded in 2020, 2019, and 2018, respectively, and is included in
General and administrative expenses on the Statutory Statements of Operations. The related liability of $18 and $18 as of December 31, 2020 and 2019, respectively, is recorded in Other liabilities on the Statutory Statements of Admitted Assets,
Liabilities, and Capital and Surplus.
(17) Statutory Capital and Surplus
Statutory accounting practices prescribed or permitted by
the Company’s state of domicile are directed toward insurer solvency and protection of policyholders. As such, the Company is required to meet minimum statutory capital and surplus requirements. The Company’s statutory capital and surplus as of
December 31, 2020 and 2019, were in compliance with these requirements. The maximum amount of ordinary dividends that can be paid by Minnesota insurance companies to the stockholder without prior approval of the Department is subject to
restrictions relating to statutory earned surplus, also known as unassigned funds. Unassigned funds are determined in accordance with the accounting procedures and practices governing preparation of the statutory annual statement. In accordance
with Minnesota Statutes, the Company may declare and pay from its Unassigned surplus cash dividends of not more than the greater of 10% of its prior year-end statutory surplus, or the net gain from operations of the insurer, not including realized
gains, for the 12-month period ending the 31st day of the next preceding year. Based on these limitations, ordinary dividends of $766 can be paid in 2021 without prior approval of the Department.
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, 2020 and 2019.
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
(18) Direct Premiums Written by Third-Party Administrators
The Company has direct premiums written by third-party
administrators (TPAs). The types of business written by the TPAs include life, accidental death and dismemberment, medical, disability, excess risk, and LTC. The authority granted to the TPAs includes claims payment, claims adjustment,
underwriting, and premium collection. Total premiums written by TPAs were $148, $116, and $99 for 2020, 2019, and 2018, respectively. For the years ended December 31, 2020, 2019, and 2018, there were no individual TPAs that wrote premiums that
equaled at least 5% of the capital and surplus of the Company.
(19) Capital Structure
The Company is authorized to issue three types of capital stock, as outlined
in the table below:
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Authorized |
|
Issued and outstanding |
|
Par value, per share |
|
Redemption and liquidation rights |
Common stock |
|
40,000,000 |
|
|
20,000,001 |
|
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$ |
1.00 |
|
|
None |
Preferred stock: |
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Class A
(consisting of Series A and B below) |
|
200,000,000 |
|
|
18,903,484 |
|
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$ |
1.00 |
|
|
Designated by
Board for each series issued |
Class A, Series A |
|
8,909,195 |
|
|
8,909,195 |
|
|
$ |
1.00 |
|
|
$35.02 per
share plus an amount to yield a compounded annual return of 6%, after actual dividends paid |
Class A, Series B |
|
10,000,000 |
|
|
9,994,289 |
|
|
$ |
1.00 |
|
|
$35.02 per
share plus an amount to yield a compounded annual return of 6%, after actual dividends paid |
Class B |
|
400,000,000 |
|
|
— |
|
|
$ |
1.00 |
|
|
Designated by
Board for each series issued |
Holders of Class A preferred stock and of common stock are
entitled to one vote per share with respect to all matters presented to or subject to the vote of shareholders. Holders of Class B preferred stock have no voting rights. All issued and outstanding shares are owned by AZOA. See Note 1 for further
discussion.
Each share of Class A preferred stock is convertible into
one share of the Company’s common stock. The Company may redeem any or all of the Class A preferred stock at any time. Dividends will be paid to each class of stock only when declared by the BOD. In the event a dividend is declared, dividends must
be paid to holders of Class A preferred stock, Class B preferred stock, and common stock, each in that order.
As discussed in Note 15 to these Statutory Financial
Statements, the Company carried out various capital transactions with related parties during 2020, 2019, and 2018.
(20) Reconciliation to the Annual Statement
The Company is required to file an Annual Statement with
the Department. As of December 31, 2020 and 2019, there is no difference in admitted assets or liabilities between this report and the Annual Statement. As of December 31, 2020, 2019, and 2018, there is no difference in capital and surplus or net
income between this report and the Annual Statement.
(21) Commitments and Contingencies
The Company and its subsidiaries are named as defendants in
various pending or threatened legal proceedings on an ongoing basis, arising from the conduct of business, including two putative class action proceedings: Sanchez v. Allianz Life Ins. Co. of North America (Superior Court of California, L.A.
County, BC594715), which has been certified as a class, and Small v. Allianz Life Ins. Co. of North America (United Stated District Court, Central District
ALLIANZ LIFE INSURANCE COMPANY OF NORTH AMERICA
Notes to Statutory Financial Statements
(Dollars in millions, except share data and security holdings quantities)
of California, Case No. 2:20-cv-01944-AB (KESx), which has
not been certified as a class action. The Company generally intends to vigorously contest the lawsuits, but may pursue settlement negotiations in some cases, if appropriate. The outcome of the cases is uncertain at this time, and there can be no
assurance that such litigation, or any future litigation, will not have a material adverse effect on the Company and/or its subsidiaries. The Company recognizes legal costs as incurred.
The Company is contingently liable for possible future
assessments under regulatory requirements pertaining to insolvencies and impairments of unaffiliated insurance companies. Provision has been made for assessments currently received and assessments anticipated for known insolvencies.
The financial services industry, variable and fixed
annuities, life insurance, distribution companies, and broker-dealers, is subject to close scrutiny by regulators, legislators, and the media.
Federal and state regulators, such as state insurance
departments, state securities departments, the SEC, the Financial Industry Regulatory Authority, the Internal Revenue Service, 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 and securities law. The Company is, and may become, 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 and life product designs,
management, and sales practices will be an ongoing source of regulatory scrutiny and enforcement actions, litigation, and rulemaking.
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.
Certain guarantees of the Company provide for the
maintenance of a subsidiary’s regulatory capital, surplus levels and liquidity sufficient to meet certain obligations. Those unlimited guarantees are made on behalf of certain wholly owned subsidiaries (AZNY, AZMO, ALFS and Questar Capital
Corporation, through its parent, Yorktown). These guarantees are not limited and cannot be estimated as of the balance sheet date. From time to time, the Company makes capital contributions to these subsidiaries as needed under the guarantees.
Capital contributions made during the years ended December 31, 2020, 2019, and 2018 are detailed in Note 15.
The Company had investments in limited partnerships that
required a commitment of capital of $306 and $217 for the years ended December 31, 2020 and 2019, respectively.
(22) Subsequent Events
The Company has evaluated subsequent events through April
2, 2021, which is the date the Statutory Financial Statements were available to be issued. No material subsequent events have occurred since December 31, 2020 that require adjustment to the Statutory Financial Statements.
In March 2021, the Company paid a cash dividend to AZOA of
$400.
For Service or More Information
The SEC maintains a website (www.sec.gov). The
prospectus, the Form N-4 SAI and other information about the Contract are available on the EDGAR database on the SEC’s website. Copies of this information may be obtained, upon payment of a duplicating fee, by electronic request at the following
email address: publicinfo@sec.gov.
Our Service Center
If you need customer service (for Contract changes,
information on Contract Values, requesting a withdrawal or transfer, changing your allocation instructions, etc.) please contact our Service Center at (800) 624-0197.
To send an application, a check for an additional
Purchase Payment, or for general customer service, please mail to the appropriate address as follows:
To send an application, a check for an additional Purchase Payment,
or for general customer service, please mail to the appropriate address as follows:
|
REGULAR MAIL
|
Allianz Life Insurance Company of North America
P.O. Box 59060
Minneapolis, MN 55459-0060
|
|
OVERNIGHT, CERTIFIED, OR REGISTERED MAIL
|
Allianz Life Insurance Company of North America
5701 Golden Hills Drive
Golden Valley, MN 55416-1297
|
Checks sent to the wrong address for applications or additional Purchase Payments are forwarded to the 5701 Golden Hills Drive address listed above, which may delay
processing.
|
For general customer service by email, please use
this address: Contact.Us@allianzlife.com. To send information by email, please use this address: variableannuity@send.allianzlife.com. To send information over the web, please upload to your account on our website at: www.allianzlife.com. If you
have questions about whether you can submit certain information by email or over the web, please contact our Service Center.
Until May 1, 2022, all dealers that effect
transactions in these securities may be required to deliver a prospectus.
Allianz Index Advantage Income ADVSM Variable Annuity Prospectus – October 18, 2021