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ANNUAL STATEMENT FOR THE YEAR 2011 OF THE TEACHERS INSURANCE and ANNUITY ASSOCIATION of AMERICA1. Summary of Significant Accounting PoliciesA. Accounting PrinciplesNOTES TO FINANCIAL STATEMENTSThe financial statements of Teachers Insurance and Annuity Association of America (“TIAA” or the“Company”) are presented on the basis of statutory accounting principles prescribed or permitted by theNew York State Department of Financial Services (the “Department”). The State of New York requiresinsurance companies domiciled in the State of New York to prepare their statutory basis financial statementsin accordance with the National Association of Insurance Commissioners’ (“NAIC”) Accounting Practices andProcedures Manual (“NAIC SAP”), subject to any deviation prescribed or permitted by the Department (“NewYork SAP”).A reconciliation of the Company’s net income and capital and contingency reserves between NAIC SAP andpractices prescribed or permitted by the State of New York is shown below:12/31/2011 12/31/2010Net Income (Loss), New York SAP................................ $ 2,358,892,933 $ 1,380,976,508New York SAP Prescribed Practices:Additional Reserves for:Term Conversions............................................... 1,680,180 1,864,226Deferred and Payout Annuities issued after 2000 ....... 171,042,653 185,996,862Net Income (Loss), NAIC SAP........................................$ 2,531,615,766 $ 1,568,837,596Capital and Contingency Reserves, New York SAP $ 27,130,896,352 $ 25,155,764,158New York SAP Prescribed Practices:Deferred Premium Asset Limitation ......................... 136,181 136,517Intangible Asset Limitation .................................... --- 12,421,900Additional Reserves for:Term Conversions............................................... 16,209,909 14,529,729Deferred and Payout Annuities issued after 2000 ....... 3,853,866,319 3,682,823,666Capital and Contingency Reserves, NAIC SAP ..................$ 31,001,108,761 $ 28,865,675,970B. Use of Estimates in Preparation of the Financial StatementsThe preparation of the Company’s statutory financial statements requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities. It also requires disclosure ofcontingent assets and liabilities at the date of the financial statements and the reported amounts of revenueand expenses during the period. Actual results could differ from those estimates.C. Accounting PolicyLife premiums are recognized as income over the premium paying period of the related policies. Annuityconsiderations are recognized as revenue when received. Deposits on deposit-type contracts are recordeddirectly as a liability when received. Expenses incurred in connection with acquiring new insurance businessare charged to operations as incurred.Dividends on insurance policies and pension annuity contracts in the payout phase are generally declaredby the TIAA Board of Trustees (the "Board") in November of each year, and such dividends are credited topolicyholders in the following calendar year. Dividends on pension annuity contracts in the accumulationphase and on certain payout annuities are generally declared by the Board in February of each year, andsuch dividends on the various existing vintages of pension annuity contracts in the accumulation phase arecredited to policyholders during the ensuing twelve month period beginning March 1.In addition, the Company uses the following accounting policies:(1) Bonds are stated at amortized cost using the current effective interest method. Bonds in or near default(rated NAIC 6) are stated at the lower of amortized cost or fair value. Bonds the Company intends tosell prior to maturity (“held for sale”) are stated at the lower of amortized cost or fair value.Included within bonds are loan-backed and structured securities. Estimated future cash flows andexpected prepayment speeds are used to determine the amortization of loan-backed and structuredsecurities under the prospective method. Expected future cash flows and prepayment speeds areevaluated quarterly. Certain loan-backed and structured securities are reported at the lower of cost orfair value as a result of the NAIC modeling process.If it is determined that a decline in the fair value of a bond, excluding loan-backed and structuredsecurities, is other-than-temporary, the cost basis of the bond is written down to fair value and theamount of the write down is accounted for as a realized loss. The new cost basis is not changed for19
ANNUAL STATEMENT FOR THE YEAR 2011 OF THE TEACHERS INSURANCE and ANNUITY ASSOCIATION of AMERICANOTES TO FINANCIAL STATEMENTSsubsequent recoveries in fair value. Future declines in fair value which are determined to be other-thantemporaryare recorded as realized losses.For loan-backed and structured securities, when an other-than-temporary impairment (“OTTI”) hasoccurred because the Company does not expect to recover the entire amortized cost basis of thesecurity, the amount of the OTTI recognized as a realized loss is the difference between the security’samortized cost basis and the present value of cash flows expected to be collected, discounted at theloan-backed or structured security’s effective interest rate.For loan-backed and structured securities, when an OTTI has occurred because the Company intendsto sell the security or the Company does not have the intent and ability to retain the security for a periodof time sufficient to recover the amortized cost basis, the amount of the OTTI realized is the differencebetween the security’s amortized cost basis and fair value at the balance sheet date.In periods subsequent to the recognition of an OTTI loss for a bond, the Company accounts for theother-than-temporarily impaired security as if the security had been purchased on the measurementdate of the impairment. The difference between the new amortized cost basis and the cash flowsexpected to be collected is accreted as interest income in future periods based on prospective changesin cash flow estimates.(2) Unaffiliated common stocks are stated at fair value. When it is determined that a decline in fair value ofan investment is other than temporary, the cost basis of the investment is reduced to its fair value andthe amount of the reduction is accounted for as a realized loss.(3) Preferred stocks are stated at amortized cost unless they have an NAIC rating designation of 4, 5, or 6which are stated at the lower of amortized cost or fair value. When it is determined that a decline in fairvalue of an investment is other than temporary, the cost basis of the investment is reduced to its fairvalue and the amount of the reduction is accounted for as a realized loss.(4) Mortgage loans are stated at amortized cost, net of valuation allowances, except that purchase moneymortgages are stated at the lower of amortized cost or ninety percent of appraised value. Mortgageloans held for sale are stated at the lower of amortized cost or fair value. Mortgage loans are evaluatedfor impairment when it is probable that the receipt of contractual payments of principal and interest maynot occur when scheduled. If the impairment is considered to be temporary, a valuation reserve isestablished for the excess of the carrying value of the mortgage over its estimated fair value. Changesin valuation reserves for mortgage loans are included in net unrealized capital gains and losses oninvestments. When an event occurs resulting in an impairment that is other than temporary, a directwrite-down is recorded as a realized loss and a new cost basis is established.(5) Short-term investments (investments with remaining maturities of one year or less at the time ofacquisition, excluding those investments classified as cash equivalents) that are not in default are statedat amortized cost using the straight line interest method. Short-term investments in default are stated atthe lower of amortized cost or fair value.(6) Investments in wholly-owned subsidiaries are stated at the value of their underlying net assets asfollows: (1) domestic insurance subsidiaries are stated at the value of their underlying statutory surplus;(2) non-insurance subsidiaries are stated at the value of their underlying audited GAAP equity.Dividends and distributions from subsidiaries are recorded in investment income and changes in theequity of subsidiaries are recorded directly to surplus as unrealized gains or losses.(7) Investments in joint ventures, partnerships and limited liability companies are stated at cost adjusted forthe Company’s percentage of changes in the underlying GAAP equity as reflected on the respectiveentity’s audited financial statements. When it is determined that a decline in fair value of an investmentis other than temporary, the cost basis of the investment is reduced to its fair value and the amount ofthe reduction is accounted for as a realized loss.(8) Derivative instrument usage is described in the Derivatives Use Plan that the Company has filed withthe Department. This plan details the Company’s derivative policy objectives, strategies and controls,and any restrictions placed on various derivative types. The plan also specifies the procedures andsystems that the Company has established to evaluate, monitor and report on the derivative portfolio interms of valuation, effectiveness and counterparty credit quality. The Company uses derivativeinstruments for hedging, income generation, asset-liability management, and asset replication purposes.Derivatives used by the Company include foreign currency swaps, interest rate swaps, credit defaultswaps, foreign currency forwards, and equity index options. (See Note 8)(9) The Company has not modified its capitalization policy from the prior period.2. Accounting Changes and Corrections of ErrorsSSAP No. 101 – Income Taxes, a Replacement of SSAP No. 10—Income Taxes and SSAP No. 10R—IncomeTaxes, A Temporary Replacement of SSAP No. 10 effective January 1, 2012. For purposes of accounting forfederal and foreign income taxes, reporting entities shall adopt FASB Statement No. 109, Accounting for IncomeTaxes (FAS 109) with modifications for state income taxes, the realization criteria for deferred tax assets, andthe recording of the impact of changes in deferred tax balances. The Company has determined that SSAP No.101 would not have a material impact on the current and deferred taxes presented under SSAP No. 10R.19.1
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