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ANNUAL STATEMENT FOR THE YEAR 2011 OF THE TEACHERS INSURANCE and ANNUITY ASSOCIATION of AMERICANOTES TO FINANCIAL STATEMENTSThe Company also purchases credit default swaps to hedge against negative credit events on selectiveinvestments in the Company’s portfolio. This type of derivative is traded over-the-counter, and the Companyis exposed to market, credit, and counterparty risk. These swap contracts qualify as fair value hedges andthe premium payment to the counterparty is expensed. Derivative instruments used in hedging transactionsthat do not meet or no longer meet the criteria of an effective hedge are accounted for at fair value.Exchange Traded Interest Rate Futures: The Company enters into interest rate futures contracts as ahedge against the effect of interest rate fluctuations on certain fixed interest rate bonds. These contracts aredesigned as economic hedges and allow the Company to manage changes, due to interest rates, in thevalue of securities that it owns. This type of derivative instrument is traded with regulated futurescommission merchants who are members of a trading exchange and is exposed to market risk. The interestrate futures contracts are initially carried at the amount of cash margin deposits outstanding, withsubsequent changes in variation margin recognized in unrealized gains or losses.Equity Index Options: The Company enters into options on equity indexes to hedge a portion of the generalaccount equity position against downside equity risk or volatility in equity markets. This derivative instrumentis traded over-the-counter and the Company is exposed to both market and counterparty risk. The carryingvalue of equity index options for which hedge accounting is applied represents the premium paid adjusted toreflect the option market value. Equity index options for which hedge accounting is not applied are carried atfair value. The changes in the carrying value of equity index options contracts are recognized at the end ofthe period as unrealized gains or losses.(3) The Company currently has International Swaps and Derivatives Association (“ISDA”) master swapagreements in place with twelve derivative counterparties to over the counter transactions. In addition to theISDA agreement, Credit Support Annexes (“CSA”), which are bilateral collateral agreements, have been putin place with twelve derivative counterparties. The CSA’s allow TIAA’s mark-to-market exposure to acounterparty to be collateralized by the posting of cash or highly liquid U.S. government securities. As ofDecember 31, 2011, TIAA held cash collateral of $102.7 million from its counterparties. TIAA must also postcollateral to the extent its net mark-to-market position with a given counterparty is out of the money in favorof the counterparty. As of December 31, 2011, the Company pledged cash collateral of $13.5 million andsecurities collateral of $15.2 million to its counterparties. The cash collateral amounts are recorded by theCompany in Aggregate Write-Ins for Invested Assets and Liabilities.(4) The Company will record impairment on a derivative position if an existing condition or set of circumstancesindicates there is a limited ability to recover an unrealized loss. The Company held $13.7 billion notionalamount in derivative positions on December 31, 2011 for which no impairment was recorded.(5) For the twelve months ended December 31, 2011, the average fair value of derivatives used for other thanhedging purposes, which are the credit default swaps used in replication synthetic asset transactions was$61.1 million in assets.17. Sale, Transfer and Servicing of Financial Assets and Extinguishments of LiabilitiesA. Transfers of Receivables Reported as SalesNot applicable.B. Transfer and Servicing of Financial AssetsNot applicable.C. Wash Sales(1) TIAA does not engage in the practice of wash sales, however, in isolated cases in the course of assetmanagement activities, a security may be sold and repurchased in whole or in part within thirty days ofsale.(2) The details by NAIC designation 3 or below of securities sold during the year ended December 31, 2011and reacquired within thirty days of the sale date are:Number ofTransactionsBook Value ofSecurities SoldCost ofSecuritiesRepurchasedGain (Loss)NAIC 3 5 $ 4,912,591 $ 5,071,875 $ 47,409NAIC 4 3 $ 3,815,076 $ 3,862,500 $ 113,04918. Gain or Loss to the Reporting Entity from Uninsured Plans and the Uninsured Portion of Partially Insured PlansNot applicable.19. Direct Premium Written/Produced by Managing General Agents/Third Party AdministratorsNot applicable.19.18
ANNUAL STATEMENT FOR THE YEAR 2011 OF THE TEACHERS INSURANCE and ANNUITY ASSOCIATION of AMERICA20. Fair Value MeasurementsNOTES TO FINANCIAL STATEMENTSIncluded in the Company’s financial statements are certain financial instruments carried at fair value. Otherfinancial instruments are periodically measured at fair value, such as when impaired, or for certain bonds andpreferred stock when carried at the lower of cost or fair value.Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderlytransaction between market participants at the measurement date.Fair values are based on quoted market prices when available. When market prices are not available, fairvalues are primarily provided by a third party pricing service for identical or comparable assets, or through theuse of valuation methodologies using observable market inputs. These fair values are generally estimated usingdiscounted cash flow analyses, incorporating current market inputs for similar financial instruments withcomparable terms and credit quality. In instances where there is little or no market activity for the same orsimilar instruments, the Company estimates fair value using methods, models and assumptions thatmanagement believes market participants would use to determine a current transaction price. These valuationtechniques involve management estimation and judgment for many factors including market bid/ask spreads,and such estimations may become significant with increasingly complex instruments or pricing models. Whereappropriate, adjustments are included to reflect the risk inherent in a particular methodology, model or inputused.The Company’s financial assets and liabilities carried at fair value have been classified, for disclosure purposes,based on a hierarchy defined by SSAP No. 100, Fair Value Measurements. The fair value hierarchy prioritizesthe inputs to valuation techniques used to measure fair value into three broad levels. The hierarchy gives thehighest ranking to fair values determined using unadjusted quoted prices in active markets for identical assetsand liabilities (Level 1) and the lowest ranking to fair values determined using methodologies and models withunobservable inputs (Level 3). An asset’s or a liability’s classification is based on the lowest level input that issignificant to its measurement. For example, a Level 3 fair value measurement may include inputs that are bothobservable (Levels 1 and Level 2) and unobservable (Level 3). The levels of the fair value hierarchy are asfollows:Level 1 – Inputs are unadjusted quoted prices in active markets for identical assets and liabilities that theCompany has the ability to access at the measurement date.Level 2 – Other than quoted prices within Level 1 inputs that are observable for the asset or liability, eitherdirectly or indirectly.Level 2 inputs include:• Quoted prices for similar assets or liabilities in active markets,• Quoted prices for identical or similar assets or liabilities in markets that are not active,• Inputs other than quoted prices that are observable for the asset or liability,• Inputs that are derived principally from or corroborated by observable market data by correlation orother means.Level 3 – Inputs are unobservable inputs for the asset or liability supported by little or no market activity.Unobservable inputs reflect the Company’s own assumptions about the assumptions that market participantswould use in pricing the asset or liability. The Company’s data used to develop unobservable inputs isadjusted if information is reasonably available without undue cost and effort that indicates that marketparticipants would use different assumptions.Considerable judgment is required to interpret market data in developing the estimates of fair value for financialinstruments for which there are no available market value quotations. The estimates presented are notnecessarily indicative of the amounts the Company could have realized in a market exchange. The use ofdifferent market assumptions and/or estimation methodologies may have a material effect on the estimated fairvalue amounts.(1) Financial assets and liabilities measured and reported at fair value:The following tables provide information about the Company’s financial assets and liabilities measured andreported at fair value at December 31, 2011:Level 1 Level 2 Level 3 TotalAssets at fair value:BondsIndustrial and Miscellaneous ......$ --- $ --- $ 456,515,227 $ 456,515,227Total Bonds .............................$ --- $ --- $ 456,515,227 $ 456,515,227Common StockIndustrial and Miscellaneous ......$ 689,625,890 $ 83,433,941 $ 370,802,003 $ 1,143,861,834Total Common Stocks.............$ 689,625,890 $ 83,433,941 $ 370,802,003 $ 1,143,861,834Total Preferred Stocks ..................$ --- $ --- $ 957,358 $ 957,35819.19
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