(10)

Closed Block

In connection with the sponsored demutualization of Provident Mutual Life Insurance Company (“Provident”) prior to its acquisition by the Company, Provident established a closed block for the benefit of certain classes of individual participating policies that had a dividend scale payable in 2001. Assets were allocated to the closed block in an amount that produces cash flows which, together with anticipated revenues from closed block business, is reasonably expected to be sufficient to provide for (1) payment of policy benefits, specified expenses and taxes, and (2) the continuation of dividends throughout the life of the Provident policies included in the closed block based upon the dividend scales payable for 2001, if the experience underlying such dividend scales continues.

Assets allocated to the closed block benefit only the holders of the policies included in the closed block and will not revert to the benefit of the Company. No reallocation, transfer, borrowing or lending of assets can be made between the closed block and other portions of the Company’s general account, any of its separate accounts, or any affiliate of the Company without the approval of the Pennsylvania Insurance Department and the Ohio Department of Insurance (“ODI”). The closed block will remain in effect as long as any policy in the closed block is in force.

If, over time, the aggregate performance of the closed block assets and policies is better than was assumed in funding the closed block, dividends to policyholders will increase. If, over time, the aggregate performance of the closed block assets and policies is less favorable than was assumed in the funding, dividends to policyholders could be reduced. If the closed block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from the Company’s assets outside of the closed block, which are general account assets.

The assets and liabilities allocated to the closed block are recorded in the Company’s consolidated financial statements on the same basis as other similar assets and liabilities. The carrying amount of closed block liabilities in excess of the carrying amount of closed block assets at the date Provident was acquired by the Company represents the maximum future earnings from the assets and liabilities designated to the closed block that can be recognized in income, for the benefit of policyholders, over the period the policies in the closed block remain in force.

If actual cumulative earnings exceed expected cumulative earnings, the expected earnings are recognized in income. This is because the excess actual cumulative earnings over expected cumulative earnings, which represents undistributed accumulated earnings attributable to policyholders, is recorded as a policyholder dividend obligation. Therefore, the excess will be paid to closed block policyholders as an additional policyholder dividend expense in the future, unless it is otherwise offset by future performance of the closed block that is less favorable than originally expected. If actual cumulative performance is less favorable than expected, actual earnings will be recognized in income.

The principal cash flow items that affect the amount of closed block assets and liabilities are premiums, net investment income, purchases and sales of investments, policyholder benefits, policyholder dividends, premium taxes and income taxes. The principal income and expense items excluded from the closed block are management and maintenance expenses, commissions and net investment income and realized gains and losses on investments held outside of the closed block that support the closed block business, all of which enter into the determination of total gross margins of closed block policies.

The amounts shown in the following tables for assets, liabilities, revenues and expenses of the closed block are those that enter into the determination of amounts that are to be paid to policyholders.

The following table summarizes financial information for the closed block, as of the dates indicated:


	December 31,
(in millions)	2018			2017
Liabilities:
Future policyholder benefits	$	1,533		$	1,571
Policyholder funds and accumulated dividends		136			137
Policyholder dividends payable		18			20
Policyholder dividend obligation		35			110
Other policy obligations and liabilities		38			25

Total liabilities	$	1,760		$	1,863

Assets:
Available-for-sale securities	$	1,202		$	1,294
Mortgage loans, net of allowance		220			220
Policy loans		124			128
Other assets		80			77

Total assets	$	1,626		$	1,719

Excess of reported liabilities over assets	$	134		$	144

Portion of above representing other comprehensive income:
(Decrease) Increase in unrealized gain on fixed maturity securities, available-for-sale	$	(67	)	$	14
Adjustment to policyholder dividend obligation		67			(14	)

Total of above representing other than comprehensive income	$	—		$	—

Maximum future earnings to be recognized from assets and liabilities	$	134		$	144

Other comprehensive income:
Available-for-sale securities:
Fair value	$	1,202		$	1,294
Amortized cost		1,181			1,206
Shadow policyholder dividend obligation		(21	)		(88	)

Net unrealized appreciation	$	—		$	—

The following table summarizes closed block operations for the years ended:


	December 31,
(in millions)	2018			2017			2016
Revenues:
Premiums	$	50		$	53		$	56
Net investment income		75			81			84
Realized investment (losses) gains		—			(1	)		(3	)
Realized losses credited to policyholder benefit obligation		(4	)		(4	)		(1	)

Total revenues	$	121		$	129		$	136

Benefits and expenses:
Policy and contract benefits	$	121		$	115		$	125
Change in future policyholder benefits and interest credited to policyholder accounts		(38	)		(32	)		(36	)
Policyholder dividends		36			39			40
Change in policyholder dividend obligation		(12	)		(8	)		(8	)
Other expenses		1			1			1

Total benefits and expenses	$	108		$	115		$	122

Total revenues, net of benefits and expenses, before federal income tax expense	$	13		$	14		$	14
Federal income tax expense		3			5			5

Revenues, net of benefits and expenses and federal income tax expense	$	10		$	9		$	9

Maximum future earnings from assets and liabilities:
Beginning of period	$	144		$	153		$	162
Change during period		(10	)		(9	)		(9	)

End of period	$	134		$	144		$	153

Cumulative closed block earnings from inception through December 31, 2018, 2017 and 2016 were higher than expected as determined in the actuarial calculation. Therefore, policyholder dividend obligations (excluding the adjustment for unrealized gains on available-for-sale securities) were $14 million, $22 million and $26 million as of December 31, 2018, 2017 and 2016, respectively.