plico-20200930

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, 2020

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number 001-31901

PROTECTIVE LIFE INSURANCE COMPANY

(Exact name of registrant as specified in its charter)


Tennessee						63-0169720
(State or other jurisdiction of incorporation or organization)						(IRS Employer Identification Number)

2801 Highway 280 South

Birmingham, Alabama 35223

(Address of principal executive offices and zip code)

(205) 268-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
N/A	N/A	N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☐

Accelerated Filer

☐

Non-accelerated filer

☒

Smaller Reporting Company

☐

Emerging Growth Company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

Number of shares of Common Stock, $1.00 Par Value, outstanding as of October 26, 2020: 5,000,000

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PROTECTIVE LIFE INSURANCE COMPANY

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2020

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		Page
	PART I

Item 1.	Financial Statements (unaudited):
	Consolidated Condensed Statements of Income For The Three and Nine Months Ended September 30, 2020 and 2019	2
	Consolidated Condensed Statements of Comprehensive Income For The Three and Nine Months Ended September 30, 2020 and 2019	3
	Consolidated Condensed Balance Sheets as of September 30, 2020 and December 31, 2019	4
	Consolidated Condensed Statements of Shareowner’s Equity For The Three and Nine Months Ended September 30, 2020 and 2019	6
	Consolidated Condensed Statements of Cash Flows For The Nine M onths Ended September 30, 2020 and 2019	8
	Notes to Consolidated Condensed Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	66
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	117
Item 4.	Controls and Procedures	117

	PART II

Item 1A.	Risk Factors	118
Item 6.	Exhibits	125
	Signature	126

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PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)


	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars In Thousands)
Revenues
Premiums and policy fees	$	1,045,148	$	1,021,152	$	2,950,425	$	2,883,935
Reinsurance ceded	(303,732)		(330,201)		(733,623)		(1,014,633)
Net of reinsurance ceded	741,416		690,951		2,216,802		1,869,302
Net investment income	738,171		739,711		2,231,586		2,066,327
Realized gains (losses) - investments/derivatives	38,156		119,685		20,147		216,308
Other income	115,484		115,679		354,018		297,987
Total revenues	1,633,227		1,666,026		4,822,553		4,449,924
Benefits and expenses
Benefits and settlement expenses, net of reinsurance ceded: (three and nine months 2020 - $245,983 and $565,374; three and nine months 2019 - $224,619 and $733,970)	1,258,824		1,171,034		3,735,160		3,147,641
Amortization of deferred policy acquisition costs and value of business acquired	109,141		61,350		144,596		125,560
Other operating expenses, net of reinsurance ceded: (three and nine months 2020 - $52,457 and $170,994; three and nine months 2019 - $59,692 and $168,566)	192,650		193,801		572,871		574,432
Total benefits and expenses	1,560,615		1,426,185		4,452,627		3,847,633
Income before income tax	72,612		239,841		369,926		602,291
Income tax expense	12,850		49,417		71,094		115,355
Net income	$	59,762	$	190,424	$	298,832	$	486,936

See Notes to Consolidated Condensed Financial Statements

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PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)


	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars In Thousands)
Net income	$	59,762	$	190,424	$	298,832	$	486,936
Other comprehensive income (loss):
Change in net unrealized gains (losses) on investments, net of income tax: (three and nine months 2020 - $127,602 and $334,656; three and nine months 2019 - $226,235 and $789,876)	480,024		851,075		1,258,943		2,971,442
Reclassification adjustment for investment amounts included in net income, net of income tax: (three and nine months 2020 - $7,513 and $16,011; three and nine months 2019 - $(1,022) and $(1,517))	28,265		(3,846)		60,231		(5,710)
Change in net unrealized gains (losses) for which a credit loss has been recognized in operations, net of income tax: (three and nine months 2020 - $7,290 and $6,821)	27,426		—		25,659		—
Change in net unrealized gains (losses) relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (three and nine months 2019 - $(5,318) and $1,146)	—		(20,008)		—		4,308
Change in accumulated (loss) gain - derivatives, net of income tax: (three and nine months 2020 - $405 and $(233); three and nine months 2019 - $(893) and $(2,157))	1,524		(3,362)		(877)		(8,116)
Reclassification adjustment for derivative amounts included in net income, net of income tax: (three and nine months 2020 - $84 and $645; three and nine months 2019 - $157 and $285)	317		589		2,427		1,075
Total other comprehensive income	537,556		824,448		1,346,383		2,962,999
Total comprehensive income	$	597,318	$	1,014,872	$	1,645,215	$	3,449,935

See Notes to Consolidated Condensed Financial Statements

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PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED BALANCE SHEETS


	As of
	September 30, 2020		December 31, 2019
	(Unaudited)
	(Dollars In Thousands)
Assets
Fixed maturities, at fair value (amortized cost: 2020 - $64,620,056; 2019 - $63,268,660; allowance for credit losses: 2020 - $19,399)	$	70,095,244	$	66,043,992
Fixed maturities, at amortized cost (fair value: 2020 - $2,990,170; 2019 - $3,025,790)	2,680,324		2,823,881
Equity securities, at fair value (cost: 2020 - $519,972; 2019 - $534,463)	538,385		553,720
Commercial mortgage loans, net of allowance for credit losses (allowance for credit losses: 2020 - $175,050; 2019 - $4,884)	9,765,312		9,379,401
Investment real estate, net of accumulated depreciation (2020 - $329; 2019 - $203)	10,195		10,321
Policy loans	1,640,147		1,675,121
Other long-term investments	2,955,438		2,479,520
Short-term investments	1,239,028		1,320,864
Total investments	88,924,073		84,286,820
Cash	381,753		171,752
Accrued investment income	723,028		715,388
Accounts and premiums receivable	161,658		174,202
Reinsurance receivables, net of allowances for credit losses (allowances for credit losses: 2020 - $107,472; 2019 - $0)	4,679,727		4,371,865
Deferred policy acquisition costs and value of business acquired	3,461,920		3,519,555
Goodwill	825,511		825,511
Other intangibles, net of accumulated amortization (2020 - $297,439; 2019 - $253,759)	553,084		583,426
Property and equipment, net of accumulated depreciation (2020 - $53,527; 2019 - $49,357)	209,554		211,745
Other assets	293,875		308,544

Assets related to separate accounts
Variable annuity	11,487,408		12,730,090
Variable universal life	1,144,474		1,135,666
Reinsurance assumed	12,091,466		11,443,105
Total assets	$	124,937,531	$	120,477,669

See Notes to Consolidated Condensed Financial Statements

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PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED BALANCE SHEETS

(continued)


	As of
	September 30, 2020		December 31, 2019
	(Unaudited)
	(Dollars In Thousands)
Liabilities
Future policy benefits and claims	$	54,074,073	$	53,943,962
Unearned premiums	781,403		794,832
Total policy liabilities and accruals	54,855,476		54,738,794
Stable value product account balances	6,017,259		5,443,752
Annuity account balances	15,213,466		14,289,907
Other policyholders’ funds	1,715,231		1,576,856
Other liabilities	4,654,669		2,977,278
Income tax payable	41,135		34,224
Deferred income taxes	1,717,358		1,371,970
Debt	696		968
Subordinated debt	110,000		110,000
Non-recourse funding obligations	2,942,126		3,082,753
Secured financing liabilities	232,826		335,480
Liabilities related to separate accounts
Variable annuity	11,487,408		12,730,090
Variable universal life	1,144,474		1,135,666
Reinsurance assumed	12,091,466		11,443,105
Total liabilities	112,223,590		109,270,843
Commitments and contingencies - Note 11
Shareowner’s equity
Preferred Stock; $1 par value, shares authorized: 2,000; Liquidation preference: $2	2		2
Common Stock, $1 par value, shares authorized and issued: 2020 and 2019 - 5,000,000	5,000		5,000
Additional paid-in-capital	8,260,537		8,260,537
Retained earnings	1,694,377		1,533,645
Accumulated other comprehensive income (loss):
Net unrealized gains (losses) on investments, net of income tax: (2020 - $733,977; 2019 - $383,311)	2,761,152		1,441,978
Net unrealized losses on investments for which a credit loss has been recognized in operations, net of income tax: (2020 - $(183))	(688)		—
Net unrealized losses relating to other-than-temporary impaired investments for which a portion has been recognized in operations, net of income tax: (2019 - $(7,004))	—		(26,347)
Accumulated gain (loss) - derivatives, net of income tax: (2020 - $(1,710); 2019 - $(2,123))	(6,439)		(7,989)
Total shareowner’s equity	12,713,941		11,206,826
Total liabilities and shareowner’s equity	$	124,937,531	$	120,477,669

See Notes to Consolidated Condensed Financial Statements

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PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF SHAREOWNER’S EQUITY

(Unaudited)


	Preferred Stock		Common Stock		Additional Paid-In-Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareowner’s Equity
	(Dollars In Thousands)













Balance, June 30, 2020	$	2	$	5,000	$	8,260,537	$	1,634,615	$	2,216,469	$	12,116,623
Net income							59,762				59,762
Other comprehensive income									537,556		537,556
Comprehensive income											597,318




Balance, September 30, 2020	$	2	$	5,000	$	8,260,537	$	1,694,377	$	2,754,025	$	12,713,941


	Preferred Stock		Common Stock		Additional Paid-In-Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareowner’s Equity
	(Dollars In Thousands)
Balance, December 31, 2019	$	2	$	5,000	$	8,260,537	$	1,533,645	$	1,407,642	$	11,206,826
Net income							298,832				298,832
Other comprehensive income									1,346,383		1,346,383
Comprehensive income											1,645,215
Cumulative effect adjustments							(138,100)				(138,100)
Balance, September 30, 2020	$	2	$	5,000	$	8,260,537	$	1,694,377	$	2,754,025	$	12,713,941

See Notes to Consolidated Condensed Financial Statements

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PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF SHAREOWNER’S EQUITY

(Unaudited)

(continued)


	Preferred Stock		Common Stock		Additional Paid-In-Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareowner’s Equity
	(Dollars In Thousands)










Balance, June 30, 2019	$	2	$	5,000	$	8,260,537	$	1,277,173	$	734,335	$	10,277,047
Net income							190,424				190,424
Other comprehensive income									824,448		824,448
Comprehensive income											1,014,872
Balance, September 30, 2019	$	2	$	5,000	$	8,260,537	$	1,467,597	$	1,558,783	$	11,291,919


	Preferred Stock		Common Stock		Additional Paid-In-Capital		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total Shareowner’s Equity
	(Dollars In Thousands)
Balance, December 31, 2018	$	2	$	5,000	$	7,410,537	$	1,031,465	$	(1,404,216)	$	7,042,788
Net income							486,936				486,936
Other comprehensive income									2,962,999		2,962,999
Comprehensive income											3,449,935
Cumulative effect adjustments							(50,804)				(50,804)
Capital contributions from parent					850,000						850,000
Balance, September 30, 2019	$	2	$	5,000	$	8,260,537	$	1,467,597	$	1,558,783	$	11,291,919

See Notes to Consolidated Condensed Financial Statements

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PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)


	For The Nine Months Ended September 30,
	2020		2019
	(Dollars In Thousands)
Cash flows from operating activities
Net income	$	298,832	$	486,936
Adjustments to reconcile net income to net cash used in operating activities:
Realized (gains) losses - investments/derivatives	(20,147)		(216,308)
Amortization of DAC and VOBA	144,596		125,560
Capitalization of DAC	(354,315)		(341,481)
Depreciation and amortization expense	57,381		55,415
Deferred income tax	26,061		(189,599)
Accrued income tax	6,911		(63,824)
Interest credited to universal life and investment products	1,155,732		954,213
Policy fees assessed on universal life and investment products	(1,338,402)		(1,269,614)
Change in reinsurance receivables	42,910		292,029
Change in accrued investment income and other receivables	25,972		(14,148)
Change in policy liabilities and other policyholders’ funds of traditional life and health products	(747,627)		(545,930)
Trading securities:
Maturities and principal reductions of investments	69,276		82,603
Sale of investments	493,059		327,852
Cost of investments acquired	(719,682)		(270,800)
Other net change in trading securities	19,577		(57,240)
Amortization of premiums and accretion of discounts on investments and commercial mortgage loans	235,331		238,086
Change in other liabilities	423,942		551,569
Other, net	26,210		(159,074)
Net cash used in operating activities	$	(154,383)	$	(13,755)

See Notes to Consolidated Condensed Financial Statements

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PROTECTIVE LIFE INSURANCE COMPANY

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(continued)


	For The Nine Months Ended September 30,
	2020		2019
	(Dollars In Thousands)
Cash flows from investing activities
Maturities and principal reductions of investments, available-for-sale	$	3,157,821	$	1,339,764
Sale of investments, available-for-sale	2,507,683		3,149,829
Cost of investments acquired, available-for-sale	(7,000,496)		(4,827,926)

Commercial mortgage loans:
New lendings	(1,053,802)		(968,656)
Repayments	484,313		723,325
Change in investment real estate, net	126		(319)
Change in policy loans, net	34,974		53,056
Change in other long-term investments, net	200,905		83,286
Change in short-term investments, net	67,941		(310,120)
Net unsettled security transactions	105,366		(154,791)
Purchase of property, equipment, and intangibles	(25,137)		(22,425)

Payment for business acquisition, net of cash acquired	—		(777,807)
Net cash used in investing activities	$	(1,520,306)	$	(1,712,784)
Cash flows from financing activities


Secured financing liabilities	(102,655)		(142,575)
Capital contributions from parent	—		850,000
Deposits to universal life and investment contracts	5,040,986		4,258,248
Withdrawals from universal life and investment contracts	(3,053,347)		(3,166,505)
Other financing activities, net	(294)		(729)
Net cash provided by financing activities	$	1,884,690	$	1,798,439
Change in cash	210,001		71,900
Cash at beginning of period	171,752		151,400
Cash at end of period	$	381,753	$	223,300

See Notes to Consolidated Condensed Financial Statements

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PROTECTIVE LIFE INSURANCE COMPANY

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

1. BASIS OF PRESENTATION

Basis of Presentation

Protective Life Insurance Company (the “Company”), a stock life insurance company, was founded in 1907. The Company is a wholly owned subsidiary of Protective Life Corporation (“PLC”), an insurance holding company. On February 1, 2015, PLC became a wholly owned subsidiary of The Dai-ichi Life Insurance Company, Limited, a kabushiki kaisha organized under the laws of Japan (now known as Dai-ichi Life Holdings, Inc., “Dai-ichi Life”), when DL Investment (Delaware), Inc., a wholly owned subsidiary of Dai-ichi Life, merged with and into PLC (the “Merger”). Prior to February 1, 2015, PLC’s stock was publicly traded on the New York Stock Exchange. Subsequent to the Merger, PLC remained an SEC registrant within the United States until January 23, 2020, when it suspended its reporting obligations with the SEC under the Securities Exchange Act of 1934. The Company has continued to be an SEC registrant for financial reporting purposes in the United States. The Company markets individual life insurance, credit life and disability insurance, guaranteed investment contracts, guaranteed funding agreements, fixed and variable annuities, and extended service contracts throughout the United States. The Company also maintains a separate segment devoted to the acquisition of insurance policies from other companies. PLC is a holding company with subsidiaries that provide financial services through the production, distribution, and administration of insurance and investment products.

These consolidated condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for the interim periods presented herein. In the opinion of management, the accompanying consolidated condensed financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the results for the interim periods presented. Operating results for the three and nine months ended September 30, 2020, are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020. The year-end consolidated condensed financial data included herein was derived from audited financial statements but this report does not include all disclosures required by GAAP. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to changing competition, economic conditions, interest rates, investment performance, insurance ratings, claims, persistency, and other factors.

During the third quarter of 2020, the Company recorded certain adjustments related to prior periods to correct errors pertaining to the calculation of policyholder reserves and ceded reinsurance premiums. These adjustments resulted in a decrease to policy liabilities and benefit and settlement expenses of $18.1 million; an increase to deferred policy acquisition costs amortization expense of $6.1 million; and a decrease to ceded premiums and other ceded operating expenses of $10.2 million and $3.2 million, respectively in the consolidated financial statements. The result of these adjustments, in total, was to increase income before income taxes by $19.0 million and $9.4 million for the three months and nine months ended September 30, 2020, respectively. The Company concluded that the adjustments were not quantitatively or qualitatively material to previously reported periods or the 2020 estimated income or earnings trends. As a result, the adjustments were recorded by the Company within the consolidated condensed financial statements as of and for the three month and nine month periods ended September 30, 2020.

During the nine months ended September 30, 2020, the Company identified certain reclassifications needed to appropriately present amounts related to reinsured vehicle service contracts. Also during the first half of 2020, the Company identified certain cash flows presented in its investing and financing activities that were determined to be non-cash items. The Company determined that the reclassifications were not material to the financial statements for any period. These amounts have been corrected in the consolidated condensed balance sheets, statements of income, and statements of cash flows for the three and nine months ended September 30, 2019.

Beginning in the first quarter of 2020, the uncontained outbreak of the novel coronavirus, which causes the disease termed COVID-19, created significant economic and social disruption and impacted various operational and financial aspects of the Company’s business. While not all of the impacts of COVID-19 are identifiable or quantifiable, during the nine months ended September 30, 2020, there has been deterioration in actual and forecasted macroeconomic variables that has adversely impacted the fair values of certain of the Company’s investments and its allowance for credit losses on commercial mortgage loans. The Company has also recorded an increase associated with guaranteed benefits on certain of its variable annuity contracts, while realizing gains from derivatives held to hedge these guaranteed benefits. Additionally, there has been an increase in life insurance claims attributed to COVID-19.

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Entities Included

The consolidated condensed financial statements in this report include the accounts of Protective Life Insurance Company and affiliate companies in which the Company holds a majority voting or economic interest. Intercompany balances and transactions have been eliminated.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Significant Accounting Policies

For a full description of the Company's significant accounting policies, refer to Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. There were no significant changes to the Company’s accounting policies during the nine months ended September 30, 2020, except the items noted below.

Allowance for Credit Losses - Fixed Maturity and Structured Investments

Each quarter the Company reviews investments with unrealized losses to determine whether such impairments are the result of credit losses. The Company analyzes various factors to make such determination including, but are not limited to: 1) actions taken by rating agencies, 2) default by the issuer, 3) the significance of the decline, 4) an assessment of the Company’s intent to sell the security (including a more likely than not assessment of whether the Company will be required to sell the security) before recovering the security’s amortized cost, 5) an economic analysis of the issuer’s industry, and 6) the financial strength, liquidity, and recoverability of the issuer. Management performs a security by security review each quarter to evaluate whether a credit loss has occurred.

For securities which the Company does not intend to sell and does not expect to be required to sell before recovering the security’s amortized cost basis, analysis of expected cash flows is used to measure the amount of the credit loss. To the extent the amortized cost basis of the security exceeds the present value of future cash flows expected to be collected, this difference represents a credit loss. Beginning on January 1, 2020, credit losses are recorded in realized gains (losses) - investments/derivatives with a corresponding adjustment to the allowance for credit losses, except that the credit loss recognized cannot exceed the difference between the book value and fair value of the security as of the date of the analysis. In future periods, recoveries in the present value of expected cash flows are recorded as a reversal of the previously recognized allowance for credit losses with an offsetting adjustment to realized gains (losses) - investments/derivatives. See, “Accounting Pronouncements Recently Adopted” below for additional information. The Company considers contractual cash flows and all known market data related to cash flows when developing its estimates of expected cash flows. The Company uses the effective interest rate implicit in the security at the date of acquisition to discount expected cash flows. For floating rate securities, the Company’s policy is to lock in the interest rate at the first instance of an impairment. Estimates of expected cash flows are not probability-weighted but reflect the Company’s best estimate based on past events, current conditions, and reasonable and supportable forecasts of future events. Debt securities that the Company intends to sell or expects to be required to sell before recovery are written down to fair value with the change recognized in realized gains (losses) - investments/derivatives.

The Company presents accrued interest receivable separately from other components of the amortized cost basis of its fixed maturity and structured investments and has made an accounting policy election not to measure an allowance for credit losses for accrued interest receivable. The Company’s policy is to write off uncollectible accrued interest receivables through a reversal of interest income in the period in which a credit loss is identified.

Allowance for Credit Losses - Commercial Mortgage Loans and Unfunded Commitments

The Company’s commercial mortgage loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, and net of the allowance for credit losses (“ACL”). Beginning January 1, 2020, the ACL represents the Company’s best estimate of expected credit losses over the contractual term of the loans. The allowance for credit losses for unfunded loan commitments is recognized as a component of other liabilities on the consolidated condensed balance sheet. Changes in the allowance for credit losses for both funded and unfunded commercial mortgage loans are recognized in realized gains (losses) - investments/derivatives.

The Company uses a loan-level probability of default (“PD”) and loss given default (“LGD”) model to calculate the allowance for credit losses for substantially all of its commercial mortgage loans and unfunded loan commitments. Guidance in Accounting Standards Codification (“ASC”) Topic 326-20 - Credit Losses requires collective assessment of financial assets with similar risk characteristics. Consistent with this guidance, the model used by the Company (the “CML Model”) incorporates historical default data for a large number of loans with similar characteristics to the Company’s commercial mortgage loans in the measurement of the allowance for credit losses. Relevant risk characteristics include debt service coverage ratio (“DSCR”), loan-to-value ratio (“LTV”), geographic location, and property type. This historical default data is applied through the CML Model to forecast loan-level risk parameters including PD and LGD which provide the basis for the

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determination of expected losses.

The CML Model incorporates both current conditions and reasonable and supportable forecasts when estimating the PD and LGD values that are used as the basis for calculating expected losses. Current conditions are incorporated by considering market-specific information, such as vacancy rates and property prices, to reflect the current position in the market cycle. To incorporate reasonable and supportable forecasts, loan-level risk parameters produced by the CML Model are conditioned by multiple probability-weighted macroeconomic forecast scenarios. CML Model results are also subject to adjustments based on other qualitative considerations to reflect management’s best estimate of the impact of future events and circumstances on the allowance for credit losses.

PDs and LGDs are forecasted over a reasonable and supportable forecast period, which is reassessed on a quarterly basis. After the reasonable and supportable forecast period, the CML Model reverts to the Company’s own historical loss history at a portfolio segment level. The historical loss data used for reversion will be assessed annually in the third quarter, along with certain other model inputs and assumptions.

All or a portion of a loan may be written off at such point that a) the Company no longer expects to receive cash payments, b) the present value of future expected payments of a renegotiated loan is less than the current principal balance, or c) at such time that the Company is party to foreclosure or bankruptcy proceedings associated with the borrower and does not expect to recover the principal balance of the loan. A write-off is recorded by eliminating the allowance against the commercial mortgage loan and recording the renegotiated loan or the collateral property related to the loan as investment real estate on the balance sheet, which is carried at the lower of the appraised fair value of the property or the unpaid principal balance of the loan, less estimated selling costs associated with the property.

Certain loans which meet the definition of collateral dependent (as outlined in the Financial Accounting Standards Board “FASB” ASC Topic 326-20) are identified as part of the Company’s ongoing loan surveillance process. Loans are considered to be collateral dependent if foreclosure is deemed probable, or if a borrower is in financial difficulty and repayment is expected to be provided substantially through the operation or sale of the underlying collateral. The allowance for credit losses for loans identified as collateral dependent is measured based on the fair value of the underlying collateral, less costs to sell.

The Company presents accrued interest receivable separately from other components of the amortized cost basis of its commercial mortgage loans and has made an accounting policy election not to measure an allowance for credit losses for accrued interest receivable. It is the Company’s policy to cease to carry accrued interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. In each scenario, accrued income is reversed through investment income. See Note 9, Commercial Mortgage Loans, for additional information.

Allowance for Credit Losses - Reinsurance Receivables

Beginning January 1, 2020, in accordance with FASB ASC Topic 326-20, the Company establishes an allowance for credit losses related to amounts receivable from reinsurers (the “Reinsurance ACL”). Changes in the Reinsurance ACL are recognized as a component of benefits and settlement expenses. The Reinsurance ACL is remeasured on a quarterly basis using an internally developed PD and LGD model. Key inputs to the calculation are a conditional probability of insurer liquidation by issuer credit rating and exposure at default derived from a runoff projection of ceded reserves by reinsurer to forecast future loss amounts. Management’s position is that the rate of return implicit in the financial asset (i.e. the ceded reserves) is associated with the discount rate used to value the underlying insurance reserves; that is, the rate of return on the asset portfolio(s) supporting the reserves. For reinsurance receivable exposures that do not share similar risk characteristics with other receivables, including those associated with counterparties that have experienced significant credit deterioration, the Company measures the allowance for credit losses individually, based on facts and circumstances associated with the specific reinsurer or transaction.

The Reinsurance ACL was $96.0 million as of January 1, 2020 upon adoption of ASU No. 2016-13 - Credit Losses. During the nine months ended September 30, 2020, the Reinsurance ACL increased slightly to $107.5 million. There were no write-offs or recoveries during the nine months ended September 30, 2020.

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The Company had total reinsurance receivables of $4.7 billion as of September 30, 2020, which includes both ceded policy benefit reserves and receivables for claims. Receivables for claims represented approximately 11% of total reinsurance receivables as of September 30, 2020. Receivables for claims are short-term in nature, and generally carry minimal credit risk. Of reserves ceded as of September 30, 2020, approximately 65% were receivables from reinsurers rated by A.M. Best Company. Of the total rated by A.M. Best, 74% were rated A+ or better, 16% were rated A, and 10% were rated A- or lower. The Company monitors the concentration of credit risk the Company has with any reinsurer, as well as the financial condition of its reinsurers, on an ongoing basis. Certain of the Company’s reinsurance receivables are supported by letters of credit, funds held or trust agreements.

Accounting Pronouncements Recently Adopted

Accounting Standards Update (“ASU” or “Update”) No. 2016-13 - Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The amendments in this Update introduce a new current expected credit loss (“CECL”) model for certain financial assets, including commercial mortgage loans and reinsurance receivables. For assets within the scope of the new model, an entity will recognize as an allowance against earnings its estimate of the contractual cash flows not expected to be collected on day one of the asset’s acquisition. The allowance may be reversed through earnings if a security recovers in value. This differs from the current impairment model, which requires recognition of credit losses when they have been incurred and recognizes a security’s subsequent recovery in value in other comprehensive income. The Update also makes targeted changes to the current impairment model for available-for-sale (“AFS”) debt securities, which comprise the majority of the Company’s invested assets. Similar to the CECL model, credit loss impairments will be recorded in an allowance against earnings that may be reversed for subsequent recoveries in value. The amendments in this Update, along with related amendments in ASU No. 2018-19, ASU No. 2019-04, and ASU No. 2019-11 - Codification Improvements to Topic 326, Financial Instruments-Credit Losses, were effective for annual and interim periods beginning after December 15, 2019 on a modified retrospective basis. A vendor-provided credit loss model is utilized to measure the allowance for the majority of the Company’s commercial mortgage loans and unfunded commercial mortgage loan commitments, and the Company utilizes use an internally-developed model to measure the allowance for amounts recoverable from reinsurers. The Company applied the revisions in the Update through a cumulative effect adjustment to retained earnings as of January 1, 2020. The cumulative effect adjustment resulted in a decrease in retained earnings of $138.1 million, net of the impact to deferred taxes, deferred acquisition costs (“DAC”), value of business acquired (“VOBA”) and other items. The Company continues to apply the previous guidance to 2019 and prior periods.

Accounting Pronouncements Not Yet Adopted

ASU No. 2018-12 - Financial Services - Insurance (Topic 944): Targeted Improvements to Accounting for Long-Duration Contracts. The amendments in this Update are designed to make improvements to the existing recognition, measurement, presentation, and disclosure requirements for certain long-duration contracts issued by an insurance company. The new amendments require insurance entities to provide a more current measure of the liability for future policy benefits for traditional and limited-payment contracts by regularly refining the liability for actual past experience and updated future assumptions. This differs from current requirements where assumptions are locked-in at contract issuance for these contract types. In addition, the updated liability will be discounted using an upper-medium grade (low-credit-risk) fixed income instrument yield that reflects the characteristics of the liability which differs from currently used rates based on the invested assets supporting the liability. In addition, the amendments introduce new requirements to assess market-based insurance contract options and guarantees for Market Risk Benefits and measure them at fair value. This Update also requires insurance entities to amortize deferred acquisition costs on a constant-level basis over the expected life of the contract. Finally, this Update requires new disclosures including liability rollforwards and information about significant inputs, judgments, assumptions, and methods used in the measurement. In November 2020, FASB issued ASU No. 2020-11 - Financial Services - Insurance (Topic 944); Effective Date and Early Application which deferred the effective date to periods beginning after December 31, 2022. The Company is currently reviewing its policies, processes, and applicable systems to determine the impact this standard will have on its operations and financial results.

ASU No. 2019-12 – Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this Update remove certain exceptions to the general principles in Topic 740 related to intraperiod tax allocations, interim tax calculations, and outside basis differences. The amendments also clarify and amend guidance in certain other areas of Topic 740 in order to eliminate diversity in practice. The amendments in this Update are effective for public business entities in fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. This Update is not expected to have a material impact on the Company’s operations and financial results.

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3. SIGNIFICANT TRANSACTIONS

Great-West Life & Annuity Insurance Company

On January 23, 2019, the Company entered into a Master Transaction Agreement (the “GWL&A Master Transaction Agreement”) with Great-West Life & Annuity Insurance Company (“GWL&A”), Great-West Life & Annuity Insurance Company of New York (“GWL&A of NY”), The Canada Life Assurance Company (“CLAC”) and The Great-West Life Assurance Company (“GWL” and, together with GWL&A, GWL&A of NY and CLAC, the “Sellers”), pursuant to which the Company will acquire via reinsurance (the “Transaction”) substantially all of the Sellers’ individual life insurance and annuity business (the “GW Individual Life Business”).

On June 3, 2019, the Company and PLAIC completed the Transaction (the “GWL&A Closing”). Pursuant to the GWL&A Master Transaction Agreement, the Company and PLAIC entered into reinsurance agreements (the “GWL&A Reinsurance Agreements”) and related ancillary documents at the GWL&A Closing. On the terms and subject to the conditions of the GWL&A Reinsurance Agreements, the Sellers ceded to the Company and PLAIC, effective as of the date of the GWL&A Closing, substantially all of the insurance policies related to the Individual Life Business on a 100% indemnity basis net of reinsurance recoveries. The aggregate ceding commission for the reinsurance of the Individual Life Business paid at the GWL&A Closing was $765.7 million. All policies issued in states other than New York were ceded to the Company under reinsurance agreements between the applicable Seller and the Company, and all policies issued in New York were ceded to PLAIC under a reinsurance agreement between GWL&A of NY and PLAIC. In addition, there were certain pending items related to the Master Transaction Agreement, which remained subject to negotiation as of September 30, 2020. On October 30, 2020, the Company reached a final settlement on all of the remaining pending items. As the one year purchase price measurement period had concluded, the Company will recognize approximately $90 million in income before income tax during the quarter ended December 31, 2020 related to the final settlement. To support its obligations under the GWL&A Reinsurance Agreements, the Company established trust accounts for the benefit of GWL&A, CLAC and GWL, and PLAIC established a trust account for the benefit of GWL&A of NY. The Sellers retained a block of participating policies, which are administered by the Company.

The GWL&A Master Transaction Agreement and other transaction documents contain certain customary representations and warranties made by each of the parties, and certain customary covenants regarding the Sellers and the Individual Life Business, and provide for indemnification, among other things, for breaches of those representations, warranties, and covenants. The terms of the GWL&A Reinsurance Agreements resulted in an acquisition of the Individual Life Business by the Company in accordance with ASC Topic 805, Business Combinations.

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The following table details the final allocation of assets acquired and liabilities assumed from the Individual Life Business reinsurance transaction as of the date of the GWL&A Closing:


	Fair Value as of June 1, 2019
	(Dollars In Thousands)
ASSETS
Fixed maturities	$	8,697,966
Commercial mortgage loans	1,386,228
Policy loans	44,002
Other long-term investments	1,521,965
Total investments	11,650,161
Cash	34,835
Accrued investment income	101,452
Reinsurance receivables	62
Accounts and premiums receivable	1,642
Value of business acquired	535,421
Other intangibles	21,300
Other assets	5,525
Assets related to separate accounts	9,583,217
Total assets	21,933,615
LIABILITIES
Future policy benefits and claims	$	11,022,177
Annuity account balances	220,064
Other policyholders’ funds	220,147
Other liabilities	75,367
Liabilities related to separate accounts	9,583,217
Total liabilities	21,120,972
NET ASSETS ACQUIRED	$	812,643

Assets related to separate accounts and liabilities related to separate accounts represent amounts receivable and payable for variable annuity and variable universal life products reinsured on a modified co-insurance basis.

The following unaudited pro forma condensed consolidated results of operations assumes that the aforementioned transactions of the Individual Life Business were completed as of January 1, 2019. The unaudited pro forma condensed results of operations are presented solely for informational purposes and are not necessarily indicative of the consolidated condensed results of operations that might have been achieved had the transaction been completed as of the date indicated:


	Unaudited		Unaudited
	For The Three Months Ended September 30, 2019		For The Nine Months Ended September 30, 2019
	(Dollars In Thousands)
Revenue	$	1,681,993	$	4,868,168
Net income	$	190,424	$	504,031

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4. MONY CLOSED BLOCK OF BUSINESS

In 1998, MONY Life Insurance Company (“MONY”) converted from a mutual insurance company to a stock corporation (“demutualization”). In connection with its demutualization, an accounting mechanism known as a closed block (the “Closed Block”) was established for certain individuals’ participating policies in force as of the date of demutualization. Assets, liabilities, and earnings of the Closed Block are specifically identified to support its participating policyholders. The Company acquired the Closed Block in conjunction with the acquisition of MONY in 2013.

Assets allocated to the Closed Block inure solely to the benefit of the Closed Block’s policyholders and will not revert to the benefit of MONY or the Company. No reallocation, transfer, borrowing or lending of assets can be made between the Closed Block and other portions of MONY’s general account, any of MONY’s separate accounts or any affiliate of MONY without the approval of the Superintendent of The New York State Department of Financial Services (the “Superintendent”). Closed Block assets and liabilities are carried on the same basis as similar assets and liabilities held in the general account.

Summarized financial information for the Closed Block as of September 30, 2020 and December 31, 2019 is as follows:


	As of
	September 30, 2020		December 31, 2019
	(Dollars In Thousands)
Closed block liabilities
Future policy benefits, policyholders’ account balances and other policyholder liabilities	$	5,458,772	$	5,836,815
Policyholder dividend obligation	473,380		278,505
Other liabilities	8,328		11,247
Total closed block liabilities	5,940,480		6,126,567
Closed block assets
Fixed maturities, available-for-sale, at fair value	$	4,827,002	$	4,682,731

Commercial mortgage loans	69,422		72,829
Policy loans	633,609		640,134
Cash and other invested assets	24,614		44,877
Other assets	96,865		107,177
Total closed block assets	5,651,512		5,547,748
Excess of reported closed block liabilities over closed block assets	288,968		578,819
Portion of above representing accumulated other comprehensive income:
Net unrealized gains (losses) - investments/derivatives net of policyholder dividend obligation: 2020 - $383,309 and 2019 - $167,285; and net of income tax: 2020 - $(80,495) and 2019 - $(35,130)	—		—
Future earnings to be recognized from closed block assets and closed block liabilities	$	288,968	$	578,819

Reconciliation of the policyholder dividend obligation is as follows:


	For The Nine Months Ended September 30,
	2020		2019
	(Dollars In Thousands)
Policyholder dividend obligation, beginning balance	$	278,505	$	—
Applicable to net revenue (losses)	(21,150)		(19,548)
Change in net unrealized gains (losses) - investments/derivatives allocated to the policyholder dividend obligation	216,025		339,413
Policyholder dividend obligation, ending balance	$	473,380	$	319,865

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Closed Block revenues and expenses were as follows:


	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars In Thousands)
Revenues
Premiums and other income	$	36,394	$	37,652	$	109,656	$	115,202
Net investment income	50,557		52,018		152,609		154,808
Net gains (losses) - investments/derivatives	(499)		1,104		(1,284)		693
Total revenues	86,452		90,774		260,981		270,703
Benefits and other deductions
Benefits and settlement expenses	80,797		84,531		242,474		250,410
Other operating expenses	284		229		877		836
Total benefits and other deductions	81,081		84,760		243,351		251,246
Net revenues before income taxes	5,371		6,014		17,630		19,457
Income tax expense	1,242		1,263		3,396		4,086
Net revenues	$	4,129	$	4,751	$	14,234	$	15,371

5. INVESTMENT OPERATIONS

Realized gains (losses) - investments includes realized gains and losses from the sale of investments, changes in fair value of equity securities, net credit losses, and trading securities. Realized gains and losses on investments are calculated on the basis of specific identification on the trade date. Realized gains (losses) - derivatives includes certain derivative and embedded derivative gains and losses and gains and losses on reinsurance-related embedded derivatives

Net realized gains (losses) - investments/derivatives are summarized as follows:


	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars In Thousands)
Fixed maturities	$	2,681	$	15,686	$	44,298	$	21,885
Equity securities	16,918		6,117		(652)		44,292
Modco trading portfolios	44,918		67,674		108,223		252,147
Net credit losses recognized in operations (1)	(38,459)		—		(120,540)		—
Net impairment losses recognized in operations (2)	—		(10,818)		—		(14,658)
Commercial mortgage loans	(2,174)		(1,575)		(101,256)		(1,435)
Other investments	(1,065)		315		(2,825)		365
Realized gains (losses) - investments	22,819		77,399		(72,752)		302,596
Realized gains (losses) - derivatives(3)	15,337		42,286		92,899		(86,288)
Realized gains (losses) - investments/derivatives	$	38,156	$	119,685	$	20,147	$	216,308

(1) Represents credit losses recognized under FASB ASC 326
(2) Represents other-than-temporary impairment losses recognized under FASB ASC 320
(3) See Note 7, Derivative Financial Instruments

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Gross realized gains and gross realized losses on investments available-for-sale (fixed maturities and short-term investments) are as follows:


	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars In Thousands)
Gross realized gains	$	2,750	$	20,155	$	49,189	$	34,801
Gross realized losses:
Credit losses(1)	$	(38,459)	$	—	$	(120,540)	$	—
Impairment losses(2)	$	—	$	(10,818)	$	—	$	(14,658)
Other realized losses	$	(69)	$	(4,469)	$	(4,891)	$	(12,916)

(1) Represents credit losses recognized under FASB ASC 326
(2) Represents other-than-temporary impairment losses recognized in prior periods under FASB ASC 320

The chart below summarizes the fair value (proceeds) and the gains (losses) realized on securities the Company sold that were in an unrealized gain position and an unrealized loss position.


	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars In Thousands)
Securities in an unrealized gain position:
Fair value proceeds	$	415,440	$	679,514	$	1,351,653	$	1,812,992
Gains realized	$	2,750	$	20,155	$	49,189	$	34,801

Securities in an unrealized loss position:
Fair value proceeds	$	8,228	$	37,488	$	33,062	$	368,416
Losses realized	$	(69)	$	(4,469)	$	(4,891)	$	(12,916)

The chart below summarizes the realized gains (losses) on equity securities sold during the period and equity securities still held at the reporting date.


	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars In Thousands)
Gains (losses) recognized during the period on equity securities still held	$	16,846	$	6,765	$	(844)	$	44,687
Net gains (losses) recognized on equity securities sold during the period	72		(648)		192		(395)
Net gains (losses) recognized during the period on equity securities	$	16,918	$	6,117	$	(652)	$	44,292

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The amortized cost, gross unrealized gains and losses, allowance for expected credit losses, and fair value of the Company’s investments classified as available-for-sale are as follows:


As of September 30, 2020	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Allowance for Expected Credit Losses		Fair Value
	(Dollars In Thousands)
Fixed maturities:
Residential mortgage-backed securities	$	6,636,849	$	211,313	$	(889)	$	—	$	6,847,273
Commercial mortgage-backed securities	2,464,104		120,335		(27,437)		—		2,557,002
Other asset-backed securities	1,562,104		40,536		(17,756)		(645)		1,584,239
U.S. government-related securities	1,054,690		28,822		(3,219)		—		1,080,293
Other government-related securities	566,924		73,814		(2,662)		—		638,076
States, municipals, and political subdivisions	4,051,031		505,479		(2,881)		—		4,553,629
Corporate securities	45,435,036		4,857,669		(289,933)		(18,754)		49,984,018
Redeemable preferred stocks	65,933		1,396		—		—		67,329
	61,836,671		5,839,364		(344,777)		(19,399)		67,311,859
Short-term investments	1,161,706		—		—		—		1,161,706
	$	62,998,377	$	5,839,364	$	(344,777)	$	(19,399)	$	68,473,565


As of December 31, 2019	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(Dollars In Thousands)
Fixed maturities:
Residential mortgage-backed securities	$	5,812,170	$	125,493	$	(6,322)	$	5,931,341
Commercial mortgage-backed securities	2,588,575		54,385		(3,292)		2,639,668
Other asset-backed securities	1,764,120		32,041		(14,926)		1,781,235
U.S. government-related securities	1,032,048		5,664		(5,316)		1,032,396
Other government-related securities	548,136		51,024		(1,991)		597,169
States, municipals, and political subdivisions	4,415,008		225,072		(1,230)		4,638,850
Corporate securities	44,493,799		2,603,636		(288,334)		46,809,101
Redeemable preferred stocks	87,237		3,677		(4,249)		86,665
	60,741,093		3,100,992		(325,660)		63,516,425
Short-term investments	1,229,651		—		—		1,229,651
	$	61,970,744	$	3,100,992	$	(325,660)	$	64,746,076

The Company holds certain investments pursuant to certain modified coinsurance (“Modco”) arrangements. The fixed maturities, equity securities, and short-term investments held as part of these arrangements are classified as trading securities. The fair value of the investments held pursuant to these Modco arrangements are as follows:

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	As of
	September 30, 2020		December 31, 2019
	(Dollars In Thousands)
Fixed maturities:
Residential mortgage-backed securities	$	207,507	$	209,521
Commercial mortgage-backed securities	208,036		201,284
Other asset-backed securities	150,290		143,361
U.S. government-related securities	36,991		47,067
Other government-related securities	29,571		28,775
States, municipals, and political subdivisions	288,085		293,791
Corporate securities	1,850,471		1,590,936
Redeemable preferred stocks	12,434		12,832
	2,783,385		2,527,567
Equity securities	16,742		6,656
Short-term investments	77,322		91,213
	$	2,877,449	$	2,625,436

The amortized cost and fair value of available-for-sale and held-to-maturity fixed maturities as of September 30, 2020, by expected maturity, are shown below. Expected maturities of securities without a single maturity date are allocated based on estimated rates of prepayment that may differ from actual rates of prepayment.


	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars In Thousands)
Due in one year or less	$	2,067,896	$	2,077,964	$	—	$	—
Due after one year through five years	11,455,625		11,970,027		—		—
Due after five years through ten years	14,897,323		16,103,285		—		—
Due after ten years	33,415,827		37,160,583		2,680,324		2,990,170
	$	61,836,671	$	67,311,859	$	2,680,324	$	2,990,170

The following chart is a rollforward of available-for-sale allowance for expected credit losses on fixed maturities held by the Company:


	For The Three Months Ended September 30, 2020						For The Nine Months Ended September 30, 2020
	Corporate Securities		Other Asset-Backed Securities		Total		Corporate Securities		Other Asset-Backed Securities		Total
	(Dollars In Thousands)
Beginning Balance	$	81,426	$	655	$	82,081	$	—	$	—	$	—
Additions for securities for which allowance was not previously recorded	—		—		—		62,442		658		63,100
Adjustments on previously recorded allowances due to change in expected cash flows	945		—		945		19,929		—		19,929
Reductions on previously recorded allowances due to disposal of security in the current period	—		(10)		(10)		—		(13)		(13)
Write-offs of previously recorded allowances due to intent or requirement to sell	(63,617)		—		(63,617)		(63,617)		$	—	(63,617)
Ending Balance	$	18,754	$	645	$	19,399	$	18,754	$	645	$	19,399

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The following table includes the gross unrealized losses, for which an allowance for credit losses has not been recorded, and fair value of the Company’s AFS fixed maturities, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2020:


	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
	(Dollars In Thousands)
Residential mortgage-backed securities	$	176,534	$	(653)	$	6,895	$	(236)	$	183,429	$	(889)
Commercial mortgage-backed securities	354,926		(21,686)		28,103		(5,751)		383,029		(27,437)
Other asset-backed securities	379,311		(6,209)		312,368		(11,547)		691,679		(17,756)
U.S. government-related securities	251,534		(3,193)		787		(26)		252,321		(3,219)
Other government-related securities	23,328		(1,900)		6,776		(762)		30,104		(2,662)
States, municipals, and political subdivisions	105,894		(2,829)		4,895		(52)		110,789		(2,881)
Corporate securities	2,847,045		(152,100)		1,076,575		(137,833)		3,923,620		(289,933)
Redeemable preferred stocks	—		—		—		—		—		—
	$	4,138,572	$	(188,570)	$	1,436,399	$	(156,207)	$	5,574,971	$	(344,777)

Commercial mortgage-backed securities (“CMBS”) had gross unrealized losses greater than twelve months $5.8 million as of September 30, 2020. Factors such as the credit enhancement within the deal structure, the average life of the securities, and the performance of the underlying collateral support the recoverability of these investments.

The other asset-backed securities have a gross unrealized loss greater than twelve months of $11.5 million as of September 30, 2020, excluding losses of $0.6 million that were considered credit related. This category predominately includes student loan backed auction rate securities (“ARS”) whose underlying collateral is at least 97% guaranteed by the Federal Family Education Loan Program (“FFELP”). At this time, the Company has no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary.

The other government-related securities had gross unrealized losses greater than twelve months of $0.8 million as of September 30, 2020. These declines were related to changes in interest rates.

The corporate securities category had gross unrealized losses greater than twelve months of $137.8 million as of September 30, 2020, excluding losses of $18.7 million that were considered credit related. The overall deterioration in the macroeconomic environment as a result of the impact of COVID-19 as well as the continued pressure on commodity prices has negatively affected the values of certain of our investments. The largest impacts have been in the oil & gas, real estate, and consumer and retail industries. For the nine months ended September 30, 2020, we have recognized $120.5 million of impairments for the Company which primarily reflect declines in the value of certain oil and gas securities.

As of September 30, 2020, the Company had a total of 645 positions that were in an unrealized loss position, including 5 positions for which an allowance for credit losses was established. For unrealized losses for which an allowance for credit losses was not established, the Company does not consider these unrealized loss positions to be credit-related. This is based on the aggregate factors discussed previously and because the Company has the ability and intent to hold these investments until the fair values recover. The Company does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of the securities.

Table of Contents

The following table includes the gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2019:


	Less Than 12 Months				12 Months or More				Total
	Fair Value		Unrealized Loss		Fair Value		Unrealized Loss		Fair Value		Unrealized Loss
	(Dollars In Thousands)
Residential mortgage-backed securities	$	851,333	$	(4,231)	$	220,843	$	(2,091)	$	1,072,176	$	(6,322)
Commercial mortgage-backed securities	371,945		(1,721)		115,566		(1,571)		487,511		(3,292)
Other asset-backed securities	482,547		(6,516)		214,058		(8,410)		696,605		(14,926)
U.S. government-related securities	383,451		(3,373)		353,517		(1,943)		736,968		(5,316)
Other government-related securities	22,962		(669)		6,230		(1,322)		29,192		(1,991)
States, municipals, and political subdivisions	56,470		(1,001)		12,907		(229)		69,377		(1,230)
Corporate securities	3,176,489		(68,289)		2,886,648		(220,045)		6,063,137		(288,334)
Redeemable preferred stocks	—		—		16,689		(4,249)		16,689		(4,249)
	$	5,345,197	$	(85,800)	$	3,826,458	$	(239,860)	$	9,171,655	$	(325,660)

As of September 30, 2020, the Company had securities in its available-for-sale portfolio which were rated below investment grade of $2.3 billion and had an amortized cost of $2.4 billion. Approximately $381.8 million of below investment grade securities held by the Company were not publicly traded. In addition, included in the Company’s trading portfolio, the Company held $125.0 million of securities which were rated below investment grade.

The change in unrealized gains (losses), excluding the allowance for expected credit losses, net of income tax, on fixed maturities, classified as available-for-sale is summarized as follows:


	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars In Thousands)
Fixed maturities	$	785,093	$	1,308,054	$	2,148,211	$	4,396,173

Table of Contents

The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of September 30, 2020 and December 31, 2019, are as follows:


As of September 30, 2020	Amortized Cost		Gross Unrecognized Holding Gains		Gross Unrecognized Holding Losses		Fair Value
	(Dollars In Thousands)
Fixed maturities:
Securities issued by affiliates:
Red Mountain, LLC	$	822,324	$	140,435	$	—	$	962,759
Steel City, LLC	1,858,000		169,411		—		2,027,411
	$	2,680,324	$	309,846	$	—	$	2,990,170

As of December 31, 2019	Amortized Cost		Gross Unrecognized Holding Gains		Gross Unrecognized Holding Losses		Fair Value
	(Dollars In Thousands)
Fixed maturities:
Securities issued by affiliates:
Red Mountain, LLC	$	795,881	$	81,022	$	—	$	876,903
Steel City, LLC	2,028,000		120,887		—		2,148,887
	$	2,823,881	$	201,909	$	—	$	3,025,790

During the three and nine months ended September 30, 2020 and 2019, the Company recorded no credit losses on held-to-maturity securities.

The Company’s held-to-maturity securities are issued by affiliates of the Company which are considered variable interest entities. The Company is not the primary beneficiary of these entities and thus the securities are not eliminated in consolidation. These securities are collateralized by non-recourse funding obligations issued by captive insurance companies that are affiliates of the Company. See Note 15, Subsequent Events for additional information on Red Mountain, LLC and Steel City, LLC.

6. FAIR VALUE OF FINANCIAL INSTRUMENTS

The Company determined the fair value of its financial instruments based on the fair value hierarchy established in FASB guidance referenced in the Fair Value Measurements and Disclosures Topic which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company has adopted the provisions from the FASB guidance that is referenced in the Fair Value Measurements and Disclosures Topic for non-financial assets and liabilities (such as property and equipment, goodwill, and other intangible assets) that are required to be measured at fair value on a periodic basis. The effect on the Company’s periodic fair value measurements for non-financial assets and liabilities was not material.

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three level hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.

Financial assets and liabilities recorded at fair value on the consolidated balance sheets are categorized as follows:

•Level 1: Unadjusted quoted prices for identical assets or liabilities in an active market.

•Level 2: Quoted prices in markets that are not active or significant inputs that are observable either directly or indirectly. Level 2 inputs include the following:

a) Quoted prices for similar assets or liabilities in active markets;

b) Quoted prices for identical or similar assets or liabilities in non-active markets;

c) Inputs other than quoted market prices that are observable; and

d) Inputs that are derived principally from or corroborated by observable market data through correlation or other means.

•Level 3: Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect management’s own estimates about the assumptions a market participant would use in pricing the asset or liability.

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of September 30, 2020:


	Measurement Category	Level 1		Level 2		Level 3		Total
		(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	4	$	—	$	6,847,273	$	—	$	6,847,273
Commercial mortgage-backed securities	4	—		2,546,317		10,685		2,557,002
Other asset-backed securities	4	—		1,149,743		434,496		1,584,239
U.S. government-related securities	4	578,554		501,739		—		1,080,293
State, municipals, and political subdivisions	4	—		4,553,629		—		4,553,629
Other government-related securities	4	—		638,076		—		638,076
Corporate securities	4	—		48,626,474		1,357,544		49,984,018
Redeemable preferred stocks	4	67,329		—		—		67,329
Total fixed maturity securities - available-for-sale		645,883		64,863,251		1,802,725		67,311,859
Fixed maturity securities - trading
Residential mortgage-backed securities	3	—		207,507		—		207,507
Commercial mortgage-backed securities	3	—		208,036		—		208,036
Other asset-backed securities	3	—		87,848		62,442		150,290
U.S. government-related securities	3	21,761		15,230		—		36,991
State, municipals, and political subdivisions	3	—		288,085		—		288,085
Other government-related securities	3	—		29,571		—		29,571
Corporate securities	3	—		1,832,592		17,879		1,850,471
Redeemable preferred stocks	3	12,434		—		—		12,434
Total fixed maturity securities - trading		34,195		2,668,869		80,321		2,783,385
Total fixed maturity securities		680,078		67,532,120		1,883,046		70,095,244
Equity securities	3	452,042		—		86,343		538,385
Other long-term investments(1)	3 & 4	73,934		1,013,846		319,994		1,407,774
Short-term investments	3	1,156,203		82,825		—		1,239,028
Total investments		2,362,257		68,628,791		2,289,383		73,280,431
Cash	3	381,753		—		—		381,753
Assets related to separate accounts
Variable annuity	3	11,487,408		—		—		11,487,408
Variable universal life	3	1,144,474		—		—		1,144,474
Total assets measured at fair value on a recurring basis		$	15,375,892	$	68,628,791	$	2,289,383	$	86,294,066
Liabilities:
Annuity account balances(2)	3	$	—	$	—	$	67,591	$	67,591
Other liabilities(1)	3 & 4	9,480		675,209		1,718,905		2,403,594
Total liabilities measured at fair value on a recurring basis		$	9,480	$	675,209	$	1,786,496	$	2,471,185

(1) Includes certain freestanding and embedded derivatives.
(2) Represents liabilities related to fixed indexed annuities.
(3) Fair Value through Net Income
(4) Fair Value through Other Comprehensive Income (Loss)

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of December 31, 2019:


	Measurement Category	Level 1		Level 2		Level 3		Total
		(Dollars In Thousands)
Assets:
Fixed maturity securities - available-for-sale
Residential mortgage-backed securities	4	$	—	$	5,931,341	$	—	$	5,931,341
Commercial mortgage-backed securities	4	—		2,629,639		10,029		2,639,668
Other asset-backed securities	4	—		1,360,016		421,219		1,781,235
U.S. government-related securities	4	662,581		369,815		—		1,032,396
State, municipals, and political subdivisions	4	—		4,638,850		—		4,638,850
Other government-related securities	4	—		597,169		—		597,169
Corporate securities	4	—		45,435,387		1,373,714		46,809,101
Redeemable preferred stocks	4	69,976		16,689		—		86,665
Total fixed maturity securities - available-for-sale		732,557		60,978,906		1,804,962		63,516,425
Fixed maturity securities - trading
Residential mortgage-backed securities	3	—		209,521		—		209,521
Commercial mortgage-backed securities	3	—		201,284		—		201,284
Other asset-backed securities	3	—		77,954		65,407		143,361
U.S. government-related securities	3	24,810		22,257		—		47,067
State, municipals, and political subdivisions	3	—		293,791		—		293,791
Other government-related securities	3	—		28,775		—		28,775
Corporate securities	3	—		1,579,565		11,371		1,590,936
Redeemable preferred stocks	3	12,832		—		—		12,832
Total fixed maturity securities - trading		37,642		2,413,147		76,778		2,527,567
Total fixed maturity securities		770,199		63,392,053		1,881,740		66,043,992
Equity securities	3	480,750		—		72,970		553,720
Other long-term investments(1)	3 & 4	52,225		733,425		209,843		995,493
Short-term investments	3	1,255,384		65,480		—		1,320,864
Total investments		2,558,558		64,190,958		2,164,553		68,914,069
Cash	3	171,752		—		—		171,752
Assets related to separate accounts
Variable annuity	3	12,730,090		—		—		12,730,090
Variable universal life	3	1,135,666		—		—		1,135,666
Total assets measured at fair value on a recurring basis		$	16,596,066	$	64,190,958	$	2,164,553	$	82,951,577
Liabilities:
Annuity account balances(2)	3	$	—	$	—	$	69,728	$	69,728
Other liabilities(1)	3 & 4	19,561		509,645		1,017,972		1,547,178
Total liabilities measured at fair value on a recurring basis		$	19,561	$	509,645	$	1,087,700	$	1,616,906

(1) Includes certain freestanding and embedded derivatives.
(2) Represents liabilities related to fixed indexed annuities.
(3) Fair Value through Net Income
(4) Fair Value through Other Comprehensive Income (Loss)

Determination of Fair Values

The valuation methodologies used to determine the fair values of assets and liabilities reflect market participant assumptions and are based on the application of the fair value hierarchy that prioritizes observable market inputs over unobservable inputs. The Company determines the fair values of certain financial assets and financial liabilities based on quoted market prices, where available. The Company also determines certain fair values based on future cash flows discounted at the appropriate current market rate. Fair values reflect adjustments for counterparty credit quality, the Company’s credit standing, liquidity, and where appropriate, risk margins on unobservable parameters. The following is a discussion of the methodologies used to determine fair values for the financial instruments as listed in the above table.

The fair value of fixed maturity, short-term, and equity securities is determined by management after considering one of three primary sources of information: third party pricing services, non-binding independent broker quotations, or pricing matrices. Security pricing is applied using a “waterfall” approach whereby publicly available prices are first sought from third party pricing services, the remaining unpriced securities are submitted to independent brokers for non-binding prices, or lastly, securities are priced using a pricing matrix. Typical inputs used by these three pricing methods include, but are not limited to: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. Third party pricing services price 92.6% of the Company’s available-for-sale and trading fixed maturity securities. Based on the typical trading volumes and the lack of quoted market prices for available-for-sale and trading fixed maturities, third party pricing services derive the majority of security prices from observable market inputs such as recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information outlined above. If there are no recent reported trades, the third party pricing services and brokers may use matrix or model processes to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Certain securities are priced via independent non-binding broker quotations. When using non-binding independent broker quotations, when available the Company obtains two quotes per security. Where multiple broker quotes are obtained, the Company reviews the quotes and selects the quote that provides the best estimate of the price a market participant would pay for these specific assets in an arm’s length transaction. A pricing matrix is used to price securities for which the Company is unable to obtain or effectively rely on either a price from a third party pricing service or an independent broker quotation.

The pricing matrix used by the Company begins with current spread levels to determine the market price for the security. The credit spreads, assigned by brokers, incorporate the issuer’s credit rating, liquidity discounts, weighted-average of contracted cash flows, risk premium, if warranted, due to the issuer’s industry, and the security’s time to maturity. The Company uses credit ratings provided by nationally recognized rating agencies.

For securities that are priced via non-binding independent broker quotations, the Company assesses whether prices received from independent brokers represent a reasonable estimate of fair value. The Company’s assessment incorporates various metrics (yield curves, credit spreads, prepayment rates, etc.) along with other information available to the Company from both internal and external sources to determine the valuation of such holdings. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon the analytics, the price received from the independent broker is adjusted accordingly. The Company did not adjust any quotes or prices received from brokers during the nine months ended September 30, 2020.

The Company has analyzed the third party pricing services’ valuation methodologies and related inputs and has also evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs that is in accordance with the Fair Value Measurements and Disclosures Topic of the ASC. Based on this evaluation and investment class analysis, each price was classified into Level 1, 2, or 3. Most prices provided by third party pricing services are classified into Level 2 because the significant inputs used in pricing the securities are market observable and the observable inputs are corroborated by the Company. Since the matrix pricing of certain debt securities includes significant non-observable inputs, they are classified as Level 3.

Asset-Backed Securities

This category mainly consists of residential mortgage-backed securities, commercial mortgage-backed securities, and other asset-backed securities (collectively referred to as asset-backed securities or “ABS”). As of September 30, 2020, the Company held $11.0 billion of ABS classified as Level 2. These securities are priced from information provided by a third party pricing service and independent broker quotes. The third party pricing services and brokers mainly value securities using both a market and income approach to valuation. As part of this valuation process they consider the following characteristics of the item being measured to be relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, and 7) credit ratings of the securities.

After reviewing these characteristics of the ABS, the third party pricing service and brokers use certain inputs to determine the value of the security. For ABS classified as Level 2, the valuation would consist of predominantly market observable inputs such as, but not limited to: 1) monthly principal and interest payments on the underlying assets, 2) average life of the security, 3) prepayment speeds, 4) credit spreads, 5) treasury and swap yield curves, and 6) discount margin. The Company reviews the methodologies and valuation techniques (including the ability to observe inputs) in assessing the information received from external pricing services and in consideration of the fair value presentation.

As of September 30, 2020, the Company held $507.6 million of Level 3 ABS, which included $445.2 million of other asset-backed securities classified as available-for-sale and $62.4 million of other asset-backed securities classified as trading. These securities are predominantly ARS whose underlying collateral is at least 97% guaranteed by the FFELP. The Company prices its ARS using an income approach valuation model. As part of the valuation process the Company reviews the following characteristics of the ARS in determining the relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, 7) credit ratings of the securities, 8) liquidity premium, and 9) paydown rate. In periods where market activity increases and there are transactions at a price that is not the result of a distressed or forced sale we consider those prices as part of our valuation. If the market activity during a period is solely the result of the issuer redeeming positions we consider those transactions in our valuation, but still consider them to be Level 3 measurements due to the nature of the transaction.

Corporate Securities, Redeemable Preferred Stocks, U.S. Government-Related Securities, States, Municipals, and Political Subdivisions, and Other Government-Related Securities

As of September 30, 2020, the Company classified approximately $56.5 billion of corporate securities, redeemable preferred stocks, U.S. government-related securities, states, municipals, and political subdivisions, and other government-related securities as Level 2. The fair value of the Level 2 securities is predominantly priced by broker quotes and a third party pricing service. The Company has reviewed the valuation techniques of the brokers and third party pricing service and has determined that such techniques used Level 2 market observable inputs. The following characteristics of the securities are considered to be the primary relevant inputs to the valuation: 1) weighted- average coupon rate, 2) weighted-average years to maturity, 3) seniority, and 4) credit ratings. The Company reviews the methodologies and valuation techniques (including the ability to observe inputs) in assessing the information received from external pricing services and in consideration of the fair value presentation.

The brokers and third party pricing service utilize valuation models that consist of a hybrid methodology that utilizes a cash flow analysis and market approach to valuation. The pricing models utilize the following inputs: 1) principal and interest payments, 2) treasury yield curve, 3) credit spreads from new issue and secondary trading markets, 4) dealer quotes with adjustments for issues with early redemption features, 5) liquidity premiums present on private placements, and 6) discount margins from dealers in the new issue market.

As of September 30, 2020, the Company classified approximately $1.4 billion of securities as Level 3 valuations. Level 3 securities primarily represent investments in illiquid bonds for which no price is readily available. To determine a price, the Company uses a discounted cash flow model with both observable and unobservable inputs. These inputs are entered into an industry standard pricing model to determine the final price of the security. These inputs include: 1) principal and interest payments, 2) coupon rate, 3) sector and issuer level spread over treasury, 4) underlying collateral, 5) credit ratings, 6) maturity, 7) embedded options, 8) recent new issuance, 9) comparative bond analysis, and 10) an illiquidity premium.

Equities

As of September 30, 2020, the Company held approximately $86.3 million of equity securities classified as Level 3. Of this total, $80.3 million represents Federal Home Loan Bank (“FHLB”) stock. The Company believes that the cost of the FHLB stock approximates fair value.

Other Long-Term Investments and Other Liabilities

Derivative Financial Instruments

Other long-term investments and other liabilities include free-standing and embedded derivative financial instruments. Refer to Note 7, Derivative Financial Instruments for additional information related to derivatives. Derivative financial instruments are valued using exchange prices, independent broker quotations, or pricing valuation models, which utilize market data inputs. Excluding embedded derivatives, as of September 30, 2020, 87.4% of derivatives based upon notional values were priced using exchange prices or independent broker quotations. The remaining derivatives were priced by pricing valuation models, which utilize observable market data inputs to the extent they are available. Inputs used to value derivatives include, but are not limited to, interest swap rates, credit spreads, interest rate and equity market volatility indices, equity index levels, and treasury rates. The Company performs monthly analysis on derivative valuations that includes both quantitative and qualitative analyses.

Derivative instruments classified as Level 1 generally include futures and options, which are traded on active exchange markets.

Derivative instruments classified as Level 2 primarily include swaps, options, and swaptions, which are traded over-the-counter. Level 2 also includes certain centrally cleared derivatives. These derivative valuations are determined using independent broker quotations, which are corroborated with observable market inputs.

Derivative instruments classified as Level 3 were embedded derivatives and include at least one significant non-observable input. A derivative instrument containing Level 1 and Level 2 inputs will be classified as a Level 3 financial instrument in its entirety if it has at least one significant Level 3 input.

The Company utilizes derivative instruments to manage the risk associated with certain assets and liabilities. However, the derivative instruments may not be classified within the same fair value hierarchy level as the associated assets and liabilities. Therefore, the changes in fair value on derivatives reported in Level 3 may not reflect the offsetting impact of the changes in fair value of the associated assets and liabilities.

Embedded derivatives are carried at fair value in other long-term investments and other liabilities on the Company’s consolidated condensed balance sheet. The changes in fair value of embedded derivatives are recorded as realized gains (losses) - investments/derivatives. Refer to Note 7, Derivative Financial Instruments for more information.

The fair value of the guaranteed living withdrawal benefits (“GLWB”) embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using multiple risk neutral stochastic equity scenarios and policyholder behavior assumptions. The risk neutral scenarios are generated using the current swap curve and projected equity volatilities and correlations. The projected equity volatilities are based on a blend of historical volatility and near-term equity market implied volatilities. The equity correlations are based on historical price observations. For policyholder behavior assumptions, expected lapse and utilization assumptions are used and updated for actual experience, as necessary. The Company assumes age-based mortality from the Ruark 2015 ALB table, with attained age factors varying from 88.0% - 100.0% based on company experience. The present value of the cash flows is determined using the discount rate curve, which is based upon LIBOR plus a credit spread (to represent the Company’s non-performance risk). For expected lapse and utilization, assumptions are used and updated for actual experience, as necessary, using an internal predictive model developed by the Company. As a result of using significant unobservable inputs, the GLWB embedded derivative is categorized as Level 3. Policyholder assumptions are reviewed on an annual basis.

The balance of the fixed indexed annuity (“FIA”) embedded derivative is impacted by policyholder cash flows associated with the FIA product that are allocated to the embedded derivative in addition to changes in the fair value of the embedded derivative during the reporting period. The fair value of the FIA embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using current index values and volatility, the hedge budget used to price the product, and policyholder assumptions (both elective and non-elective). For policyholder behavior, assumptions are used and updated for actual experience, as necessary. The Company assumes age-based mortality from the 2015 Ruark ALB mortality table with attained age factors varying from 88.0% - 100.0% based on company experience. The present value of the cash flows is determined using the discount rate curve, which is based upon LIBOR up to one year and constant maturity treasury rates plus a credit spread (to represent the Company’s non-performance risk) thereafter. Policyholder assumptions are reviewed on an annual basis. As a result of using significant unobservable inputs, the FIA embedded derivative is categorized as Level 3.

The balance of the indexed universal life (“IUL”) embedded derivative is impacted by policyholder cash flows associated with the IUL product that are allocated to the embedded derivative in addition to changes in the fair value of the embedded derivative during the reporting period. The fair value of the IUL embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using current index values and volatility, the hedge budget used to price the product, and policyholder assumptions (both elective and non-elective). For policyholder behavior assumptions, expected lapse and withdrawal assumptions are used and updated for actual experience, as necessary. The Company assumes age-based mortality from the SOA 2015 VBT Primary Tables, with attained age factors varying from 36.0% - 161.0% based on company experience. The present value of the cash flows is determined using the discount rate curve, which is based upon LIBOR up to one year and constant maturity treasury rates plus a credit spread (to represent the Company’s non-performance risk) thereafter. Policyholder assumptions are reviewed on an annual basis. As a result of using significant unobservable inputs, the IUL embedded derivative is categorized as Level 3.

The Company has assumed and ceded certain blocks of policies under modified coinsurance agreements in which the investment results of the underlying portfolios inure directly to the reinsurers. Funds withheld arrangements related to such agreements contain embedded derivatives that are reported at fair value. Changes in their fair value are reported in realized gains (losses) - investments/derivatives. The fair value of embedded derivatives related to funds withheld under modified coinsurance agreements are a function of the unrealized gains or losses on the underlying assets and are calculated in a manner consistent with the terms of the agreements. The investments supporting certain of these agreements are designated as “trading securities”; therefore changes in their fair value are also reported in realized gains (losses) - investments/derivatives. The fair value of embedded derivatives is estimated based on market standard valuation methodology and is considered a Level 3 valuation.

The Company and certain of its subsidiaries have entered into interest support, yearly renewable term (“YRT”) premium support, and portfolio maintenance agreements with PLC. These agreements meet the definition of a derivative and are accounted for at fair value and are considered Level 3 valuations. The fair value of these derivatives as of September 30, 2020 was $133.5 million and is included in other long-term investments. For information regarding realized gains on these derivatives please refer to Note 7, Derivative Financial Instruments.

The Interest Support Agreement provides that PLC will make payments to Golden Gate II Captive Insurance Company (“Golden Gate II”), a wholly owned subsidiary of the Company, if actual investment income on certain of Golden Gate II’s asset portfolios falls below a calculated investment income amount as defined in the Interest Support Agreement. The calculated investment income amount is a level of investment income deemed to be sufficient to support certain of Golden Gate II’s obligations under a reinsurance agreement with the Company, dated July 1, 2007. The derivative is valued using an internal valuation model that assumes a conservative projection of investment income under an adverse interest rate scenario and the probability that the expectation falls below the calculated investment income amount. This derivative had a fair value of $78.6 million as of September 30, 2020. Golden Gate II recognized $2.4 million in gains related to payments made under this agreement for the nine months ended September 30, 2020. As of September 30, 2020, certain interest support agreement obligations to Golden Gate II of approximately $5.5 million have been collateralized by PLC. Re-evaluation and, if necessary, adjustments of any support agreement collateralization amounts occur annually during the first quarter pursuant to the terms of the support agreement.

The YRT premium support agreements provide that PLC will make payments to Golden Gate Captive Insurance Company (“Golden Gate”), a wholly owned subsidiary of the Company, and Golden Gate II in the event that YRT premium rates increase. The derivatives are valued using an internal valuation model. The valuation model is a probability weighted discounted cash flow model. The value is primarily a function of the likelihood and severity of future YRT premium increases. The fair value of these derivatives as of September 30, 2020 was $53.2 million. Golden Gate II recognized $1.6 million in gains related to payments made under this agreement for the nine months ended September 30, 2020.

The portfolio maintenance agreements provide that PLC will make payments to Golden Gate, Golden Gate V, and West Coast Life Insurance Company (“WCL”), a wholly owned subsidiary of the Company, in the event of other-than-temporary impairments on investments, measured in accordance with Statutory Accounting Principles, that exceed defined thresholds. The derivatives are valued using an internal discounted cash flow model. The significant unobservable inputs are the projected probability and severity of credit losses used to project future cash flows on the investment portfolios. The fair value of the portfolio maintenance agreements as of September 30, 2020, was $1.7 million. As of September 30, 2020, no payments have been made under these agreements.

The Funds Withheld derivative results from reinsurance agreements with subsidiaries of PLC, where the economic performance of certain hedging instruments held by the Company are ceded to the subsidiaries. The value of the Funds Withheld derivative is directly tied to the value of the hedging instruments held in the funds withheld account. The hedging instruments predominantly consist of derivative instruments the fair values of which are classified as a Level 2 measurement; as such, the fair value of the Funds Withheld derivative has been classified as a Level 2 measurement. The fair value of the Funds Withheld derivative as of September 30, 2020, was a liability of $145.0 million.

Annuity Account Balances

The Company records a certain legacy block of FIA reserves at fair value. Based on the characteristics of these reserves, the Company believes that the fund value approximates fair value. The fair value measurement of these reserves is considered a Level 3 valuation due to the unobservable nature of the fund values.

Separate Accounts

Separate account assets are invested in open-ended mutual funds and are included in Level 1.

Valuation of Level 3 Financial Instruments

The following table presents the valuation method for material financial instruments included in Level 3, as well as the unobservable inputs used in the valuation of those financial instruments as of September 30, 2020:

Fair Value

Valuation
Technique

Unobservable
Input

Range
(Weighted Average)

(Dollars In Thousands)

Assets:

Commercial mortgage-backed securities

10,685

Discounted cash flow

Spread over treasury

2.78%

Other asset-backed securities

434,496

Liquidation

Liquidation value

$95.75 - $97.00 ($96.40)

Discounted cash flow

Liquidity premium

0.51% - 2.33% (1.61%)

Paydown rate

8.75% - 12.55% (11.38%)

Corporate securities

1,357,544

Discounted cash flow

Spread over treasury

0.60% - 4.75% (2.24%)

Liabilities:(1)

Embedded derivatives - GLWB(2)

518,246

Actuarial cash flow model

Mortality

88% to 100% of

Ruark 2015 ALB Table

Lapse

PL-RBA Predictive Model

Utilization

PL-RBA Predictive Model

Nonperformance risk

0.22% - 0.88%

Embedded derivative - FIA

531,814

Actuarial cash flow model

Expenses

$207 per policy

Withdrawal rate

0.4% - 2.4% prior to age 70, 100% of the RMD for ages 70+ or WB withdrawal rate. Assume underutilized RMD for non-WB policies ages 70-81.

Mortality

88% to 100% of Ruark 2015 ALB table

Lapse

0.2% - 50.0%, depending on duration/surrender charge period

Dynamically adjusted for WB moneyness and projected market rates vs credited rates

Nonperformance risk

0.22% - 0.88%

Embedded derivative - IUL

194,228

Actuarial cash flow model

Mortality

37% - 161% of 2015

VBT Primary Tables

94% - 248% of duration 8 point in scale 2015 VBT Primary Tables, depending on type of business

Lapse

0.4% - 10%, depending on

duration/distribution channel

and smoking class

Nonperformance risk

0.22% - 0.88%

(1) Excludes modified coinsurance arrangements.

(2) The fair value for the GLWB embedded derivative is presented as a net liability.

The chart above excludes Level 3 financial instruments that are valued using broker quotes and for which book value approximates fair value. Unobservable inputs were weighted by the relative fair value of instruments, except for other asset-backed securities which were weighted by the relative par amounts.

The Company has considered all reasonably available quantitative inputs as of September 30, 2020, but the valuation techniques and inputs used by some brokers in pricing certain financial instruments are not shared with the Company. This resulted in $98.1 million of financial instruments being classified as Level 3 as of September 30, 2020, of which $79.3 million are other asset-backed securities, $12.8 million are corporate securities and $6.0 million are equity securities.

In certain cases the Company has determined that book value materially approximates fair value. As of September 30, 2020, the Company held $80.3 million of financial instruments where book value approximates fair value which was predominantly FHLB stock.

Fair Value

Valuation
Technique

Unobservable
Input

Range
(Weighted Average)

(Dollars In Thousands)

Assets:

Commercial mortgage-backed securities

10,029

Discounted cash flow

Spread over treasury

2.5%

Other asset-backed securities

421,219

Liquidation

Liquidation value

$95.39 - $99.99 ($97.95)

Discounted cash flow

Liquidity premium

0.34% - 2.28% (1.44%)

Paydown Rate

8.99% - 12.45% (11.28%)

Corporate securities

1,373,714

Discounted cash flow

Spread over treasury

0.00% - 4.03% (1.60%)

Liabilities:(1)

Embedded derivatives - GLWB(2)

186,038

Actuarial cash flow model

Mortality

87% to 100% of

Ruark 2015 ALB Table

Lapse

Ruark Predictive Model

Utilization

99%. 10% of policies have a one-time over-utilization of 400%

Nonperformance risk

0.12% - 0.82%

Embedded derivative - FIA

336,826

Actuarial cash flow model

Expenses

$195 per policy

Withdrawal rate

0.4% - 1.2% prior to age 70 RMD for

ages 70+

or WB withdrawal rate

Assume underutilized RMD

for non-WB policies age 70-81

Mortality

87% to 100% or Ruark 2015 ALB table

Lapse

0.5% - 50.0%, depending on duration/surrender charge period

Nonperformance risk

0.12% - 0.82%

Embedded derivative - IUL

151,765

Actuarial cash flow model

Mortality

37% - 156% of 2015

VBT Primary Tables

94% - 248% of duration

8 point in scale 2015

VBT Primary Tables,

depending on type of business

Lapse

0.5% - 10%, depending on duration/distribution channel and smoking class

Nonperformance risk

0.12% - 0.82%

(1) Excludes modified coinsurance arrangements.

(2) The fair value for the GLWB embedded derivative is presented as a net liability.

The chart above excludes Level 3 financial instruments that are valued using broker quotes and for which book value approximates fair value.

The Company had considered all reasonably available quantitative inputs as of December 31, 2019, but the valuation techniques and inputs used by some brokers in pricing certain financial instruments are not shared with the Company. This resulted in $76.8 million of financial instruments being classified as Level 3 as of December 31, 2019, of which $65.4 million are other asset backed securities and $11.4 million are corporate securities.

In certain cases the Company has determined that book value materially approximates fair value. As of December 31, 2019, the Company held $73.0 million of financial instruments where book value approximates fair value which was predominantly FHLB stock.

The asset-backed securities classified as Level 3 are predominantly ARS. A change in the paydown rate (the projected annual rate of principal reduction) of the ARS can significantly impact the fair value of these securities. A decrease in the paydown rate would increase the projected weighted average life of the ARS and increase the sensitivity of the ARS’s fair value to changes in interest rates. An increase in the liquidity premium would result in a decrease in the fair value of the securities, while a decrease in the liquidity premium would increase the fair value of these securities. The liquidation values for these securities are sensitive to the issuer’s available cash flows and ability to redeem the securities, as well as the current holders’ willingness to liquidate at the specified price.

The fair value of corporate bonds classified as Level 3 is sensitive to changes in the interest rate spread over the corresponding U.S. Treasury rate. This spread represents a risk premium that is impacted by company-specific and market factors. An increase in the spread can be caused by a perceived increase in credit risk of a specific issuer and/or an increase in the overall market risk premium associated with similar securities. The fair values of corporate bonds are sensitive to changes in spread. When holding the treasury rate constant, the fair value of corporate bonds increases when spreads decrease and decreases when spreads increase.

The fair value of the GLWB embedded derivative is sensitive to changes in the discount rate which includes the Company’s nonperformance risk, volatility, lapse, and mortality assumptions. The volatility assumption is an observable input as it is based on market inputs. The Company’s nonperformance risk, lapse, and mortality are unobservable. An increase in the three unobservable assumptions would result in a decrease in the fair value of the liability and conversely, if there is a decrease in the assumptions the fair value would increase. The fair value is also dependent on the assumed policyholder utilization of the GLWB where an increase in assumed utilization would result in an increase in the fair value of the liability and conversely, if there is a decrease in the assumption, the fair value would decrease.

The fair value of the FIA and IUL embedded derivatives are predominantly impacted by observable inputs such as discount rates and equity returns. However, the fair value of the FIA and IUL embedded derivatives are sensitive to non-performance risk, which is unobservable. The value of the liability increases with decreases in the discount rate and non-performance risk and decreases with increases in the discount rate and nonperformance risk. The value of the liability increases with increases in equity returns and the value of the liability decreases with a decrease in equity returns.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the three months ended September 30, 2020, for which the Company has used significant unobservable inputs (Level 3):


			Total Realized and Unrealized Gains				Total Realized and Unrealized Losses																		Total Gains (losses) included in Operations related to Instruments still held at the Reporting Date
	Beginning Balance		Included in Operations		Included in Other Comprehensive Income (Loss)		Included in Operations		Included in Other Comprehensive Income (Loss)		Purchases		Sales		Issuances		Settlements		Transfers in/out of Level 3		Other		Ending Balance
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial mortgage-backed securities	9,971		—		740		—		1		—		(21)		—		—		—		(6)		10,685		—
Other asset-backed securities	430,964		—		4,383		(12)		(525)		—		(517)		—		—		—		203		434,496		—



Corporate securities	1,365,963		—		27,591		—		(2,937)		62,185		(125,885)		—		—		31,172		(545)		1,357,544		—
Total fixed maturity securities - available-for-sale	1,806,898		—		32,714		(12)		(3,461)		62,185		(126,423)		—		—		31,172		(348)		1,802,725		—
Fixed maturity securities - trading


Other asset-backed securities	60,622		2,706		—		(382)		—		1,031		(1,571)		—		—		—		36		62,442		2,681



Corporate securities	12,158		286		—		(12)		—		5,477		—		—		—		—		(30)		17,879		273
Total fixed maturity securities - trading	72,780		2,992		—		(394)		—		6,508		(1,571)		—		—		—		6		80,321		2,954
Total fixed maturity securities	1,879,678		2,992		32,714		(406)		(3,461)		68,693		(127,994)		—		—		31,172		(342)		1,883,046		2,954
Equity securities	78,613		780		—		—		—		6,950		—		—		—		—		—		86,343		780
Other long-term investments(1)	275,907		78,164		—		(34,077)		—		—		—		—		—		—		—		319,994		44,087

Total investments	2,234,198		81,936		32,714		(34,483)		(3,461)		75,643		(127,994)		—		—		31,172		(342)		2,289,383		47,821
Total assets measured at fair value on a recurring basis	$	2,234,198	$	81,936	$	32,714	$	(34,483)	$	(3,461)	$	75,643	$	(127,994)	$	—	$	—	$	31,172	$	(342)	$	2,289,383	$	47,821
Liabilities:
Annuity account balances(2)	$	68,064	$	—	$	—	$	(744)	$	—	$	—	$	—	$	37	$	1,254	$	—	$	—	$	67,591	$	—
Other liabilities(1)	1,664,251		130,913		—		(185,567)		—		—		—		—		—		—		—		1,718,905		(54,654)
Total liabilities measured at fair value on a recurring basis	$	1,732,315	$	130,913	$	—	$	(186,311)	$	—	$	—	$	—	$	37	$	1,254	$	—	$	—	$	1,786,496	$	(54,654)

(1) Represents certain freestanding and embedded derivatives.
(2) Represents liabilities related to fixed indexed annuities.

For the three months ended September 30, 2020, there were $31.2 million of securities transferred into Level 3 from Level 2. These transfers resulted from securities that were priced by independent pricing services or brokers in previous periods but were priced internally using significant unobservable inputs where market observable inputs were not available as of September 30, 2020.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the nine months ended September 30, 2020, for which the Company has used significant unobservable inputs (Level 3):


			Total Realized and Unrealized Gains				Total Realized and Unrealized Losses																		Total Gains (losses) included in Operations related to Instruments still held at the Reporting Date
	Beginning Balance		Included in Operations		Included in Other Comprehensive Income (Loss)		Included in Operations		Included in Other Comprehensive Income (Loss)		Purchases		Sales		Issuances		Settlements		Transfers in/out of Level 3		Other		Ending Balance
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale

Commercial mortgage-backed securities	$	10,029	$	—	$	1,520	$	—	$	(784)	$	—	$	(62)	$	—	$	—	$	—	$	(18)	$	10,685	$	—
Other asset-backed securities	421,219		—		4,495		(33)		(12,978)		—		(1,034)		—		—		22,187		640		434,496		—



Corporate securities	1,373,714		—		112,592		—		(82,132)		365,449		(497,587)		—		—		88,107		(2,599)		1,357,544		—
Total fixed maturity securities - available-for-sale	1,804,962		—		118,607		(33)		(95,894)		365,449		(498,683)		—		—		110,294		(1,977)		1,802,725		—
Fixed maturity securities - trading
Residential mortgage-backed securities	—		—		—		—		—		—		—		—		—		—		—		—		—

Other asset-backed securities	65,407		4,174		—		(8,696)		—		4,250		(2,023)		—		—		(766)		96		62,442		2,681



Corporate securities	11,371		773		—		(427)		—		8,798		(2,141)		—		—		(408)		(87)		17,879		273
Total fixed maturity securities - trading	76,778		4,947		—		(9,123)		—		13,048		(4,164)		—		—		(1,174)		9		80,321		2,954
Total fixed maturity securities	1,881,740		4,947		118,607		(9,156)		(95,894)		378,497		(502,847)		—		—		109,120		(1,968)		1,883,046		2,954
Equity securities	72,970		781		—		(1)		—		7,373		—		—		—		5,220		—		86,343		780
Other long-term investments(1)	209,843		171,097		—		(97,705)		—		40,831		—		—		(4,072)		—		—		319,994		69,320
Short-term investments	—		—		—		—		—		—		—		—		—		—		—		—		—
Total investments	2,164,553		176,825		118,607		(106,862)		(95,894)		426,701		(502,847)		—		(4,072)		114,340		(1,968)		2,289,383		73,054
Total assets measured at fair value on a recurring basis	$	2,164,553	$	176,825	$	118,607	$	(106,862)	$	(95,894)	$	426,701	$	(502,847)	$	—	$	(4,072)	$	114,340	$	(1,968)	$	2,289,383	$	73,054
Liabilities:
Annuity account balances(2)	$	69,728	$	—	$	—	$	(1,811)	$	—	$	—	$	—	$	366	$	4,314	$	—	$	—	$	67,591	$	—
Other liabilities(1)	1,017,972		387,386		—		(1,088,319)		—		—		—		—		—		—		—		1,718,905		(700,933)
Total liabilities measured at fair value on a recurring basis	$	1,087,700	$	387,386	$	—	$	(1,090,130)	$	—	$	—	$	—	$	366	$	4,314	$	—	$	—	$	1,786,496	$	(700,933)

(1) Represents certain freestanding and embedded derivatives.
(2) Represents liabilities related to fixed indexed annuities.

For the nine months ended September 30, 2020, there were $115.5 million of securities transferred into Level 3. These transfers resulted from securities that were priced by independent pricing services or brokers in previous periods but were priced internally using significant unobservable inputs where market observable inputs were not available as of September 30, 2020.

For the nine months ended September 30, 2020, there were $1.2 million of securities transferred into Level 2 from Level 3.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the three months ended September 30, 2019, for which the Company has used significant unobservable inputs (Level 3):


			Total Realized and Unrealized Gains				Total Realized and Unrealized Losses																		Total Gains (losses) included in Operations related to Instruments still held at the Reporting Date
	Beginning Balance		Included in Operations		Included in Other Comprehensive Income (Loss)		Included in Operations		Included in Other Comprehensive Income (Loss)		Purchases		Sales		Issuances		Settlements		Transfers in/out of Level 3		Other		Ending Balance
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale
Residential mortgage-backed securities	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Commercial mortgage-backed securities	9,366		—		294		—		—		—		(19)		—		—		—		(6)		9,635		—
Other asset-backed securities	418,310		—		865		(14)		(3,276)		—		(8)		—		—		—		185		416,062		—



Corporate securities	1,328,491		—		22,910		—		(3,408)		9,150		(72,215)		—		—		41,319		(1,135)		1,325,112		—
Total fixed maturity securities - available-for-sale	1,756,167		—		24,069		(14)		(6,684)		9,150		(72,242)		—		—		41,319		(956)		1,750,809		—
Fixed maturity securities - trading


Other asset-backed securities	62,180		294		—		(34)		—		—		(879)		—		—		—		(34)		61,527		274



Corporate securities	5,294		67		—		—		—		1,700		—		—		—		—		(25)		7,036		6,906
Total fixed maturity securities - trading	67,474		361		—		(34)		—		1,700		(879)		—		—		—		(59)		68,563		7,180
Total fixed maturity securities	1,823,641		361		24,069		(48)		(6,684)		10,850		(73,121)		—		—		41,319		(1,015)		1,819,372		7,180
Equity securities	68,486		—		—		(2)		—		—		—		—		—		—		—		68,484		191
Other long-term investments(1)	143,583		49,457		—		—		—		—		—		—		—		—		—		193,040		49,457

Total investments	2,035,710		49,818		24,069		(50)		(6,684)		10,850		(73,121)		—		—		41,319		(1,015)		2,080,896		56,828
Total assets measured at fair value on a recurring basis	$	2,035,710	$	49,818	$	24,069	$	(50)	$	(6,684)	$	10,850	$	(73,121)	$	—	$	—	$	41,319	$	(1,015)	$	2,080,896	$	56,828
Liabilities:
Annuity account balances(2)	$	72,585	$	—	$	—	$	(523)	$	—	$	—	$	—	$	91	$	1,379	$	—	$	—	$	71,820	$	—
Other liabilities(1)	842,035		—		—		(191,572)		—		33,684		—		—		—		—		—		1,067,291		(191,572)
Total liabilities measured at fair value on a recurring basis	$	914,620	$	—	$	—	$	(192,095)	$	—	$	33,684	$	—	$	91	$	1,379	$	—	$	—	$	1,139,111	$	(191,572)

(1) Represents certain freestanding and embedded derivatives.
(2) Represents liabilities related to fixed indexed annuities.

For the three months ended September 30, 2019, there were $52.1 million of securities transferred into Level 3. These transfers resulted from securities that were priced by independent pricing services or brokers in previous periods but were priced internally using significant unobservable inputs where market observable inputs were not available as of September 30, 2019.

For the three months ended September 30, 2019, there were $10.8 million of securities transferred into Level 2 from Level 3.

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the nine months ended September 30, 2019, for which the Company has used significant unobservable inputs (Level 3):


			Total Realized and Unrealized Gains				Total Realized and Unrealized Losses																		Total Gains (losses) included in Operations related to Instruments still held at the Reporting Date
	Beginning Balance		Included in Operations		Included in Other Comprehensive Income (Loss)		Included in Operations		Included in Other Comprehensive Income (Loss)		Purchases		Sales		Issuances		Settlements		Transfers in/out of Level 3		Other		Ending Balance
	(Dollars In Thousands)
Assets:
Fixed maturity securities available-for-sale

Commercial mortgage-backed securities	$	—	$	—	$	310	$	—	$	—	$	9,359	$	(26)	$	—	$	—	$	—	$	(8)	$	9,635	$	—
Other asset-backed securities	421,642		446		11,525		(71)		(8,075)		—		(10,023)		—		—		—		618		416,062		—



Corporate securities	638,276		82		66,866		—		(6,917)		704,777		(157,171)		—		—		80,574		(1,375)		1,325,112		—
Total fixed maturity securities - available-for-sale	1,059,918		528		78,701		(71)		(14,992)		714,136		(167,220)		—		—		80,574		(765)		1,750,809		—
Fixed maturity securities - trading


Other asset-backed securities	26,056		4,300		—		(3,618)		—		15,463		(6,771)		—		—		26,267		(170)		61,527		(2,442)



Corporate securities	6,242		236		—		(31)		—		1,700		(1,035)		—		—		—		(76)		7,036		5,274
Total fixed maturity securities - trading	32,298		4,536		—		(3,649)		—		17,163		(7,806)		—		—		26,267		(246)		68,563		2,832
Total fixed maturity securities	1,092,216		5,064		78,701		(3,720)		(14,992)		731,299		(175,026)		—		—		106,841		(1,011)		1,819,372		2,832
Equity securities	63,421		1		—		(17)		—		5,079		—		—		—		—		—		68,484		345
Other long-term investments(1)	151,342		73,246		—		(31,419)		—		1,579		—		—		(1,708)		—		—		193,040		40,119
Short-term investments	—		—		—		—		—		—		—		—		—		—		—		—		—
Total investments	$	1,306,979	$	78,311	$	78,701	$	(35,156)	$	(14,992)	$	737,957	$	(175,026)	$	—	$	(1,708)	$	106,841	$	(1,011)	$	2,080,896	$	43,296
Total assets measured at fair value on a recurring basis	1,306,979		78,311		78,701		(35,156)		(14,992)		737,957		(175,026)		—		(1,708)		106,841		(1,011)		2,080,896		43,296
Liabilities:
Annuity account balances(2)	$	76,119	$	—	$	—	$	(1,675)	$	—	$	—	$	—	$	158	$	6,132	$	—	$	—	$	71,820	$	—
Other liabilities(1)	438,127		830		—		(559,106)		—		70,888		—		—		—		—		—		1,067,291		(558,276)
Total liabilities measured at fair value on a recurring basis	$	514,246	$	830	$	—	$	(560,781)	$	—	$	70,888	$	—	$	158	$	6,132	$	—	$	—	$	1,139,111	$	(558,276)

(1) Represents certain freestanding and embedded derivatives.
(2) Represents liabilities related to fixed indexed annuities.

For the nine months ended September 30, 2019, there were $138.2 million of securities transferred into Level 3.

For the nine months ended September 30, 2019, there were $31.4 million of securities transferred into Level 2 from Level 3. These transfers resulted from securities that were priced internally using significant unobservable inputs where market observable inputs were not available in previous periods but were priced by independent pricing services or brokers as of September 30, 2019.

Total realized and unrealized gains (losses) on Level 3 assets and liabilities are reported in either realized gains (losses) - investments/derivatives within the consolidated condensed statements of income or in change in net unrealized gains (losses) on investments within the consolidated condensed statements of other comprehensive income (loss) based on the appropriate accounting treatment for the item.

Purchases, sales, issuances, and settlements, net, represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily relates to purchases and sales of fixed maturity securities and issuances and settlements of fixed indexed annuities.

The amount of total gains (losses) for assets and liabilities still held as of the reporting date primarily represents changes in fair value of trading securities and certain derivatives that exist as of the reporting date and the change in fair value of fixed indexed annuities.

Estimated Fair Value of Financial Instruments

The carrying amounts and estimated fair values of the Company’s financial instruments as of the periods shown below are as follows:


		As of
		September 30, 2020				December 31, 2019
	Fair Value Level	Carrying Amounts		Fair Values		Carrying Amounts		Fair Values
		(Dollars In Thousands)
Assets:
Commercial mortgage loans(1)	3	$	9,765,312	$	10,522,036	$	9,379,401	$	9,584,487
Policy loans	3	1,640,147		1,640,147		1,675,121		1,675,121
Fixed maturities, held-to-maturity(2)	3	2,680,324		2,990,170		2,823,881		3,025,790
Other long-term investments(3)	2	1,286,291		1,206,966		1,216,996		1,246,889
Liabilities:
Stable value product account balances	3	$	6,017,259	$	6,180,630	$	5,443,752	$	5,551,195
Future policy benefits and claims(4)	3	1,604,174		1,615,924		1,701,324		1,705,235
Other policyholders’ funds(5)	3	103,280		107,319		127,084		130,259
Debt:(6)
Non-recourse funding obligations(7)	3	$	2,942,126	$	3,296,873	$	3,082,753	$	3,298,580
Subordinated funding obligations	3	110,000		117,216		110,000		113,286

Except as noted below, fair values were estimated using quoted market prices.
(1) The carrying amount is net of allowance for credit losses.
(2) Securities purchased from unconsolidated affiliates, Red Mountain, LLC and Steel City, LLC.
(3) Other long-term investments represents a Modco receivable, which is related to invested assets such as fixed income and structured securities, which are legally owned by the ceding company. The fair value is determined in a manner consistent with other similar invested assets held by the Company.
(4) Single premium immediate annuity without life contingencies.
(5) Supplementary contracts without life contingencies.
(6) Excludes capital lease obligations of $0.7 million and $1.0 million as of September 30, 2020 and December 31, 2019, respectively.
(7) As of September 30, 2020, carrying amount of $2.7 billion and a fair value of $3.0 billion related to non-recourse funding obligations issued by Golden Gate and Golden Gate V. As of December 31, 2019, carrying amount of $2.8 billion and a fair value of $3.0 billion related to non-recourse funding obligations issued by Golden Gate and Golden Gate V.

Fair Value Measurements

Commercial mortgage loans

The Company estimates the fair value of commercial mortgage loans using an internally developed model. This model includes inputs derived by the Company based on assumed discount rates relative to the Company’s current commercial mortgage loan lending rate and an expected cash flow analysis based on a review of the commercial mortgage loan terms. The model also contains the Company’s determined representative risk adjustment assumptions related to credit and liquidity risks.

Policy loans

The Company believes the fair value of policy loans approximates book value. Policy loans are funds provided to policyholders in return for a claim on the policy. The funds provided are limited to the cash surrender value of the underlying policy. The nature of policy loans is to have a negligible default risk as the loans are fully collateralized by the value of the policy. Policy loans do not have a stated maturity and the balances and accrued interest are repaid either by the policyholder or with proceeds from the policy. Due to the collateralized nature of policy loans and unpredictable timing of repayments, the Company believes the carrying value of policy loans approximates fair value.

Fixed maturities, held-to-maturity

The Company estimates the fair value of its fixed maturity, held-to-maturity securities using internal discounted cash flow models. The discount rates used in the model are based on a current market yield for similar financial instruments.

Other long-term investments

In addition to free standing and embedded derivative financial instruments discussed above, other long-term investments includes approximately $1.3 billion of amounts receivable under certain modified coinsurance agreements as of September 30, 2020 and December 31, 2019. These amounts represent funds withheld in connection with certain reinsurance agreements in which the Company acts as the reinsurer. Under the terms of these agreements, assets equal to statutory reserves are withheld and legally owned by the ceding company, and any excess or shortfall is settled periodically. In some cases, these modified coinsurance agreements contain embedded derivatives which are discussed in more detail above. The fair value of amounts receivable under modified coinsurance agreements, including the embedded derivative component, correspond to the fair value of the underlying assets withheld.

Stable value product and other investment contract balances

The Company estimates the fair value of stable value product account balances and other investment contract balances (included in Future policy benefits and claims as well as Other policyholders’ funds line items on our consolidated condensed balance sheet) using models based on discounted expected cash flows. The discount rates used in the models are based on a current market rate for similar financial instruments.

Funding obligations

The Company estimates the fair value of its subordinated and non-recourse funding obligations using internal discounted cash flow models. The discount rates used in the model are based on a current market yield for similar financial instruments.

7. DERIVATIVE FINANCIAL INSTRUMENTS

Types of Derivative Instruments and Derivative Strategies

The Company utilizes a risk management strategy that incorporates the use of derivative financial instruments to reduce exposure to certain risks, including but not limited to, interest rate risk, currency exchange risk, volatility risk, and equity market risk. These strategies are developed through the Company’s analysis of data from financial simulation models and other internal and industry sources, and are then incorporated into the Company’s risk management program.

Derivative instruments expose the Company to credit and market risk and could result in material changes from period to period. The Company attempts to minimize its credit in connection with its overall asset/liability management programs and risk management strategies. In addition, all derivative programs are monitored by our risk management department.

Derivatives Related to Interest Rate Risk Management

Derivative instruments that are used as part of the Company’s interest rate risk management strategy include interest rate swaps, interest rate futures, interest rate caps, and interest rate swaptions.

Derivatives Related to Foreign Currency Exchange Risk Management

Derivative instruments that are used as part of the Company’s foreign currency exchange risk management strategy include foreign currency swaps, foreign currency futures, foreign equity futures, and foreign equity options.

Derivatives Related to Risk Mitigation of Certain Annuity Contracts

The Company may use the following types of derivative contracts to mitigate its exposure to certain guaranteed benefits related to variable annuity (“VA”) contracts, fixed indexed annuities, and indexed universal life contracts:

•Foreign Currency Futures

•Variance Swaps

•Interest Rate Futures

•Equity Options

•Equity Futures

•Credit Derivatives

•Interest Rate Swaps

•Interest Rate Swaptions

•Volatility Futures

•Volatility Options

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•Funds Withheld Agreements

•Total Return Swaps

•Foreign Currency Options

Other Derivatives

The Company and certain of its subsidiaries have derivatives with PLC. These derivatives consist of an interest support agreement, YRT premium support agreements, and portfolio maintenance agreements with PLC.

The Company has a funds withheld account that consists of various derivative instruments held by the Company that are used to hedge the GLWB and GMDB riders and the fixed indexed annuity products. The economic performance of derivatives in the funds withheld account is ceded to subsidiaries of PLC. The funds withheld account is accounted for as a derivative financial instrument.

Accounting for Derivative Instruments

GAAP requires that all derivative instruments be recognized in the balance sheet at fair value. The Company records its derivative financial instruments in the consolidated condensed balance sheet in other long-term investments and other liabilities. The change in the fair value of derivative financial instruments is reported either in the statement of income or in other comprehensive income (loss), depending upon whether it qualified for and also has been properly identified as being part of a hedging relationship, and also on the type of hedging relationship that exists.

It is the Company's policy not to offset assets and liabilities associated with open derivative contracts. However, the Chicago Mercantile Exchange (“CME”) rules characterize variation margin transfers as settlement payments, as opposed to adjustments to collateral. As a result, derivative assets and liabilities associated with centrally cleared derivatives for which the CME serves as the central clearing party are presented as if these derivatives had been settled as of the reporting date.

For a derivative financial instrument to be accounted for as an accounting hedge, it must be identified and documented as such on the date of designation. For cash flow hedges, the effective portion of their realized gain or loss is reported as a component of other comprehensive income (loss) and reclassified into operations in the same period during which the hedged item impacts operations. Any remaining gain or loss, the ineffective portion, is recognized in current operations. For fair value hedge derivatives, their gain or loss as well as the offsetting loss or gain attributable to the hedged risk of the hedged item is recognized in current operations. Effectiveness of the Company’s hedge relationships is assessed on a quarterly basis.

The Company reports changes in fair values of derivatives that are not part of a qualifying hedge relationship through operations in the period of change. Changes in the fair value of these derivatives are recognized in realized gains (losses) - investments/derivatives in the consolidated condensed statements of income.

Derivative Instruments Designated and Qualifying as Hedging Instruments

Cash-Flow Hedges

•To hedge a fixed rate note denominated in a foreign currency, the Company entered into a fixed-to-fixed foreign currency swap in order to hedge the foreign currency exchange risk associated with the note. The cash flows received on the swap are identical to the cash flows paid on the note.

•To hedge a floating rate note, the Company entered into an interest rate swap to exchange the floating rate on the note for a fixed rate in order to hedge the interest rate risk associated with the note. The cash flows received on the swap are identical to the cash flow variability paid on the note.

Derivative Instruments Not Designated and Not Qualifying as Hedging Instruments

The Company uses various other derivative instruments for risk management purposes that do not qualify for hedge accounting treatment. Changes in the fair value of these derivatives are recognized in realized gains (losses) - investments/derivatives in the consolidated condensed statements of income.

Derivatives Related to Variable Annuity Contracts

•The Company uses equity futures, equity options, total return swaps, interest rate futures, interest rate swaps, interest rate swaptions, currency futures, currency options, volatility futures, volatility options, and variance swaps to mitigate the risk related to certain guaranteed minimum benefits, including GLWB, within its VA products. In general, the cost of such benefits varies with the level of equity and interest rate markets, foreign currency levels, and overall volatility.

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•The Company markets certain VA products with a GLWB rider. The GLWB component is considered an embedded derivative, not considered to be clearly and closely related to the host contract.

•The Company has a funds withheld account that consists of various derivative instruments held by the Company that are used to hedge the GLWB and GMDB riders. The economic performance of derivatives in the funds withheld account is ceded to Shades Creek Captive Insurance Company (“Shades Creek”), a direct wholly owned subsidiary of PLC. The funds withheld account is accounted for as a derivative financial instrument.

Derivatives Related to Fixed Annuity Contracts

•The Company uses equity futures and options to mitigate the risk within its fixed indexed annuity products. In general, the cost of such benefits varies with the level of equity and overall volatility.

•The Company markets certain fixed indexed annuity products. The FIA component is considered an embedded derivative as it is not considered to be clearly and closely related to the host contract.

•The Company has a funds withheld account that consists of various derivative instruments held by the Company that are used to hedge the fixed indexed annuity products. The economic performance of derivatives in the funds withheld account is ceded to Protective Life Reinsurance Bermuda Ltd. The funds withheld account is accounted for as a derivative financial instrument.

Derivatives Related to Indexed Universal Life Contracts

•The Company uses equity futures and options to mitigate the risk within its indexed universal life products. In general, the cost of such benefits varies with the level of equity markets.

•The Company markets certain IUL products. The IUL component is considered an embedded derivative as it is not considered to be clearly and closely related to the host contract.

Other Derivatives

•The Company and certain of its subsidiaries have an interest support agreement, YRT premium support agreements, and portfolio maintenance agreements with PLC. See Note 15, Subsequent Events for additional information on these agreements.

•The Company uses various swaps and other types of derivatives to manage risk related to other exposures.

•The Company is involved in various modified coinsurance and funds withheld arrangements which contain embedded derivatives. Changes in their fair value are recorded in realized gains (losses) - investments/derivatives in the consolidated condensed statements of income. The investment portfolios that support the related modified coinsurance reserves and funds withheld arrangements had fair value changes which substantially offset the gains or losses on these embedded derivatives.

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The following table sets forth realized gains (losses) - derivatives for the periods shown:

Realized gains (losses) - derivative financial instruments


	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars In Thousands)
Derivatives related to VA contracts:
Interest rate futures	$	2,257	$	727	$	(3,565)	$	(16,575)
Equity futures	(1,187)		5,220		131,912		37,517
Currency futures	(9,536)		9,181		1,438		11,028
Equity options	(41,584)		(3,957)		66,647		(97,354)

Interest rate swaps	(57,657)		149,766		363,644		342,561
Total return swaps	(31,465)		(1,950)		30,680		(50,522)
Embedded derivative - GLWB	72,519		(86,635)		(332,202)		(189,624)
Funds withheld derivative	45,787		(350)		(103,494)		80,198
Total derivatives related to VA contracts	(20,866)		72,002		155,060		117,229
Derivatives related to FIA contracts:
Embedded derivative	(8,642)		(4,335)		(38,065)		(67,968)
Funds withheld derivative	(2,804)		—		(9,586)		—
Equity futures	518		962		(6,550)		964
Equity options	24,870		4,785		15,031		60,026
Other derivatives	483		—		258		—
Total derivatives related to FIA contracts	14,425		1,412		(38,912)		(6,978)
Derivatives related to IUL contracts:
Embedded derivative	15,648		6,261		1,409		(18,395)
Equity futures	(230)		91		(2,374)		347
Equity options	6,535		586		583		9,372
Total derivatives related to IUL contracts	21,953		6,938		(382)		(8,676)
Embedded derivative - Modco reinsurance treaties	(25,438)		(44,027)		(55,864)		(199,704)
Derivatives with PLC(1)	19,833		7,583		22,179		14,852
Other derivatives	5,430		(1,622)		10,818		(3,011)
Total realized gains (losses) - derivatives	$	15,337	$	42,286	$	92,899	$	(86,288)

(1) These derivatives include the Interest Support, YRT premium support, and portfolio maintenance agreements between certain of the Company’s subsidiaries and PLC.

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The following table presents the components of the gain or loss on derivatives that qualify as a cash flow hedging relationship.

Gain (Loss) on Derivatives in Cash Flow Hedging Relationship


	Amount of Gains (Losses) Deferred in Accumulated Other Comprehensive Income (Loss) on Derivatives		Amount and Location of Gains (Losses) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Loss)		Amount and Location of Gains (Losses) Recognized in Income (Loss) on Derivatives
	(Effective Portion)		(Effective Portion)		(Ineffective Portion)
			Benefits and settlement expenses		Realized gains (losses) - investments/derivatives
	(Dollars In Thousands)
For The Three Months Ended September 30, 2020
Foreign currency swaps	$	808	$	(224)	$	—
Interest rate swaps	1,121		(177)		—
Total	$	1,929	$	(401)	$	—

For The Nine Months Ended September 30, 2020
Foreign currency swaps	$	(1,316)	$	(841)	$	—
Interest rate swaps	206		(2,231)		—
Total	$	(1,110)	$	(3,072)	$	—

For The Three Months Ended September 30, 2019
Foreign currency swaps	$	(4,163)	$	(373)	$	—
Interest rate swaps	(93)		(373)		—
Total	$	(4,256)	$	(746)	$	—

For The Nine Months Ended September 30, 2019
Foreign currency swaps	$	(7,789)	$	(767)	$	—
Interest rate swaps	(2,484)		(593)		—
Total	$	(10,273)	$	(1,360)	$	—

Based on expected cash flows of the underlying hedged items, the Company expects to reclassify $1.0 million out of accumulated other comprehensive income (loss) into realized gains (losses) - investments/derivatives in the consolidated condensed statements of income during the next twelve months.

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The table below presents information about the nature and accounting treatment of the Company’s primary derivative financial instruments and the location in and effect on the consolidated condensed financial statements for the periods presented below:


	As of
	September 30, 2020				December 31, 2019
	Notional Amount		Fair Value		Notional Amount		Fair Value
	(Dollars In Thousands)
Other long-term investments



Derivatives not designated as hedging instruments:
Interest rate swaps	$	1,628,000	$	210,420	$	2,228,000	$	98,655
Total return swaps	433,231		7,018		269,772		941
Derivatives with PLC(1)	2,618,962		133,486		2,830,889		115,379
Embedded derivative - Modco reinsurance treaties	1,269,954		83,379		1,280,189		31,926
Embedded derivative - GLWB	610,426		48,091		1,147,436		62,538
Embedded derivative - FIA	310,468		55,038		—		—
Interest rate futures	700,637		4,818		896,073		7,557
Equity futures	156,317		2,063		159,901		2,109
Currency futures	161,793		1,750		72,593		131
Equity options	7,740,526		861,711		6,685,670		676,257


	$	15,630,314	$	1,407,774	$	15,570,523	$	995,493
Other liabilities
Cash flow hedges:
Interest rate swaps	$	—	$	—	$	350,000	$	—
Foreign currency swaps	117,178		18,727		117,178		11,373
Derivatives not designated as hedging instruments:
Interest rate swaps	1,194,000		—		50,000		—
Total return swaps	418,088		7,112		579,675		3,229
Embedded derivative - Modco reinsurance treaties	2,892,930		331,836		2,263,685		231,516
Funds withheld derivative	3,810,657		145,030		1,845,649		70,583
Embedded derivative - GLWB	3,359,799		566,337		2,892,926		248,577
Embedded derivative - FIA	3,656,227		580,268		2,892,803		332,869
Embedded derivative - IUL	339,564		194,228		301,598		151,765
Interest rate futures	421,631		1,825		669,223		10,375
Equity futures	162,260		3,571		174,743		2,376
Currency futures	128,613		1,016		192,306		1,836
Equity options	5,465,007		507,408		4,827,714		429,434
Other	268,436		46,236		199,387		53,245
	$	22,234,390	$	2,403,594	$	17,356,887	$	1,547,178

(1) These derivatives include the Interest, YRT premium support, and portfolio maintenance agreements between certain of the Company’s subsidiaries and PLC.

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8. OFFSETTING OF ASSETS AND LIABILITIES

Certain of the Company’s derivative instruments are subject to enforceable master netting arrangements that provide for the net settlement of all derivative contracts between the Company and a counterparty in the event of default or upon the occurrence of certain termination events. Collateral support agreements associated with each master netting arrangement provide that the Company will receive or pledge financial collateral in the event either minimum thresholds, or in certain cases ratings levels, have been reached. Additionally, certain of the Company’s repurchase agreements provide for net settlement on termination of the agreement. Refer to Note 10, Debt and Other Obligations for details of the Company’s repurchase agreement programs.

Collateral received includes both cash and non-cash collateral. Cash collateral received by the Company is recorded on the consolidated condensed balance sheet as “cash”, with a corresponding amount recorded in “other liabilities” to represent the Company’s obligation to return the collateral. Non-cash collateral received by the Company is not recognized on the consolidated condensed balance sheet unless the Company exercises its right to sell or re-pledge the underlying asset. As of September 30, 2020 and December 31, 2019, the fair value of non-cash collateral received was $29.5 million and $21.3 million, respectively.

The tables below present the derivative instruments by assets and liabilities for the Company as of September 30, 2020.


	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheets		Net Amounts of Assets Presented in the Balance Sheets		Gross Amounts Not Offset in the Balance Sheets
							Financial Instruments		Collateral Received		Net Amount
	(Dollars In Thousands)
Offsetting of Assets
Derivatives:
Free-Standing derivatives	$	1,087,780	$	—	$	1,087,780	$	537,340	$	391,941	$	158,499
Total derivatives, subject to a master netting arrangement or similar arrangement	1,087,780		—		1,087,780		537,340		391,941		158,499
Derivatives not subject to a master netting arrangement or similar arrangement
Embedded derivative - Modco reinsurance treaties	83,379		—		83,379		—		—		83,379
Embedded derivative - GLWB	48,091		—		48,091		—		—		48,091
Derivatives with PLC	133,486		—		133,486		—		—		133,486
Other	55,038		—		55,038		—		—		55,038
Total derivatives, not subject to a master netting arrangement or similar arrangement	319,994		—		319,994		—		—		319,994
Total derivatives	1,407,774		—		1,407,774		537,340		391,941		478,493
Total Assets	$	1,407,774	$	—	$	1,407,774	$	537,340	$	391,941	$	478,493

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	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Balance Sheets		Net Amounts of Liabilities Presented in the Balance Sheets		Gross Amounts Not Offset in the Balance Sheets
							Financial Instruments		Collateral Posted		Net Amount
	(Dollars In Thousands)
Offsetting of Liabilities
Derivatives:
Free-Standing derivatives	$	539,659	$	—	$	539,659	$	537,340	$	2,319	$	—
Total derivatives, subject to a master netting arrangement or similar arrangement	539,659		—		539,659		537,340		2,319		—
Derivatives, not subject to a master netting arrangement or similar arrangement
Embedded derivative - Modco reinsurance treaties	331,836		—		331,836		—		—		331,836
Funds withheld derivative	145,030		—		145,030		—		—		145,030
Embedded derivative - GLWB	566,337		—		566,337		—		—		566,337
Embedded derivative - FIA	580,268		—		580,268		—		—		580,268
Embedded derivative - IUL	194,228		—		194,228		—		—		194,228
Other	46,236		—		46,236		—		—		46,236
Total derivatives, not subject to a master netting arrangement or similar arrangement	1,863,935		—		1,863,935		—		—		1,863,935
Total derivatives	2,403,594		—		2,403,594		537,340		2,319		1,863,935
Repurchase agreements(1)	150,000		—		150,000		—		—		150,000
Total Liabilities	$	2,553,594	$	—	$	2,553,594	$	537,340	$	2,319	$	2,013,935

(1) Borrowings under repurchase agreements are for a term less than 90 days.

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The tables below present the derivative instruments by assets and liabilities for the Company as of December 31, 2019.


	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Balance Sheets		Net Amounts of Assets Presented in the Balance Sheets		Gross Amounts Not Offset in the Balance Sheets
							Financial Instruments		Collateral Received		Net Amount
	(Dollars In Thousands)
Offsetting of Assets
Derivatives:
Free-Standing derivatives	$	785,650	$	—	$	785,650	$	452,562	$	215,587	$	117,501
Total derivatives, subject to a master netting arrangement or similar arrangement	785,650		—		785,650		452,562		215,587		117,501
Derivatives not subject to a master netting arrangement or similar arrangement
Embedded derivative - Modco reinsurance treaties	31,926		—		31,926		—		—		31,926
Embedded derivative - GLWB	62,538		—		62,538		—		—		62,538
Derivatives with PLC	115,379		—		115,379		—		—		115,379
Other	—		—		—		—		—		—
Total derivatives, not subject to a master netting arrangement or similar arrangement	209,843		—		209,843		—		—		209,843
Total derivatives	995,493		—		995,493		452,562		215,587		327,344
Total Assets	$	995,493	$	—	$	995,493	$	452,562	$	215,587	$	327,344

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	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Balance Sheets		Net Amounts of Liabilities Presented in the Balance Sheets		Gross Amounts Not Offset in the Balance Sheets
							Financial Instruments		Collateral Posted		Net Amount
	(Dollars In Thousands)
Offsetting of Liabilities
Derivatives:
Free-Standing derivatives	$	458,623	$	—	$	458,623	$	452,562	$	4,791	$	1,270
Total derivatives, subject to a master netting arrangement or similar arrangement	458,623		—		458,623		452,562		4,791		1,270
Derivatives not subject to a master netting arrangement or similar arrangement
Embedded derivative - Modco reinsurance treaties	231,516		—		231,516		—		—		231,516
Funds withheld derivative	70,583		—		70,583		—		—		70,583
Embedded derivative - GLWB	248,577		—		248,577		—		—		248,577
Embedded derivative - FIA	332,869		—		332,869		—		—		332,869
Embedded derivative - IUL	151,765		—		151,765		—		—		151,765
Other	53,245		—		53,245		—		—		53,245
Total derivatives, not subject to a master netting arrangement or similar arrangement	1,088,555		—		1,088,555		—		—		1,088,555
Total derivatives	1,547,178		—		1,547,178		452,562		4,791		1,089,825
Repurchase agreements(1)	270,000		—		270,000		—		—		270,000
Total Liabilities	$	1,817,178	$	—	$	1,817,178	$	452,562	$	4,791	$	1,359,825

(1) Borrowings under repurchase agreements are for a term less than 90 days.

9. COMMERCIAL MORTGAGE LOANS

Commercial Mortgage Loans

The Company invests a portion of its investment portfolio in commercial mortgage loans. As of September 30, 2020, the Company’s commercial mortgage loan holdings were approximately $9.9 billion, and $9.8 billion net of allowance for credit losses. The Company has specialized in making loans on credit-oriented commercial properties, credit-anchored strip shopping centers, senior living facilities, and apartments. The Company’s underwriting procedures relative to its commercial mortgage loan portfolio are based, in the Company’s view, on a conservative and disciplined approach. The Company concentrates on a small number of commercial real estate asset classes (retail, industrial, senior living, office, and multi-family). With respect to retail, the Company’s focus is on the necessities of life sector. The Company believes that this retail focus, along with the other preferred asset classes tend to weather economic downturns better than other commercial real estate asset classes in which it has chosen not to participate. The Company believes this disciplined approach has helped to maintain a relatively low delinquency and foreclosure rate throughout its history. The majority of the Company’s commercial mortgage loan portfolio was underwritten by the Company. From time to time, the Company may acquire loans in conjunction with an acquisition.

The Company’s commercial mortgage loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, and net of the allowance for credit losses. See Note 2, Summary of Significant Accounting Policies, for a detailed discussion of the Company’s policies with respect to the measurement of the allowance for credit losses. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Amortization of premiums and discounts is recorded using the effective yield method. Interest income, amortization of premiums and discounts and prepayment fees are reported in net investment income.

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Certain of the commercial mortgage loans have call options that occur within the next 10 years. However, if interest rates were to significantly increase, the Company may be unable to exercise the call options on its existing commercial mortgage loans commensurate with the significantly increased market rates. As of September 30, 2020, assuming the loans are called at their next call dates, approximately $8.1 million of principal would become due for the remainder of 2020, $763.7 million in 2021 through 2025 and $56.7 million in 2026 through 2029.

The Company offers a type of commercial mortgage loan under which the Company will permit a loan-to-value ratio of up to 85% in exchange for a participating interest in the cash flows from the underlying real estate. As of September 30, 2020 and December 31, 2019, approximately $805.2 million and $717.0 million, respectively, of the Company’s total commercial mortgage loans principal balance have this participation feature. Cash flows received as a result of this participation feature are recorded as interest income. During the three and nine months ended September 30, 2020 and 2019, the Company recognized $0.9 million, $3.8 million, $17.3 million, and $18.0 million respectively, of participation commercial mortgage loan income.

As of September 30, 2020, the Company had $1.2 million of invested assets that consisted of nonperforming commercial mortgage loans, restructured commercial mortgage loans, or commercial mortgage loans that were foreclosed and were converted to real estate properties. The Company does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities. Non-performing commercial mortgage loans include loans that are greater than 90 days delinquent, or otherwise deemed uncollectible. During the nine months ended September 30, 2020, the Company recognized two troubled debt restructurings as a result of granting concessions to borrowers which included loan terms unavailable from other lenders. During the three and nine months ended September 30, 2020, the Company did not have any commercial mortgage loans that were foreclosed and were converted to real estate properties. It is the Company’s policy to write off loan amounts that are deemed uncollectible. No amounts were written off during the three and nine months ended September 30, 2020.

As of September 30, 2019, $3.2 million of the Company’s invested assets consisted of nonperforming commercial mortgage loans, restructured commercial mortgage loans, or commercial mortgage loans that were foreclosed and were converted to real estate properties. The Company does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities. Non-performing commercial mortgage loans include loans that are greater than 90 days delinquent, or otherwise deemed uncollectible. During the nine months ended September 30, 2019, the Company recognized four troubled debt restructurings as a result of granting concessions to borrowers which included loan terms unavailable from other lenders. During the three and nine months ended September 30, 2019, the Company did not have any commercial mortgage loans that were foreclosed and were converted to real estate properties. The Company did not identify any loans whose principal was permanently impaired during the three and nine months ended September 30, 2019.

On March 27, 2020, H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”) was signed into legislation. Section 4013 of the CARES Act provides additional relief for certain loan modifications made as a result of the COVID-19 pandemic. Specifically, the CARES Act specifies that a financial institution may suspend the requirements under GAAP with respect to troubled debt restructuring classification and reporting for loan modifications made in response to the COVID-19 pandemic which meet the following criteria: 1) the borrower was not more than 30 days past due as of December 31, 2019 and 2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan. The relief provided by the CARES Act terminates on the earlier of December 31, 2020 or 60 days after the end of the national emergency declared on March 13, 2020. Accordingly, the Company provided certain relief under the CARES Act under its COVID-19 Commercial Mortgage Loan Program (the “Loan Modification Program”). As of September 30, 2020, the Company had a total of 308 loans with $2.2 billion in unpaid principal balance under the Loan Modification Program. The modifications under this program include agreements to defer principal payments only and/or to defer principal and interest payments for a specified period of time. None of these modifications were considered troubled debt restructurings.

As of September 30, 2020, the amortized cost basis of the Company's commercial mortgage loan receivables by origination year, net of the allowance, for credit losses is as follows:

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	Term Loans Amortized Cost Basis by Origination Year
	2020		2019		2018		2017		2016		Prior		Total
	(Dollars In Thousands)
As of September 30, 2020
Commercial mortgage loans:
Performing	$	937,464	$	2,528,592	$	1,606,876	$	1,361,092	$	956,593	$	2,549,745	$	9,940,362
Non-performing	—		—		—		—		—		—		—
Amortized cost	$	937,464	$	2,528,592	$	1,606,876	$	1,361,092	$	956,593	$	2,549,745	$	9,940,362
Allowance for credit losses	(11,139)		(39,465)		(43,172)		(30,722)		(15,789)		(34,763)		(175,050)
Total commercial mortgage loans	$	926,325	$	2,489,127	$	1,563,704	$	1,330,370	$	940,804	$	2,514,982	$	9,765,312

The following table presents loan-to-value ratios for commercial mortgages by year of vintage:


	Loan-to-Value Ratios for Commercial Mortgages by Year of Vintage
	2020		2019		2018		2017		2016		Prior		Total
	(Dollars In Thousands)
As of September 30, 2020
Commercial mortgage loans:
Greater than 75%	$	37,291	$	105,608	$	104,885	$	51,973	$	6,605	$	6,122	$	312,484
50% - 75%	688,487		1,589,323		1,017,753		1,027,418		778,876		1,368,660		6,470,517
Less than 50%	211,686		833,661		484,238		281,701		171,112		1,174,963		3,157,361
Amortized Cost	937,464		2,528,592		$	1,606,876	$	1,361,092	$	956,593	$	2,549,745	$	9,940,362
Allowance for credit losses	(11,139)		(39,465)		(43,172)		(30,722)		(15,789)		(34,763)		(175,050)
Total commercial mortgage loans	$	926,325	$	2,489,127	$	1,563,704	$	1,330,370	$	940,804	$	2,514,982	$	9,765,312

(1) The loan-to-value ratio compares the current unpaid principal of the loan to the estimated fair value of the underlying property collateralizing the loan. Our weighted average loan-to-value ratio was 54% at both September 30, 2020 and December 31, 2019.

The following table presents debt service coverage ratios for commercial mortgages by year of vintage:


	Debt Service Coverage Ratios for Commercial Mortgages by Year of Vintage
	2020		2019		2018		2017		2016		Prior		Total
	(Dollars In Thousands)
As of September 30, 2020
Commercial mortgage loans:
>1.20x	$	900,073	$	2,073,671	$	1,202,174	$	1,059,070	$	725,071	$	1,943,864	$	7,903,923
1.00x - 1.20x	37,391		354,960		330,495		237,527		143,886		360,784		1,465,043
<1.00x	—		99,961		74,207		64,495		87,636		245,097		571,396
Amortized Cost	937,464		2,528,592		1,606,876		1,361,092		956,593		2,549,745		9,940,362
Allowance for credit losses	(11,139)		(39,465)		(43,172)		(30,722)		(15,789)		(34,763)		(175,050)
Total commercial mortgage loans	$	926,325	$	2,489,127	$	1,563,704	$	1,330,370	$	940,804	$	2,514,982	$	9,765,312

(1) The debt service coverage ratio compares a property’s net operating income to its debt service payments, including principal and interest. Our weighted average debt service coverage ratio was 1.74x at September 30, 2020 and 1.73x at December 31, 2019.

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The ACL increased by $99.1 million during the nine months ended September 30, 2020, primarily as a result of deterioration in the macroeconomic forecasts, as a result of COVID-19, used in the measurement of the ACL since the initial allowance was established.


	For The Three Months Ended September 30, 2020		For The Nine Months Ended September 30, 2020
	(Dollars In Thousands)
Allowance for Funded Commercial Mortgage Loan Credit Losses
Beginning balance	$	173,186	$	4,884
Cumulative effect adjustment	—		80,239
Charge offs	—		—
Recoveries	—		(1,839)
Provision	1,864		91,766
Ending balance	$	175,050	$	175,050

Allowance for Unfunded Commercial Mortgage Loan Commitments Credit Losses
Beginning balance	$	19,550	$	—
Cumulative effect adjustment	—		10,610
Charge offs	—		—
Recoveries	—		—
Provision	247		9,187
Ending balance	$	19,797	$	19,797

An analysis of delinquent loans is shown in the following chart:


					Greater
	30-59 Days		60-89 Days		than 90 Days		Total
As of September 30, 2020	Delinquent		Delinquent		Delinquent		Delinquent
	(Dollars In Thousands)
Commercial mortgage loans	$	—	$	—	$	—	$	—
Number of delinquent commercial mortgage loans	—		—		—		—

As of December 31, 2019
Commercial mortgage loans	$	6,455	$	—	$	710	$	7,165
Number of delinquent commercial mortgage loans	2		—		3		5

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The Company limits accrued interest income on loans to ninety days of interest. For loans in nonaccrual status, interest income is recognized on a cash basis. For the nine months ended September 30, 2020, an immaterial amount of accrued interest was excluded from the amortized cost basis pursuant to the Company's nonaccrual policy.

An analysis of loans in a nonaccrual status is shown in the following chart:


	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Income
	(Dollars In Thousands)
As of September 30, 2020
Commercial mortgage loans:
With no related allowance recorded	$	—	$	—	$	—	$	—	$	—	$	—
With an allowance recorded	$	—	$	—	$	—	$	—	$	—	$	—
As of December 31, 2019
Commercial mortgage loans:
With no related allowance recorded	$	710	$	702	$	—	$	237	$	20	$	28
With an allowance recorded	$	16,209	$	16,102	$	4,884	$	3,242	$	841	$	838

Commercial mortgage loans that were modified in a troubled debt restructuring as of September 30, 2020 and December 31, 2019 are shown below.


	Number of Contracts	Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars In Thousands)
As of September 30, 2020
Troubled debt restructuring:
Commercial mortgage loans	1	$	1,237	$	1,237

As of December 31, 2019
Troubled debt restructuring:
Commercial mortgage loans	2	$	3,771	$	3,771

10. DEBT AND OTHER OBLIGATIONS

Under a revolving line of credit arrangement (the “Credit Facility”), the Company has the ability to borrow on an unsecured basis up to an aggregate principal amount of $1.0 billion. The Company has the right in certain circumstances to request that the commitment under the Credit Facility be increased up to a maximum principal amount of $1.5 billion. Balances outstanding under the Credit Facility accrue interest at a rate equal to, at the option of the Borrowers, (i) LIBOR plus a spread based on the ratings of PLC’s Senior Debt, or (ii) the sum of (A) a rate equal to the highest of (x) the Administrative Agent’s Prime rate, (y) 0.50% above the Funds Rate, or (z) the one-month LIBOR plus 1.00% and (B) a spread based on the ratings of PLC’s Senior Debt. The Credit Facility also provided for a facility fee at a rate that varies with the ratings of PLC’s Senior Debt and that is calculated on the aggregate amount of commitments under the Credit Facility, whether used or unused. The annual facility fee rate is 0.125% of the aggregate principal amount. The Credit Facility provides that PLC is liable for the full amount of any obligations for borrowings or letters of credit, including those of the Company, under the Credit Facility. The maturity date of the Credit Facility is May 3, 2023. The Company is not aware of any non-compliance with the financial debt covenants of the Credit Facility as of September 30, 2020. PLC had a combined outstanding balance of $255.0 million, with $215.0 million bearing an interest at a rate of LIBOR plus 1.00%, and $40 million bearing an interest rate of Prime as of September 30, 2020. PLC did not have an outstanding balance as of December 31, 2019.

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Non-Recourse Funding Obligations

Non-recourse funding obligations outstanding as of September 30, 2020, on a consolidated basis, are shown in the following table. See Note 15, Subsequent Events for additional information on the Company’s non-recourse funding obligations.


Issuer	Outstanding Principal		Carrying Value(1)		Maturity Year	Year-to-Date Weighted-Avg Interest Rate
	(Dollars In Thousands)
Golden Gate Captive Insurance Company(2)(3)	$	1,858,000	$	1,858,000	2039	4.70	%
Golden Gate II Captive Insurance Company	329,949		275,895		2052	3.91	%
Golden Gate V Vermont Captive Insurance Company(2)(3)	750,000		806,015		2037	5.12	%
MONY Life Insurance Company(3)	1,885		2,216		2024	6.19	%
Total	$	2,939,834	$	2,942,126

(1) Carrying values include premiums and discounts and do not represent unpaid principal balances.
(2) Obligations are issued to non-consolidated subsidiaries of PLC. These obligations collateralize certain held-to-maturity securities issued by wholly owned subsidiaries of the Company. Changes in Golden Gate and Golden Gate V are non-cash items.
(3) Fixed rate obligations.

Non-recourse funding obligations outstanding as of December 31, 2019, on a consolidated basis, are shown in the following table:


Issuer	Outstanding Principal		Carrying Value(1)		Maturity Year	Year-to-Date Weighted-Avg Interest Rate
	(Dollars In Thousands)
Golden Gate Captive Insurance Company(2)(3)	$	2,028,000	$	2,028,000	2039	4.70	%
Golden Gate II Captive Insurance Company	329,949		274,955		2052	5.06	%
Golden Gate V Vermont Captive Insurance Company(2)(3)	720,000		777,527		2037	5.12	%
MONY Life Insurance Company(3)	1,885		2,271		2024	6.19	%
Total	$	3,079,834	$	3,082,753

(1) Carrying values include premiums and discounts and do not represent unpaid principal balances.
(2) Obligations are issued to non-consolidated subsidiaries of PLC. These obligations collateralize certain held-to-maturity securities issued by wholly owned subsidiaries of the Company. Changes in Golden Gate and Golden Gate V are non-cash items.
(3) Fixed rate obligations.

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Secured Financing Transactions

Repurchase Program Borrowings

While the Company anticipates that the cash flows of its operating subsidiaries will be sufficient to meet its investment commitments and operating cash needs in a normal credit market environment, the Company recognizes that investment commitments scheduled to be funded may, from time to time, exceed the funds then available. Therefore, the Company has established repurchase agreement programs for certain of its insurance subsidiaries to provide liquidity when needed. The Company expects that the rate received on its investments will equal or exceed its borrowing rate. Under this program, the Company may, from time to time, sell an investment security at a specific price and agree to repurchase that security at another specified price at a later date. These borrowings are typically for a term less than 90 days. The market value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty against credit exposure. Cash received is invested in fixed maturity securities, and the agreements provide for net settlement in the event of default or on termination of the agreements. As of September 30, 2020, the fair value of securities pledged under the repurchase program was $153.7 million, and the repurchase obligation of $150.0 million was included in the Company’s consolidated condensed balance sheets (at an average borrowing rate of 14 basis points). During the nine months ended September 30, 2020, the maximum balance outstanding at any one point in time related to these programs was $565.0 million. The average daily balance was $94.4 million (at an average borrowing rate of 50 basis points) during the nine months ended September 30, 2020. As of December 31, 2019, the fair value of securities pledged under the repurchase program was $282.2 million, and the repurchase obligation of $270.0 million was included in the Company’s consolidated condensed balance sheets (at an average borrowing rate of 163 basis points). During 2019, the maximum balance outstanding at any one point in time related to these programs was $900.0 million. The average daily balance was $212.2 million (at an average borrowing rate of 214 basis points) during the year ended December 31, 2019.

Securities Lending

The Company participates in securities lending, primarily as an investment yield enhancement, whereby securities that are held as investments are loaned out to third parties for short periods of time. The Company requires collateral at least equal to 102% of the fair value of the loaned securities to be separately maintained. The loaned securities’ fair value is monitored on a daily basis and collateral is adjusted accordingly. The Company maintains ownership of the securities at all times and is entitled to receive from the borrower any payments for interest received on such securities during the loan term. Securities lending transactions are accounted for as secured borrowings. As of September 30, 2020, securities with a fair value of $80.2 million were loaned under this program. As collateral for the loaned securities, the Company receives cash which is primarily reinvested in short-term repurchase agreements, which are also collateralized by U.S. Government or U.S. Government Agency securities, and government money market funds. These investments are recorded in short-term investments with a corresponding liability recorded in secured financing liabilities to account for its obligation to return the collateral. As of September 30, 2020, the fair value of the collateral related to this program was $82.8 million and the Company has an obligation to return $82.8 million of collateral to the securities borrowers.

The following table provides the fair value of collateral pledged for repurchase agreements, grouped by asset class as of September 30, 2020 and December 31, 2019:

Repurchase Agreements, Securities Lending Transactions, and Repurchase-to-Maturity Transactions

Accounted for as Secured Borrowings

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	Remaining Contractual Maturity of the Agreements
	As of September 30, 2020
	(Dollars In Thousands)
	Overnight and Continuous		Up to 30 days		30-90 days		Greater Than 90 days		Total
Repurchase agreements and repurchase-to-maturity transactions
U.S. Treasury and agency securities	$	153,681	$	—	$	—	$	—	$	153,681






Total repurchase agreements and repurchase-to-maturity transactions	153,681		—		—		—		153,681
Securities lending transactions



Corporate securities	60,358		—		—		—		60,358
Equity securities	17,282		—		—		—		17,282

Other government related securities	2,554		—		—		—		2,554

Total securities lending transactions	80,194		—		—		—		80,194
Total securities	$	233,875	$	—	$	—	$	—	$	233,875

Repurchase Agreements, Securities Lending Transactions, and Repurchase-to-Maturity Transactions

Accounted for as Secured Borrowings


	Remaining Contractual Maturity of the Agreements
	As of December 31, 2019
	(Dollars In Thousands)
	Overnight and Continuous		Up to 30 days		30-90 days		Greater Than 90 days		Total
Repurchase agreements and repurchase-to-maturity transactions
U.S. Treasury and agency securities	$	282,198	$	—	$	—	$	—	$	282,198






Total repurchase agreements and repurchase-to-maturity transactions	282,198		—		—		—		282,198
Securities lending transactions



Fixed maturity securities	55,720		—		—		—		55,720
Equity securities	7,120		—		—		—		7,120



Total securities lending transactions	62,840		—		—		—		62,840
Total securities	$	345,038	$	—	$	—	$	—	$	345,038

11. COMMITMENTS AND CONTINGENCIES

The Company leases administrative and marketing office space as well as various office equipment. Most leases have terms ranging from two years to twenty-five years. Leases with an initial term of 12 months or less are not recorded on the consolidated condensed balance sheet. The Company accounts for lease components separately from non-lease components (e.g., common area maintenance). Certain of the Company’s lease agreements include options to renew at the Company’s discretion. Management has concluded that the Company is not reasonably certain to elect any of these renewal options. The Company will use the interest rates received on its funding agreement backed notes as the collateralized discount rate when calculating the present value of remaining lease payments when the rate implicit in the lease is unavailable.

Under the insurance guaranty fund laws in most states, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. From time to time, companies may be asked to contribute amounts beyond prescribed limits. It is possible that the Company could be assessed with respect to product lines not offered by the Company. In addition, legislation may be introduced in various states with respect to guaranty fund assessment laws related to insurance products, including long term care insurance and other specialty products, that increases the cost of future assessments or alters future premium tax offsets received in connection with guaranty fund assessments. The Company cannot predict the amount, nature or timing of any future assessments or legislation, any of which could have a material and adverse impact on the Company’s financial condition or results of operations.

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A number of civil jury verdicts have been returned against insurers, broker-dealers, and other providers of financial services involving sales, refund or claims practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or persons with whom the insurer does business, and other matters. Often these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive and non-economic compensatory damages. In some states, juries, judges, and arbitrators have substantial discretion in awarding punitive and non-economic compensatory damages which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration. Arbitration awards are subject to very limited appellate review. In addition, in some class action and other lawsuits, companies have made material settlement payments. The financial services and insurance industries in particular are also sometimes the target of law enforcement and regulatory investigations relating to the numerous laws and regulations that govern such companies. Some companies have been the subject of law enforcement or regulatory actions or other actions resulting from such investigations. The Company, in the ordinary course of business, is involved in such matters.

The Company establishes liabilities for litigation and regulatory actions when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. For matters where a loss is believed to be reasonably possible, but not probable, no liability is established. For such matters, the Company may provide an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made. The Company reviews relevant information with respect to litigation and regulatory matters on a quarterly and annual basis and updates its established liabilities, disclosures, and estimates of reasonably possible losses or range of loss based on such reviews.

Certain of the Company’s insurance subsidiaries, as well as certain other insurance companies for which the Company has coinsured blocks of life insurance and annuity policies, are under audit for compliance with the unclaimed property laws of a number of states. The audits are being conducted on behalf of the treasury departments or unclaimed property administrators in such states. The focus of the audits is on whether there have been unreported deaths, maturities, or policies that have exceeded limiting age with respect to which death benefits or other payments under life insurance or annuity policies should be treated as unclaimed property that should be escheated to the state. The Company is presently unable to estimate the reasonably possible loss or range of loss that may result from the audits due to a number of factors, including the early stages of the audits being conducted, and uncertainty as to whether the Company or other companies are responsible for the liabilities, if any, arising in connection with certain co-insured policies. The Company will continue to monitor the matter for any developments that would make the loss contingency associated with the audits reasonably estimable.

Advance Trust & Life Escrow Services, LTA, as Securities Intermediary of Life Partners Position Holder Trust v. Protective Life Insurance Company, Case No. 2:18-CV-01290, is a putative class action that was filed on August 13, 2018 in the United States District Court for the Northern District of Alabama. Plaintiff alleges that the Company required policyholders to pay unlawful and excessive cost of insurance charges. Plaintiff seeks to represent all owners of universal life and variable universal life policies issued or administered by the Company or its predecessors that provide that cost of insurance rates are to be determined based on expectations of future mortality experience. The plaintiff seeks class certification, compensatory damages, pre-judgment and post-judgment interest, costs, and other unspecified relief. The Company is vigorously defending this matter and cannot predict the outcome of or reasonably estimate the possible loss or range of loss that might result from this litigation.

Scottish Re (U.S.), Inc. ("SRUS") was placed in rehabilitation on March 6, 2019 by the State of Delaware. Under the related order, the Insurance Commissioner of the State of Delaware has been appointed the receiver of SRUS (the “Receiver”) and provided with authority to conduct and continue the business of SRUS in the interest of its cedents, creditors, and stockholder. The order was accompanied by an injunction requiring the continued payment of reinsurance premiums to SRUS and temporarily prohibiting cedents, including the Company, from offsetting premiums payable against receivables from SRUS. On June 20, 2019, the Delaware Court of Chancery (the “Court”) entered an order approving a Revised Offset Plan, which allows cedents, including the Company, to offset premiums under certain circumstances.

A proposed Rehabilitation Plan (“Rehabilitation Plan”) was filed by the receiver of SRUS on June 30, 2020. The Rehabilitation Plan presents the following two options to each cedent: 1) remain in business with SRUS and be governed by the Rehabilitation Plan, or 2) recapture business ceded to SRUS. Due to SRUS’s financial status, neither option pays 100% of outstanding claims. Certain financial terms and conditions will be imposed on the cedents based on the election made, the type of business ceded, the manner in which the business is collateralized, and the amount of losses sustained by a cedent. The Company is currently working to evaluate the impact of both options and to provide feedback/objections to the Receiver on the Rehabilitation Plan. On October 9, 2020, the Receiver filed a proposed order setting forth a schedule to present the Rehabilitation Plan for Court approval, which order contemplates possible modifications to the Rehabilitation Plan to be filed with the Court by March 16, 2021.

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The Company continues to monitor SRUS and the actions of the Receiver through discussions with legal counsel and review of publicly available information. An allowance for credit losses related to SRUS is included in the overall reinsurance allowance for credit losses. See Note 2, Summary of Significant Accounting Policies. As of September 30, 2020, management does not believe that the ultimate outcome of the rehabilitation process will have a material impact on the Company’s financial position or results of operations.

12. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following tables summarize the changes in the accumulated balances for each component of accumulated other comprehensive income (loss) (“AOCI”) as of September 30, 2020 and December 31, 2019.

Changes in Accumulated Other Comprehensive Income (Loss) by Component


	Unrealized Gains and Losses on Investments(2)		Accumulated Gain and Loss Derivatives		Total Accumulated Other Comprehensive Income (Loss)
	(Dollars In Thousands, Net of Tax)
Balance, December 31, 2018	$	(1,404,209)	$	(7)	$	(1,404,216)
Other comprehensive income (loss) before reclassifications	2,833,888		(9,781)		2,824,107
Other comprehensive income (loss) relating to other-than-temporary impaired investments for which a portion has been recognized in earnings	(3,574)		—		(3,574)
Amounts reclassified from accumulated other comprehensive income (loss)(1)	(10,474)		1,799		(8,675)

Balance, December 31, 2019	$	1,415,631	$	(7,989)	$	1,407,642
Other comprehensive income (loss) before reclassifications	1,258,943		(877)		1,258,066
Other comprehensive income (loss) on investments for which a credit loss has been recognized in earnings	25,659		—		25,659
Amounts reclassified from accumulated other comprehensive income (loss)(1)	60,231		2,427		62,658

Balance, September 30, 2020	$	2,760,464	$	(6,439)	$	2,754,025

(1) See Reclassifications Out of Accumulated Other Comprehensive Income (Loss) table below for details.
(2) As of September 30, 2020 and December 31, 2019, net unrealized gains reported in AOCI were offset by $(1.6) billion and $(776.9) million, respectively, due to the impact those net unrealized losses would have had on certain of the Company’s insurance assets and liabilities if the net unrealized losses had been recognized in net income.

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The following tables summarize the reclassifications amounts out of AOCI for the three and nine months ended September 30, 2020 and 2019.

Reclassifications Out of Accumulated Other Comprehensive Income (Loss)


		For The Three Months Ended September 30,				For The Nine Months Ended September 30,
Gains (losses) in net income:	Affected Line Item in the Consolidated Condensed Statements of Income	2020		2019		2020		2019
		(Dollars In Thousands)

Derivative instruments	Benefits and settlement expenses, net of reinsurance ceded(1)	$	(401)	$	(746)	$	(3,072)	$	(1,360)
	Tax (expense) benefit	84		157		645		285
		$	(317)	$	(589)	$	(2,427)	$	(1,075)

Unrealized gains and losses on available-for-sale securities	Realized gains (losses) - investments	$	2,681	$	15,686	$	44,298	$	21,885
	Net credit losses recognized in operations	(38,459)		—		(120,540)		—
	Net impairment losses recognized in operations	—		(10,818)		—		(14,658)
	Tax (expense) benefit	7,513		(1,022)		16,011		(1,517)
		$	(28,265)	$	3,846	$	(60,231)	$	5,710

(1) See Note 7, Derivative Financial Instruments for additional information

13. INCOME TAXES

The Company used its respective estimates for its annual 2020 and 2019 income in computing its effective income tax rates for the three and nine months ended September 30, 2020 and 2019. The effective tax rates for the three and nine months ended September 30, 2020 and 2019, were 17.7%, 19.2% 20.6%, and 19.2% respectively.

The CARES Act, as described in Note 9, Commercial Mortgage Loans, includes tax provisions relevant to businesses. The Company was required to recognize the effect on the consolidated financial statements in the period the law was enacted, which was in the period ended March 31, 2020. For the period ended March 31, 2020, the CARES Act was not material to the Company's consolidated financial statements; however, if we were to have a taxable loss for the year ended December 31, 2020, we would be able to carryback those losses to prior periods. At this time, the Company does not expect the impact of the CARES Act to be material to the Company's consolidated financial statements for the year ended December 31, 2020.

In April 2019, the IRS proposed favorable and unfavorable adjustments to the Company’s 2014 through 2016 reported taxable income. The Company agreed to these adjustments. The resulting taxes have been settled, other than interest; the settlement of interest will not materially impact the Company or its effective tax rate.

In general, the Company is no longer subject to income tax examinations by taxing authorities for tax years that began before 2017.

Due to the aforementioned IRS adjustments to the Company's pre-2017 taxable income, the Company has amended certain of its 2014 through 2016 state income tax returns. Such amendments will cause such years to remain open, pending the states' acceptances of the returns.

There have been no changes to the balance of unrecognized tax benefits during the three and nine months ended September 30, 2020. The Company believes that in the next twelve months, none of the unrecognized tax benefits will be reduced.

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14. OPERATING SEGMENTS

The Company has several operating segments, each having a strategic focus. An operating segment is distinguished by products, channels of distribution, and/or other strategic distinctions. The Company periodically evaluates its operating segments and makes adjustments to its segment reporting as needed. A brief description of each segment follows.

In the first quarter of 2020, as a result of changes in the way the chief operating decision maker makes decisions about the allocation of resources and assesses the performance of the business, the Company combined two of its former six segments into one segment, Retail Life and Annuity. These changes enable the Company to better serve the needs of its customer and to help achieve the goals of the organization.

Prior period amounts were adjusted retrospectively to reflect the change in the Company’s reportable segments.

•The Retail Life and Annuity segment primarily markets fixed universal life (“UL”), indexed universal life (“IUL”), variable universal life (“VUL”), level premium term insurance (“traditional”), fixed annuity, and variable annuity (“VA”) products on a national basis primarily through networks of independent insurance agents and brokers, broker-dealers, financial institutions, independent marketing organizations, and affinity groups.

•The Acquisitions segment focuses on acquiring, converting, and servicing policies and contracts acquired from other companies. The segment’s primary focus is on life insurance policies and annuity products that were sold to individuals. Additionally, this segment recently increased its focus on identifying transactions which present ongoing retail opportunities. The level of the segment’s acquisition activity is predicated upon many factors, including available capital, operating capacity, potential return on capital, and market dynamics. Policies acquired through the Acquisitions segment are typically blocks of business where no new policies are being marketed, however, some recent acquisitions have included ongoing new business activities. Ongoing new product sales written by the Company from these acquisitions are included in the Retail Life and Annuity segment. As a result, earnings and account values are expected to decline as the result of lapses, deaths, and other terminations of coverage unless new acquisitions are made.

•The Stable Value Products segment sells fixed and floating rate funding agreements directly to the trustees of municipal bond proceeds, money market funds, bank trust departments, and other institutional investors. This segment also issues funding agreements to the FHLB, and markets guaranteed investment contracts (“GICs”) to 401(k) and other qualified retirement savings plans. The Company also has an unregistered funding agreement-backed notes program which provides for offers of notes to both domestic and international institutional investors.

•The Asset Protection segment markets extended service contracts, GAP products, credit life and disability insurance, and other specialized ancillary products to protect consumers’ investments in automobiles and recreational vehicles. GAP products are designed to cover the difference between the scheduled loan pay-off amount and an asset’s actual cash value in the case of a total loss. Each type of specialized ancillary product protects against damage or other loss to a particular aspect of the underlying asset.

•The Corporate and Other segment primarily consists of net investment income on assets supporting our equity capital, unallocated corporate overhead and expenses not attributable to the segments above. This segment includes earnings from several non-strategic or runoff lines of business, various financing and investment-related transactions, and the operations of several small subsidiaries.

The Company’s management and Board of Directors analyzes and assesses the operating performance of each segment using pre-tax adjusted operating income (loss) and after-tax adjusted operating income (loss). Consistent with GAAP accounting guidance for segment reporting, pre-tax adjusted operating income (loss) is the Company’s measure of segment performance. Pre-tax adjusted operating income (loss) is calculated by adjusting income (loss) before income tax, by excluding the following items:

•realized gains and losses on investments and derivatives,

•changes in the GLWB embedded derivatives exclusive of the portion attributable to the economic cost of the GLWB,

•actual GLWB incurred claims, and

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•the amortization of DAC, VOBA, and certain policy liabilities that is impacted by the exclusion of these items.

The items excluded from adjusted operating income (loss) are important to understanding the overall results of operations. Pre-tax adjusted operating income (loss) and after-tax adjusted operating income (loss) are not substitutes for income before income taxes or net income (loss), respectively. These measures may not be comparable to similarly titled measures reported by other companies. The Company believes that pre-tax and after-tax adjusted operating income (loss) enhances management’s and the Board of Directors’ understanding of the ongoing operations, the underlying profitability of each segment, and helps facilitate the allocation of resources.

After-tax adjusted operating income (loss) is derived from pre-tax adjusted operating income (loss) with the inclusion of income tax expense or benefits associated with pre-tax adjusted operating income. Income tax expense or benefits is allocated to the items excluded from pre-tax adjusted operating income (loss) at the statutory federal income tax rate for the associated period. Income tax expense or benefits allocated to after-tax adjusted operating income (loss) can vary period to period based on changes in the Company’s effective income tax rate.

In determining the components of the pre-tax adjusted operating income (loss) for each segment, premiums and policy fees, other income, benefits and settlement expenses, and amortization of DAC and VOBA are attributed directly to each operating segment. Net investment income is allocated based on directly related assets required for transacting the business of that segment. Realized gains (losses) - investments/derivatives and other operating expenses are allocated to the segments in a manner that most appropriately reflects the operations of that segment. Investments and other assets are allocated based on statutory policy liabilities net of associated statutory policy assets, while DAC/VOBA and goodwill are shown in the segments to which they are attributable.

As of April 1, 2020, the Company refined its method of allocating the realized gains and losses associated with its derivative portfolios to the Acquisitions and Retail Life and Annuity operating segments. The impact of the change in allocation was not considered material to the operation segment results for the three and nine months ended September 30, 2019.

There were no significant intersegment transactions during the three and nine months ended September 30, 2020 and 2019.

The following tables present a summary of results and reconciles pre-tax adjusted operating income (loss) to consolidated income before income tax and net income:

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	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars In Thousands)
Revenues
Retail Life and Annuity	$	664,525	$	651,222	$	1,995,041	$	1,817,232
Acquisitions	802,200		859,524		2,399,362		2,136,497
Stable Value Products	48,081		59,954		137,222		187,118
Asset Protection	68,198		72,729		209,790		218,995
Corporate and Other	50,223		22,597		81,138		90,082
Total revenues	$	1,633,227	$	1,666,026	$	4,822,553	$	4,449,924
Pre-tax Adjusted Operating Income (Loss)
Retail Life and Annuity	$	14,927	3,015		22,642		$	87,405
Acquisitions	64,999		103,210		238,121		247,932
Stable Value Products	20,129		20,863		62,119		71,208
Asset Protection	9,484		9,637		32,851		26,945
Corporate and Other	(32,125)		(36,563)		(103,897)		(119,675)
Pre-tax adjusted operating income	77,414		100,162		251,836		313,815
Realized gains (losses) and adjustments	(4,802)		139,679		118,090		288,476
Income before income tax	72,612		239,841		369,926		602,291
Income tax expense	(12,850)		(49,417)		(71,094)		(115,355)
Net income	$	59,762	$	190,424	$	298,832	$	486,936

Pre-tax adjusted operating income	$	77,414	$	100,162	$	251,836	$	313,815
Adjusted operating income tax expense	(13,859)		(20,085)		(46,295)		(54,775)
After-tax adjusted operating income	63,555		80,077		205,541		259,040
Realized gains (losses) and adjustments	(4,802)		139,679		118,090		288,476
Income tax (expense) benefit on adjustments	1,009		(29,332)		(24,799)		(60,580)
Net income	$	59,762	$	190,424	$	298,832	$	486,936

Realized gains (losses) and adjustments:
Derivative financial instruments	$	15,337	$	42,286	$	92,899	$	(86,288)
Investments	22,819		77,399		(72,752)		302,596
Less: related amortization(1)	56,313		(6,205)		(58,065)		(37,406)
Less: VA GLWB economic cost	(13,355)		(13,789)		(39,878)		(34,762)
Total realized gains (losses) and adjustments	$	(4,802)	$	139,679	$	118,090	$	288,476

(1) Includes amortization of DAC/VOBA and benefits and settlement expenses that are impacted by realized gains (losses).

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	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars In Thousands)
Net investment income
Retail Life and Annuity	$	249,122	$	235,318	$	748,470	$	697,786
Acquisitions	405,458		426,510		1,235,231		1,106,782
Stable Value Products	54,210		59,707		169,279		184,450
Asset Protection	5,438		7,164		19,144		21,015
Corporate and Other	23,943		11,012		59,462		56,294
Total net investment income	$	738,171	$	739,711	$	2,231,586	$	2,066,327

Amortization of DAC and VOBA
Retail Life and Annuity	$	76,982	37,277		69,978		$	57,471
Acquisitions	14,114		7,388		23,720		18,349
Stable Value Products	872		857		2,439		2,584
Asset Protection	17,173		15,828		48,459		47,156
Corporate and Other	—		—		—		—
Total amortization of DAC and VOBA	$	109,141	$	61,350	$	144,596	125,560


	Operating Segment Assets
	As of September 30, 2020
	(Dollars In Thousands)
	Retail Life & Annuity		Acquisitions		Stable Value Products
Investments and other assets	$	39,070,453	$	54,395,295	$	5,889,432
DAC and VOBA	2,476,357		808,377		7,681
Other intangibles	375,851		33,831		6,222
Goodwill	558,501		23,862		113,924
Total assets	$	42,481,162	$	55,261,365	$	6,017,259


	Asset Protection		Corporate and Other		Total Consolidated
Investments and other assets	$	869,456	$	19,872,380	$	120,097,016
DAC and VOBA	169,505		—		3,461,920
Other intangibles	104,019		33,161		553,084
Goodwill	129,224		—		825,511
Total assets	$	1,272,204	$	19,905,541	$	124,937,531

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	Operating Segment Assets
	As of December 31, 2019
	(Dollars In Thousands)
	Retail Life & Annuity		Acquisitions		Stable Value Products
Investments and other assets	$	37,448,239	$	54,074,450	$	5,317,885
DAC and VOBA	2,416,616		924,090		5,221
Other intangibles	401,178		36,321		6,722
Goodwill	558,501		23,862		113,924
Total assets	$	40,824,534	$	55,058,723	$	5,443,752


	Asset Protection		Corporate and Other		Total Consolidated
Investments and other assets	$	878,386	$	17,830,217	$	115,549,177
DAC and VOBA	173,628		—		3,519,555
Other intangibles	112,032		27,173		583,426
Goodwill	129,224		—		825,511
Total assets	$	1,293,270	$	17,857,390	$	120,477,669

15. SUBSEQUENT EVENTS

The Company has evaluated the effects of events subsequent to September 30, 2020, and through the date the Company filed its consolidated condensed financial statements with the United States Securities and Exchange Commission. All accounting and disclosure requirements related to subsequent events are included in the Company's consolidated condensed financial statements.

On October 1, 2020, as part of a corporate initiative to consolidate and simplify PLC’s reserve financing structures and reduce related financial and operational costs, Golden Gate II Captive Insurance Company, Golden Gate III Vermont Captive Insurance Company, Golden Gate IV Vermont Captive Insurance Company, and Golden Gate V Vermont Captive Insurance Company, all of which are wholly owned captive insurance company subsidiaries of the Company (collectively “the Captives”) merged with and into (the “Captive Merger”) Golden Gate Captive Insurance Company (“Golden Gate”), a Vermont special purpose financial insurance company and a wholly owned subsidiary of the Company.

In conjunction with the Captive Merger, Golden Gate and Steel City, LLC (“Steel City”), a wholly owned subsidiary of PLC, terminated the financing facility into which Golden Gate and Steel City had entered in 2016. This termination included redeeming the fixed maturity securities issued by Steel City to Golden Gate and the surplus note issued by Golden Gate to Steel City.

In conjunction with the Captive Merger, Golden Gate II redeemed the full outstanding principal amount of floating rate non-recourse funding obligations due July 15, 2052. These non-recourse funding obligations were previously marked to fair value in conjunction with the February 1, 2015 acquisition of the Company by The Dai-ichi Life Insurance Company (now known as Dai-ichi Life Holdings, Inc., “Dai-ichi Life”). The redemption required the acceleration of the accretion of the discount associated with the non-recourse funding obligation. The estimated impact of this non-cash acceleration is a $54 million reduction to income before income taxes for the year ended December 31, 2020.

Also in conjunction with the Captive Merger, Golden Gate V and Red Mountain, LLC (“Red Mountain”), a wholly owned subsidiary of PLC, terminated the financing facility into which Golden Gate V and Red Mountain had entered into in 2012. This termination included redeeming the fixed maturity securities issued by Red Mountain to Golden Gate V and the non-recourse funding obligation issued by Golden Gate V to Red Mountain. As a result of these redemptions, the amortization and accretion of premiums and discounts recorded against the fixed maturities and non-recourse funding obligations which were previously marked to fair value in conjunction with the February 1, 2015 acquisition of the Company by Dai-ichi Life was accelerated. The estimated net impact of this non-cash acceleration is a $16 million reduction to income before income taxes for the year ended December 31, 2020.

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Also, in connection with the Captive Merger, the interest support and YRT premium support agreements that were entered into with PLC were terminated. As discussed in Note 6, Fair Value of Financial Instruments, these agreements met the definition of a derivative financial instrument and were accounted for at fair value in the consolidated financial statements. PLC intends to settle its obligations under these agreements during the fourth quarter of 2020.

On October 1, 2020, immediately following the Captive Merger, Golden Gate entered into a transaction with a term of 20 years, that may be extended to up to a maximum term of 25 years, to finance up to a maximum term of $5 billion of “XXX” and “AXXX” reserves related to the term life insurance business and universal life insurance with secondary guarantee business that is reinsured to Golden Gate by PLICO and West Coast pursuant to an Excess of Loss Reinsurance Agreement (the “XOL Agreement”) with Hannover Life Reassurance Company of America (Bermuda) Ltd., The Canada Life Assurance Company (Barbados Branch) and RGA Reinsurance Company (Barbados) Ltd. (collectively, the “Retrocessionaires”). Pursuant to the XOL Agreement, in exchange for periodic fees, the Retrocessionaires assume, on an excess of loss basis, the obligation to pay (the “XOL Payments”) each quarter the lessor of a) the greater of (i) statutory reserves in excess of economic reserves and (ii) the financed amount and b) if total claims for such quarter exceed the available assets (as set forth in the XOL Agreement) of Golden Gate, the amount of such excess. The transaction is “non-recourse” to the Company, WCL, and PLICO, meaning that none of these companies are liable to reimburse the Retrocessionaires for any XOL payments required to be made.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our consolidated condensed financial statements included under Part I, Item 1, Financial Statements (Unaudited), of this Quarterly Report on Form 10-Q and our audited consolidated financial statements for the year ended December 31, 2019, included in our most recent Annual Report on Form 10-K.

For a more complete understanding of our business and current period results, please read the following MD&A in conjunction with our latest Annual Report on Form 10-K and other filings with the United States Securities and Exchange Commission (the “SEC”).

FORWARD-LOOKING STATEMENTS — CAUTIONARY LANGUAGE

This report reviews our financial condition and results of operations, including our liquidity and capital resources. Historical information is presented and discussed, and 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 involve risks and uncertainties, which may cause actual results to differ materially from the results contained in the forward-looking statements, and we cannot give assurances that such statements will prove to be correct. Actual results could differ materially from those expressed in or implied by such forward-looking statements due to a variety of factors, including:

General

•the impact of the novel coronavirus (COVID-19) global pandemic, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic;

•exposure to risks related to natural and man-made disasters and catastrophes, such as diseases, epidemics, pandemics (including the novel coronavirus COVID-19), malicious acts, cyber attacks, terrorist acts, and climate change, which could adversely affect our operations and results;

•a disruption or cyber attack affecting the electronic, communication and information technology systems or other technologies of the Company or those on whom the Company relies could adversely affect our business, financial condition, and results of operations;

•confidential information maintained in the systems of the Company or other parties upon which we rely could be compromised or misappropriated as a result of security breaches or other related lapses or incidents, damaging our business and reputation and adversely affecting our financial condition and results of operations;

•our results and financial condition may be negatively affected should actual experience differ from management’s models, assumptions, or estimates;

•compliance with existing and emerging privacy regulations could result in increased compliance costs and/or lead to changes in business practices and policies, and any failure to protect the confidentiality of consumer information could adversely affect our reputation and have a material adverse effect on our business, financial condition, and results of operations;

•we may not realize our anticipated financial results from our acquisitions strategy;

•we may experience competition in our Acquisition segment;

•assets allocated to the MONY Closed Block benefit only the holders of certain policies; adverse performance of Closed Block assets or adverse experience of Closed Block liabilities may negatively affect us;

•we are dependent on the performance of others;

•our risk management policies, practices, and procedures could leave us exposed to unidentified or unanticipated risks, which could negatively affect our business or result in losses;

•our strategies for mitigating risks arising from our day-to-day operations may prove ineffective resulting in a material adverse effect on our results of operations and financial condition;

•events that damage our reputation or the reputation of our industry could adversely impact our business, results of operations, or financial condition;

•we may not be able to protect our intellectual property and may be subject to infringement claims;

•developments in technology may impact our business;

Financial Environment

•interest rate fluctuations and sustained periods of low or high interest rates could negatively affect our interest earnings and spread income, or otherwise impact our business;

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•our investments are subject to market and credit risks, which could be heightened during periods of extreme volatility or disruption in financial and credit markets;

•climate change may adversely affect our investment portfolio;

•elimination of London Inter-Bank Offered Rate (“LIBOR”) may adversely affect the interest rates on and value of certain derivatives and floating rate securities we hold and floating rate securities we have issued, the value and profitability of certain real estate lending and other activities we conduct, and any other assets or liabilities whose value is tied to LIBOR;

•credit market volatility or disruption could adversely impact the Company’s financial condition or results from operations;

•disruption of the capital and credit markets could negatively affect the Company’s ability to meet its liquidity and financial needs;

•equity market volatility could negatively impact our business;

•our use of derivative financial instruments within our risk management strategy may not be effective or sufficient;

•our ability to grow depends in large part upon the continued availability of capital;

•we could be forced to sell investments at a loss to cover policyholder withdrawals;

•difficult general economic conditions could materially adversely affect our business and results of operations;

•we may be required to establish a valuation allowance against our deferred tax assets, which could have a material adverse effect on our results of operations, financial condition, and capital position;

•we could be adversely affected by an inability to access our credit facility;

•the amount of statutory capital or risk-based capital that we have and the amount of statutory capital or risk-based capital that we must hold to maintain our financial strength and credit ratings and meet other requirements can vary significantly from time to time and is sensitive to a number of factors outside of our control;

•we could be adversely affected by a ratings downgrade or other negative action by a rating organization;

•we operate as a holding company and depend on the ability of our subsidiaries to transfer funds to us to meet our obligations;

•we could be adversely affected by an inability to access FHLB lending;

•our securities lending program may subject us to liquidity and other risks;

•our financial condition or results of operations could be adversely impacted if our assumptions regarding the fair value and future performance of our investments differ from actual experience;

•adverse actions of certain funds or their advisers could have a detrimental impact on our ability to sell our variable life and annuity products, or maintain current levels of assets in those products;

Industry and Regulation

•the business of our company is highly regulated and is subject to routine audits, examinations, and actions by regulators, law enforcement agencies, and self-regulatory organizations;

•we may be subject to regulations of, or regulations influenced by, international regulatory authorities or initiatives;

•NAIC actions, pronouncements and initiatives may affect our product profitability, reserve and capital requirements, financial condition or results of operations;

•our use of affiliate and captive reinsurance companies to finance statutory reserves related to our term and universal life products and to reduce volatility affecting our variable annuity products, may be limited or adversely affected by regulatory action, pronouncements and interpretations;

•laws, regulations and initiatives related to unreported deaths and unclaimed property and death benefits may result in operational burdens, fines, unexpected payments or escheatments;

•we are subject to insurance guaranty fund laws, rules and regulations that could adversely affect our financial condition or results of operations;

•we are subject to insurable interest laws, rules and regulations that could adversely affect our financial condition or results of operations;

•the Healthcare Act and related regulations could adversely affect our results of operations or financial condition;

•laws, rules and regulations promulgated in connection with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act may adversely affect our results of operations or financial condition;

•new and amended regulations regarding the standard of care or standard of conduct applicable to investment professionals, insurance agencies, and financial institutions that recommend or sell annuities or life insurance products may have a material adverse impact on our ability to sell annuities and other products and to retain in-force business and on our financial condition or results of operations;

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•we may be subject to regulation, investigations, enforcement actions, fines and penalties imposed by the SEC, FINRA and other federal and international regulators in connection with our business operations;

•changes to tax law, or interpretations of existing tax law could adversely affect our ability to compete with non-insurance products or reduce the demand for certain insurance products;

•financial services companies are frequently the targets of legal proceedings, including class action litigation, which could result in substantial judgments;

•the financial services and insurance industries are sometimes the target of law enforcement investigations and the focus of increased regulatory scrutiny;

•new accounting rules, changes to existing accounting rules, or the granting of permitted accounting practices to competitors could negatively impact us;

•if our business does not perform well, we may be required to recognize an impairment of our goodwill and indefinite lived intangible assets which could adversely affect our results of operations or financial condition;

•use of reinsurance introduces variability in our statements of income;

•our reinsurers could fail to meet assumed obligations, increase rates, terminate agreements or be subject to adverse developments that could affect us;

•our policy claims fluctuate from period to period resulting in earnings volatility;

•we operate in a mature, highly competitive industry, which could limit our ability to gain or maintain our position in the industry and negatively affect profitability;

•developments in technology may impact our business; and

•our ability to maintain competitive unit costs is dependent upon the level of new sales and persistency of existing business.

For more information about the risks, uncertainties, and other factors that could affect our future results, please see Part II, Item 1A, Risk Factors of this report and Part I, Item 1A, Risk Factors of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments, or otherwise.

IMPORTANT INVESTOR INFORMATION

We file reports with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other reports as required. We are an electronic filer and the SEC maintains an internet site at http://www.sec.gov that contains our annual, quarterly, and current reports and other information filed electronically by the Company.

We make available through PLC’s website, http://www.protective.com, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after such materials are electronically filed with or furnished to the SEC. The information found on PLC’s website is not part of this or any other report filed with or furnished to the SEC. We will furnish such documents to anyone who requests such copies in writing. Requests for copies should be directed to: Financial Information, Protective Life Corporation, P. O. Box 2606, Birmingham, Alabama 35202, Telephone (205) 268-3912, Fax (205) 268-3642.

We also make available to the public current information, including financial information, regarding the Company and our affiliates on the Financial Information page of PLC’s website, www.protective.com. We encourage investors, the media and others interested in us and our affiliates to review the information we post on PLC’s website. The information found on PLC’s website is not part of this or any other report filed with or furnished to the SEC.

OVERVIEW

Our Business

We are a wholly owned subsidiary of Protective Life Corporation (“PLC”). Founded in 1907, we are the largest operating subsidiary of PLC. On February 1, 2015, PLC became a wholly owned subsidiary of The Dai-ichi Life Insurance Company, Limited, a kabushiki kaisha organized under the laws of Japan (now known as Dai-ichi Life Holdings, Inc., “Dai-ichi Life”), when DL Investment (Delaware), Inc., a wholly owned subsidiary of Dai-ichi Life, merged with and into PLC. Prior to February 1, 2015, PLC’s stock was publicly traded on the New York Stock Exchange. Subsequent to the Merger, PLC remained an SEC registrant within the United States until January 23, 2020, when PLC suspended its reporting obligations with the SEC under the Securities Exchange Act of 1934. Subsequent to the Merger, the Company has continued to be an SEC registrant for financial reporting purposes in the United States. We provide financial services through the production, distribution, and administration of insurance and investment products. Unless the context otherwise requires, the “Company,” “we,” “us,” or “our” refers to the consolidated group of Protective Life Insurance Company and our subsidiaries.

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We have several operating segments, each having a strategic focus. An operating segment is distinguished by products, channels of distribution, and/or other strategic distinctions. We periodically evaluate our operating segments and make adjustments to our segment reporting as needed.

In the first quarter of 2020, as a result of changes in the way the chief operating decision maker makes decisions about the allocation of resources and assesses the performance of the business, the Company combined two of its former six segments into one segment, Retail Life and Annuity. These changes enable the Company to better serve the needs of its customers and to help achieve the goals of the organization.

Prior period amounts were adjusted retrospectively to reflect the change in our reportable segments.

Our operating segments are Retail Life and Annuity, Acquisitions, Stable Value Products, and Asset Protection. We have an additional reporting segment referred to as Corporate and Other.

•Retail Life and Annuity - We primarily market fixed universal life (“UL”), indexed universal life (“IUL”), variable universal life (“VUL”), level premium term insurance (“traditional”), fixed annuity, and variable annuity (“VA”) products on a national basis primarily through networks of independent insurance agents and brokers, broker-dealers, financial institutions, independent distribution organizations, and affinity groups.

•Acquisitions - We focus on acquiring, converting, and/or servicing policies and contracts from other companies. This segment’s primary focus is on life insurance policies and annuity products that were sold to individuals. Additionally, this segment recently increased its focus on identifying transactions which present ongoing retail opportunities. The level of the segment’s acquisition activity is predicated upon many factors, including available capital, operating capacity, potential return on capital, and market dynamics. Policies acquired through the Acquisitions segment are typically blocks of business where no new policies are being marketed, however, some recent acquisitions have included ongoing new business activities. Ongoing new product sales written by the Company from these acquisitions are included in the Retail Life and Annuity segment. As a result, earnings and account values are expected to decline as the result of lapses, deaths, and other terminations of coverage unless new acquisitions are made.

•Stable Value Products - We sell fixed and floating rate funding agreements directly to the trustees of municipal bond proceeds, money market funds, bank trust departments, and other institutional investors. The segment also issues funding agreements to the Federal Home Loan Bank (“FHLB”), and markets guaranteed investment contracts (“GICs”) to 401(k) and other qualified retirement savings plans. We also have an unregistered funding agreement-backed notes program which provides for offers of notes to both domestic and international institutional investors.

•Asset Protection - We market extended service contracts, guaranteed asset protection (“GAP”) products, credit life and disability insurance, and other specialized ancillary products to protect consumers’ investments in automobiles and recreational vehicles. GAP products are designed to cover the difference between the scheduled loan pay-off amount and an asset’s actual cash value in the case of a total loss. Each type of specialized ancillary product protects against damage or other loss to a particular aspect of the underlying asset.

•Corporate and Other - This segment primarily consists of net investment income on assets supporting our equity capital, unallocated corporate overhead, and expenses not attributable to the segments above. This segment includes earnings from several non-strategic or runoff lines of business, financing and investment-related transactions, and the operations of several small subsidiaries.

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Impact of COVID-19

In December 2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China. COVID-19 has since spread, and infections have been found around the world, including the United States. On March 11, 2020, the World Health Organization declared the outbreak to constitute a pandemic based on the global spread of the disease, the severity of illnesses it causes, and its effects on society. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and continued spread of the outbreak, current and future regulatory and private sector responses, which may be precautionary, and the impact on our customers, workforce, and vendors, all of which are uncertain and cannot be predicted. The COVID-19 outbreak is disrupting supply chains and affecting production and sales across a range of industries, and it could materially adversely impact the mortality, morbidity, or other experience of the Company or its reinsurers or have a material adverse effect on lapses and surrenders of existing policies, as well as sales of new policies. The continued macroeconomic effects of the COVID-19 outbreak could also materially adversely affect the Company’s asset portfolio, as well as many other aspects of the Company’s business, financial condition, and results of operations.

Retail Life and Annuity segment and Acquisitions segment. The pre-tax adjusted operating income in the Retail Life and Annuity segment and the Acquisitions segment were affected primarily by the effect of the COVID-19 pandemic on mortality and equity markets. The COVID-19 pandemic has resulted in an increase in claims in the life insurance block. Further, the pandemic has resulted in significant volatility in equity markets which has impacted variable product account values. Declining variable product account values accelerated the amortization of deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”). Lower account values also resulted in higher annuity guaranteed benefit and other reserves and lower fee income during the three months ended March 31, 2020. An improvement in equity markets since that time has resulted in an increase in account values, which resulted in the slowing of DAC and VOBA amortization and a decrease in guaranteed benefit reserves. Lower fee income is expected to continue until variable account values increase with further increases in the equity markets. As variable account values increase, our exposure to claims related to guaranteed benefits will decline which in turn will result in lowering the required reserves associated with these guaranteed benefits. Additionally, the pandemic will continue to impact earnings based on the volume and severity of claims in the life insurance blocks related to COVID-19. The pandemic has also affected the manner in which our Acquisitions segment conducts due diligence, negotiates transactions, works with counterparties and integrates acquisitions, in each case adapting processes and procedures to reflect the increased reliance on technology and remote interactions as a result of COVID-19.

Asset Protection segment. The primary impacts from COVID-19 on the Asset Protection segment during the third quarter of 2020 included a positive impact on sales due to pent up demand from the second quarter in industry auto sales and lower general and administrative expenses, especially with respect to travel costs. While current trends remain positive, there remains uncertainty around the potential effect of the COVID-19 pandemic on the segment’s fourth quarter 2020 results, including a potential negative impact on sales if increased COVID-19 cases result in increased shut downs of economic activity.

Corporate Securities. The overall deterioration in the macroeconomic environment as a result of the impact of COVID-19 as well as the continued pressure on commodity prices has negatively affected the values of certain of our investments. The largest impacts have been in the oil & gas, real estate, and consumer and retail industries. For the nine months ended September 30, 2020, we have recognized $120.5 million of impairments primarily reflecting declines in the value of certain oil and gas securities.

Commercial Mortgage Loans. On March 27, 2020, H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act (“the CARES Act”) was signed into legislation. Section 4013 of the CARES Act provides additional relief for certain loan modifications made as a result of the COVID-19 pandemic. Specifically, the CARES Act specifies that a financial institution may suspend the requirements under GAAP with respect to troubled debt restructuring classification and reporting for loan modifications made in response to the COVID-19 pandemic which meet the following criteria: 1) the borrower was not more than 30 days past due as of December 31, 2019 and 2) the modifications are related to arrangements that defer or delay the payment of principal or interest, or change the interest rate on the loan. The relief provided by the CARES Act terminates on the earlier of December 31, 2020 or 60 days after the end of the national emergency declared on March 13, 2020. Accordingly, we provided certain relief under the CARES Act under its COVID-19 Commercial Mortgage Loan Program (the “Loan Modification Program”). As of September 30, 2020, we had a total of 308 loans with $2.2 billion in unpaid principal balance under the Loan Modification Program. The modifications under this program include agreements to defer principal payments only or to defer principal and interest payments for a specified period of time. None of these modifications were considered troubled debt restructurings.

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RECENT DEVELOPMENTS

Reserve Financing Restructuring

As discussed in Note 15, Subsequent Events, to the consolidated condensed financial statements contained in this report, on October 1, 2020, as part of a corporate initiative to consolidate and simplify PLC’s reserve financing structures and reduce related financial and operational costs, Golden Gate II Captive Insurance Company, Golden Gate III Vermont Captive Insurance Company, Golden Gate IV Vermont Captive Insurance Company, and Golden Gate V Vermont Captive Insurance Company (“Captive Merger”), all of which were wholly owned captive insurance company subsidiaries of the Company (collectively “the Captives”) merged with and into Golden Gate Captive Insurance Company (“Golden Gate”), a Vermont special purpose financial insurance company and a wholly owned subsidiary of the Company.

The Captive Merger will impact the Company through termination of the interest support and YRT premium support agreements that were entered into with PLC. As discussed in Note 6, Fair Value of Financial Instruments, to the consolidated condensed financial statements contained in this report, these agreements met the definition of a derivative financial instrument and were accounted for at fair value in the consolidated financial statements. PLC intends to settle its obligations under these agreements during the fourth quarter of 2020.

On October 1, 2020, immediately following the Captive Merger, Golden Gate entered into a transaction with a term of 20 years, that may be extended to up to a maximum term of 25 years, to finance up to $5 billion of “XXX” and “AXXX” reserves related to the term life insurance business and universal life insurance with secondary guarantee business that is reinsured to Golden Gate by PLICO and West Coast pursuant to an Excess of Loss Reinsurance Agreement (the “XOL Agreement”) with Hannover Life Reassurance Company of America (Bermuda) Ltd., The Canada Life Assurance Company (Barbados Branch) and RGA Reinsurance Company (Barbados) Ltd. (collectively, the “Retrocessionaires”). Pursuant to the XOL Agreement, in exchange for periodic fees, the Retrocessionaires assume, on an excess of loss basis, the obligation to pay (“XOL Payments”) each quarter the lessor of a) the greater of (i) statutory reserves in excess of economic reserves and (ii) the financed amount and b) if total claims for such quarter exceed the available assets (as set forth in the XOL Agreement) of Golden Gate, the amount of such excess.

The transaction is “non-recourse” to the Company, WCL, and the Company, meaning that none of these companies are liable to reimburse the Retrocessionaires for any XOL Payments required to be made. The estimated average annual expense of the facility is approximately $4.2 million over the expected life of the XOL Agreement and approximately $7.0 million during the first five years (representing average savings when compared to the prior reserve financings of approximately $7.9 million per year over the life of the financing and approximately $16.2 million per year during the first five years of the financing), in each case presented on an after-tax basis and calculated in accordance with GAAP.

RECENT SIGNIFICANT TRANSACTIONS

Great-West Life & Annuity Insurance Company

On January 23, 2019, we entered into a Master Transaction Agreement (the “GWL&A Master Transaction Agreement”) with Great-West Life & Annuity Insurance Company (“GWL&A”), Great-West Life & Annuity Insurance Company of New York (“GWL&A of NY”), The Canada Life Assurance Company (“CLAC”), and The Great-West Life Assurance Company (“GWL” and, together with GWL&A, GWL&A of NY, and CLAC, the “Sellers”), pursuant to which we acquired via reinsurance (the “Transaction”) substantially all of the Sellers’ individual life insurance and annuity business (the “Individual Life Business”).

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On June 3, 2019, the Company and PLAIC completed the Transaction (the “GWL&A Closing”). Pursuant to the GWL&A Master Transaction Agreement, the Company and PLAIC entered into reinsurance agreements (the “GWL&A Reinsurance Agreements”) and related ancillary documents at the GWL&A Closing. On the terms and subject to the conditions of the GWL&A Reinsurance Agreements, the Sellers ceded to the Company and PLAIC, effective as of the date of the GWL&A Closing, substantially all of the insurance policies related to the Individual Life Business on a 100% indemnity basis net of reinsurance recoveries. The aggregate ceding commission for the reinsurance of the Individual Life Business paid at the GWL&A Closing was $765.7 million. All policies issued in states other than New York were ceded to the Company under reinsurance agreements between the applicable Seller and the Company, and all policies issued in New York were ceded to PLAIC under a reinsurance agreement between GWL&A of NY and PLAIC. In addition, there were certain pending items which remained subject to adjustment in accordance with the Master Transaction Agreement as of September 30, 2020. On October 30, 2020, the Company reached a final settlement on all of the remaining pending items. As a result of these adjustments, the Company will recognize approximately $90 million in income before income tax during the quarter ended December 31, 2020. To support its obligations under the GWL&A Reinsurance Agreements, the Company established trust accounts for the benefit of GWL&A, CLAC and GWL, and PLAIC established a trust account for the benefit of GWL&A of NY. The Sellers retained a block of participating policies, which are administered by the Company.

CRITICAL ACCOUNTING POLICIES

Our accounting policies require the use of judgments relating to a variety of assumptions and estimates, including, but not limited to expectations of current and future mortality, morbidity, persistency, expenses, and interest rates, as well as expectations around the valuations of securities. Because of the inherent uncertainty when using the assumptions and estimates, the effect of certain accounting policies under different conditions or assumptions could be materially different from those reported in the consolidated condensed financial statements. For a complete listing of our critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2019.

RESULTS OF OPERATIONS

Our management and Board of Directors analyze and assess the operating performance of each segment using pre-tax adjusted operating income (loss) and after-tax adjusted operating income (loss). Consistent with GAAP accounting guidance for segment reporting, pre-tax adjusted operating income (loss) is our measure of segment performance. Pre-tax adjusted operating income (loss) is calculated by adjusting income (loss) before income tax, by excluding the following items:

•realized gains and losses on investments and derivatives,

•changes in the guaranteed living withdrawal benefits (“GLWB”) embedded derivatives exclusive of the portion attributable to the economic cost of the GLWB,

•actual GLWB incurred claims, and

•the amortization of DAC, VOBA, and certain policy liabilities that is impacted by the exclusion of these items.

The items excluded from adjusted operating income (loss) are important to understanding the overall results of operations. Pre-tax adjusted operating income (loss) and after-tax adjusted operating income (loss) are not substitutes for income before income taxes or net income (loss), respectively. These measures may not be comparable to similarly titled measures reported by other companies. Our belief is that pre-tax and after-tax adjusted operating income (loss) enhances management’s and the Board of Directors’ understanding of the ongoing operations, the underlying profitability of each segment, and helps facilitate the allocation of resources.

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In determining the components of the pre-tax adjusted operating income (loss) for each segment, premiums and policy fees, other income, benefits and settlement expenses, and amortization of DAC and VOBA are attributed directly to each operating segment. Net investment income is allocated based on directly related assets required for transacting the business of that segment. Realized gains (losses) - investments/derivatives and other operating expenses are allocated to the segments in a manner that most appropriately reflects the operations of that segment. Investments and other assets are allocated based on policy liabilities net of associated policy assets, while DAC/VOBA and goodwill are shown in the segments to which they are attributable.

We periodically review and update as appropriate our key assumptions used to measure certain balances related to insurance products, including future mortality, expenses, lapses, premium persistency, benefit utilization, investment yields, interest rates, and separate account fund returns. Changes to these assumptions result in adjustments which increase or decrease DAC and VOBA amortization and/or benefits and expenses. Assumptions may be updated as part of our annual assumption review process, as well as during our quarterly update of historical business activity. This periodic review and updating of assumptions is collectively referred to as “unlocking”. When referring to unlocking the reference is to changes in all balance sheet components associated with these changes. The adjustments associated with unlocking can create significant variability from period to period in the profitability of certain of the Company’s operating segments.

Level term policies are policies in which premium rate remains the same for our established level term period (e.g. 20 years). At the end of the level term period, premium rates typically increase significantly and policyholder lapse rates are typically high. Since most of our reinsurance premiums are paid on an annual in advance basis, at each period end, we establish an accrual to adjust for the income effect of policies expected to lapse in the next period. Premiums paid to and refunded by reinsurers is included in reinsurance ceded, while adjustments from the accrual for post level policy lapses is included in the benefits and settlement expenses line in the statements of income (loss). As a result, over time there can be significant volatility in these individual line items due to the impact of business entering the post level period.

As of April 1, 2020, the Company refined its method of allocating the realized gains and losses associated with its derivative portfolios to the Acquisitions and Retail Life and Annuity operating segments. The impact of the change in allocation was not considered material to the operating segment results for the three and nine months ended September 30, 2019.

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The following table presents a summary of results and reconciles pre-tax adjusted operating income (loss) to consolidated income before income tax and net income:


	For The Three Months Ended September 30,					For The Nine Months Ended September 30,
	2020		2019		Change	2020		2019		Change
	(Dollars In Thousands)					(Dollars In Thousands)
Pre-tax Adjusted Operating Income (Loss)
Retail Life & Annuity	$	14,927	$	3,015	n/m	$	22,642	$	87,405	(74.1)%
Acquisitions	64,999		103,210		(37.0)	238,121		247,932		(4.0)
Stable Value Products	20,129		20,863		(3.5)	62,119		71,208		(12.8)
Asset Protection	9,484		9,637		(1.6)	32,851		26,945		21.9
Corporate and Other	(32,125)		(36,563)		(12.1)	(103,897)		(119,675)		(13.2)
Pre-tax adjusted operating income	77,414		100,162		(22.7)	251,836		313,815		(19.8)
Realized gains (losses) and adjustments	(4,802)		139,679		n/m	118,090		288,476		(59.1)
Income before income tax	72,612		239,841		(69.7)	369,926		602,291		(38.6)
Income tax expense	(12,850)		(49,417)		(74.0)	(71,094)		(115,355)		(38.4)
Net income	$	59,762	$	190,424	(68.6)%	$	298,832	$	486,936	(38.6)%

Pre-tax adjusted operating income	$	77,414	$	100,162	(22.7)%	$	251,836	$	313,815	(19.8)%
Adjusted operating income tax expense	(13,859)		(20,085)		(31.0)	(46,295)		(54,775)		(15.5)
After-tax adjusted operating income	63,555		80,077		(20.6)	205,541		259,040		(20.7)
Realized gains (losses) and adjustments	(4,802)		139,679		n/m	118,090		288,476		(59.1)
Income tax expense on adjustments	1,009		(29,332)		n/m	(24,799)		(60,580)		(59.1)
Net income	$	59,762	$	190,424	(68.6)%	$	298,832	$	486,936	(38.6)%

Realized gains (losses) and adjustments:
Derivative financial instruments	$	15,337	$	42,286	(63.7)	$	92,899	$	(86,288)	n/m
Investments	22,819		77,399		(70.5)	(72,752)		302,596		n/m
Less: related amortization(1)	56,313		(6,205)		n/m	(58,065)		(37,406)		55.2
Less: VA GLWB economic cost	(13,355)		(13,789)		(3.1)	(39,878)		(34,762)		14.7
Total realized gains (losses) and adjustments	$	(4,802)	$	139,679	n/m	$	118,090	$	288,476	(59.1)%

(1) Includes amortization of DAC/VOBA and benefits and settlement expenses that are impacted by realized gains (losses).
N/M - we define n/m as not meaningful for increases or decreases greater than 100%.

For The Three Months Ended September 30, 2020 as compared to The Three Months Ended September 30, 2019

Net income for the three months ended September 30, 2020 included a $22.7 million decrease in pre-tax adjusted operating income. The decrease consisted of a $38.2 million decrease in the Acquisition segment, a $0.2 million decrease in the Asset Protection segment, and a $0.7 million decrease in the Stable Value Products. These decreases were partially offset by a $11.9 million increase in the Retail Life and Annuity segment and a $4.4 million improvement in the Corporate and Other segment.

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For The Nine Months Ended September 30, 2020 as compared to The Nine Months Ended September 30, 2019

Net income for the nine months ended September 30, 2020 included a $62.0 million decrease in pre-tax adjusted operating income. The decrease consisted of a $64.8 million decrease in the Retail Life and Annuity segment, a $9.8 million decrease in the Acquisition segment, and a $9.1 million decrease in the Stable Value Products segment which was partially offset by a $15.8 million improvement in the Corporate and Other segment and a $5.9 million increase in the Asset Protection segment.

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Retail Life and Annuity

Segment Results of Operations

Segment results were as follows:


	For The Three Months Ended September 30,					For The Nine Months Ended September 30,
	2020		2019		Change	2020		2019		Change
	(Dollars In Thousands)					(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	564,377	$	530,490	6.4%	$	1,560,111	$	1,579,452	(1.2)%
Reinsurance ceded	(192,980)		(220,770)		(12.6)	(432,597)		(686,127)		(37.0)
Net premiums and policy fees	371,397		309,720		19.9	1,127,514		893,325		26.2
Net investment income	249,122		235,318		5.9	748,470		697,786		7.3
Realized gains (losses) - investments/derivatives	(10,477)		(10,489)		(0.1)	(31,269)		(31,462)		(0.6)
Other income	40,689		41,850		(2.8)	121,208		122,084		(0.7)
Total operating revenues	650,731		576,399		12.9	1,965,923		1,681,733		16.9
Realized gains (losses) - investments/derivatives	13,794		74,823		(81.6)	29,118		135,499		(78.5)
Total revenues	664,525		651,222		2.0	1,995,041		1,817,232		9.8
BENEFITS AND EXPENSES
Benefits and settlement expenses	546,076		463,200		17.9	1,660,292		1,323,786		25.4
Amortization of DAC/VOBA	39,149		57,625		(32.1)	137,212		113,373		21.0
Other operating expenses	50,579		52,559		(3.8)	145,777		157,169		(7.2)
Operating benefits and settlement expenses	635,804		573,384		10.9	1,943,281		1,594,328		21.9
Benefits and settlement expenses related to realized gains (losses)	9,847		7,961		23.7	(10,763)		7,418		n/m
Amortization of DAC/VOBA related to realized gains (losses)	37,833		(20,348)		n/m	(67,234)		(55,902)		20.3
Total benefits and expenses	683,484		560,997		21.8	1,865,284		1,545,844		20.7
INCOME BEFORE INCOME TAX	(18,959)		90,225		n/m	129,757		271,388		(52.2)
Less: realized gains (losses) - investments/derivatives	13,794		74,823		(81.6)	29,118		135,499		(78.5)
Less: related benefits and settlement expenses	(9,847)		(7,961)		23.7	10,763		(7,418)		n/m
Less: related amortization of DAC/VOBA	(37,833)		20,348		n/m	67,234		55,902		20.3
PRE-TAX ADJUSTED OPERATING INCOME	$	14,927	$	3,015	n/m	$	22,642	$	87,405	(74.1)%

N/M - we define n/m as not meaningful for increases or decreases greater than 100%.

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The following table summarizes key data for the Retail Life and Annuity segment:


	For The Three Months Ended September 30,							For The Nine Months Ended September 30,
	2020			2019			Change	2020			2019			Change
	(Dollars In Thousands)							(Dollars In Thousands)
Sales By Product
Traditional life(1)	$	74,041		$	59,982		23.4%	$	191,457		$	174,869		9.5%
Universal life(1)	9,420			18,009			(47.7)	32,284			63,053			(48.8)
Fixed annuity(2)	793,145			433,850			82.8	1,803,630			1,392,044			29.6
Variable annuity(2)	80,310			53,832			49.2	173,790			163,179			6.5
	$	956,916		$	565,673		69.2%	$	2,201,161		$	1,793,145		22.8%
Average Account Values
Universal life	$	7,655,550		$	7,803,697		(1.9)%	$	7,697,595		$	7,793,225		(1.2)%
Variable universal life(6)	848,166			824,761			2.8	820,726			795,211			3.2
Fixed annuity(3)	11,098,627			9,970,444			11.3	10,759,010			9,737,304			10.5
Variable annuity	10,797,645			12,053,880			(10.4)	10,748,731			12,069,246			(10.9)
	$	30,399,988		$	30,652,782		(0.8)%	$	30,026,062		$	30,394,986		(1.2)%
Average Life Insurance In-force(4)
Traditional	$	382,628,724		$	360,112,093		6.3%	$	374,968,167		$	358,590,816		4.6%
Universal life	288,154,312			288,396,760			(0.1)	288,522,395			286,909,706			0.6
	$	670,783,036		$	648,508,853		3.4%	$	663,490,562		$	645,500,522		2.8%
Interest Spread - Fixed Annuities(5)
Net investment income yield	3.43		%	3.59		%		3.68		%	3.65		%
Interest credited to policyholders	2.50		%	2.62		%		2.50		%	2.54		%
Interest spread	0.93		%	0.97		%		1.18		%	1.11		%

	As of
	September 30, 2020			December 31, 2019
	(Dollars In Thousands)
VA GLWB Benefit Base	$	9,649,358		$	9,850,644
Account value subject to GLWB rider	$	7,482,140		$	8,403,428

(1) Sales data for traditional life insurance, other than Single Premium Whole Life (“SPWL”) insurance, is based on annualized premiums. SPWL insurance sales are based on total single premium dollars received in the period. Universal life sales are based on annualized planned premiums, or “target” premiums if lesser, plus 6% of amounts received in excess of target premiums and 10% of single premiums. “Target” premiums for universal life are those premiums upon which full first year commissions are paid.
(2) Sales are measured based on the amount of purchase payments received less surrenders occurring within twelve months of the purchase payments.
(3) Includes general account balances held within VA products. Fixed annuity account value is net of non-affiliate reinsurance ceded.
(4) Amounts are not adjusted for reinsurance ceded.
(5) Interest spread on average general account values.
(6) Includes general account balances held within VUL products.
N/M - we define n/m as not meaningful for increases or decreases greater than 100%.

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For The Three Months Ended September 30, 2020, as compared to The Three Months Ended September 30, 2019

Pre-tax adjusted operating income

Pre-tax adjusted operating income increased $11.9 million which was driven by higher net premiums in the traditional life block, higher annuity interest spread and investment income, lower expenses, and a favorable change in unlocking. These increases were partially offset by higher claims in the traditional life and universal life blocks and lower variable annuity (“VA”) fee income. Segment results were negatively impacted by $20.6 million of unfavorable unlocking for the three months ended September 30, 2020, as compared to $34.4 million of unfavorable unlocking for the three months ended September 30, 2019.

Operating revenues

Total operating revenues increased $74.3 million which was driven by an increase in traditional life and universal life net premiums and higher investment income partially offset by lower VA fee income.

Net premiums and policy fees

Net premiums and policy fees increased by $61.7 million, driven by an increase in traditional life and universal life net premiums, partially offset by lower VA fee income.

Net investment income

Net investment income in the segment increased $13.8 million driven by higher fixed annuity account value and higher investment income in the universal life and traditional life blocks.

Other income

Other income decreased $1.2 million due to lower VA fee income.

Benefits and settlement expenses

Benefits and settlement expenses increased by $82.9 million driven by higher traditional life and universal life claims, an unfavorable change in unlocking in the universal life block, a net unfavorable change in reserves and higher annuity credited interest. Segment results were negatively impacted by $22.6 million of unfavorable unlocking as compared to $11.8 million of unfavorable unlocking in 2019.

Amortization of DAC/VOBA

DAC/VOBA amortization decreased $18.5 million primarily due to a favorable change in unlocking in the universal life block, partially offset by higher amortization in the traditional life block and an unfavorable change in annuity unlocking. Segment results were positively impacted by $2.0 million of favorable unlocking as compared to $22.6 million of unfavorable unlocking in 2019.

Other operating expenses

Other operating expenses decreased $2.0 million which was driven by lower acquisition expense, maintenance and overhead expense, and lower commissions, partially offset by a decrease in reinsurance allowances.

Sales

Sales increased $391.2 million, primarily due to an increase in fixed annuity sales.

For The Nine Months Ended September 30, 2020, as compared to The Nine Months Ended September 30, 2019

Pre-tax adjusted operating income

Pre-tax adjusted operating income decreased $64.8 million primarily driven by higher claims in the universal life and traditional life blocks, unfavorable unlocking, an unfavorable change in guaranteed benefit reserves, and lower fee income offset by higher net premiums in the traditional life block, higher investment income, lower expenses, and a favorable change in SPIA mortality compared to prior year. Segment results were negatively impacted by $68.2 million of unfavorable unlocking, as compared to $25.3 million of unfavorable unlocking for 2019.

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Operating revenues

Total operating revenues increased $284.2 million, which was driven by a $246.8 million increase in net traditional life premiums due to post level activity and higher investment income, partially offset by a decrease in universal life net policy fees and lower VA fee income.

Net premiums and policy fees

Net premiums and policy fees increased by $234.2 million, driven by a favorable impact of post level activity in the traditional life block partially offset by a decrease in policy fees in the universal life block and lower VA fee income.

Net investment income

Net investment income in the segment increased $50.7 million, driven by higher liability balances.

Other income

Other income decreased $0.9 million, which was due to lower VA fee income partially offset by higher fee income on fixed annuity products.

Benefits and settlement expenses

Benefits and settlement expenses increased by $336.5 million, driven by $199.7 million unfavorable change in reserves in the traditional life block due to post level impacts, as well as higher traditional life and universal life claims, unfavorable unlocking in the universal life block, higher annuity credited interest, and an unfavorable change in annuity guaranteed benefit reserve partially offset by a favorable change in reserves in the universal life block and favorable SPIA mortality. Segment results were negatively impacted by $37.7 million of unfavorable unlocking, as compared to $13.3 million of unfavorable unlocking for 2019.

Amortization of DAC/VOBA

DAC/VOBA amortization increased $23.8 million, primarily due to an unfavorable change in unlocking in the variable universal life and variable annuity blocks partially offset by a favorable change in unlocking in the universal life block. DAC and VOBA unlocking was $30.4 million unfavorable as compared to $12.1 million unfavorable for the nine months ended September 30, 2019.

Other operating expenses

Other operating expenses decreased $11.4 million which was due to higher ceding allowance and lower commissions.

Sales

Sales for the segment increased $408.0 million which was primarily due to an increase in fixed annuity sales.

Reinsurance

Currently, the Retail Life and Annuity segment reinsures significant amounts of its life insurance in-force. Pursuant to the underlying reinsurance contracts, reinsurers pay allowances to the segment as a percentage of both first year and renewal premiums. Reinsurance allowances represent the amount the reinsurer is willing to pay for reimbursement of acquisition costs incurred by the direct writer of the business. A portion of reinsurance allowances received is deferred as part of DAC and a portion is recognized immediately as a reduction of other operating expenses. As the non-deferred portion of allowances reduces operating expenses in the period received, these amounts represent a net increase to adjusted operating income during that period.

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Reinsurance allowances do not affect the methodology used to amortize DAC or the period over which such DAC is amortized. However, they do affect the amounts recognized as DAC amortization. DAC on universal life-type, limited-payment long duration, and investment contracts business is amortized based on the estimated gross profits of the policies in-force. Reinsurance allowances are considered in the determination of estimated gross profits, and therefore, impact DAC amortization on these lines of business. Deferred reinsurance allowances on level term business are recorded as ceded DAC, which is amortized over the estimated ceded premiums of the policies in-force. Thus, deferred reinsurance allowances may impact DAC amortization.

Impact of reinsurance

Reinsurance impacted the Retail Life and Annuity segment line items as shown in the following table:

Retail Life and Annuity Segment

Line Item Impact of Reinsurance


	For The Three Months Ended September 30,					For The Nine Months Ended September 30,
	2020		2019		Change	2020		2019		Change
	(Dollars In Thousands)					(Dollars In Thousands)
REVENUES
Reinsurance ceded	$	(192,980)	$	(220,770)	(12.6)%	$	(432,597)	$	(686,127)	(37.0)%
Realized gains (losses) - derivatives	9,979		10,336		(3.5)	29,999		31,458		(4.6)
Other income	(1,212)		—		n/m	(2,414)		—		n/m
Total operating revenues	(184,213)		(210,434)		(12.5)	(405,012)		(654,669)		(38.1)
Realized gains (losses) - derivatives, net of economic cost	(82,161)		126,771		n/m	214,374		237,527		(9.7)
Total revenues	(266,374)		(83,663)		n/m	(190,638)		(417,142)		(54.3)
BENEFITS AND EXPENSES
Benefits and settlement expenses	(153,768)		(142,187)		8.1	(334,649)		(483,900)		(30.8)
Amortization of DAC/VOBA	(1,114)		(1,613)		(30.9)	(3,109)		(3,841)		(19.1)
Other operating expenses(1)	(44,855)		(50,574)		(11.3)	(146,124)		(141,530)		3.2
Operating benefits and expenses	(199,737)		(194,374)		2.8	(483,882)		(629,271)		(23.1)
Benefits and settlement expenses related to realized gains (losses)	774		132		n/m	(1,172)		(118)		n/m
Amortization of DAC/VOBA related to realized gains (losses)	1,702		728		n/m	5,116		2,266		n/m
Total benefits and expenses	(197,261)		(193,514)		1.9	(479,938)		(627,123)		(23.5)
NET IMPACT OF REINSURANCE	$	(69,113)	$	109,851	n/m	$	289,300	$	209,981	37.8


(1) Other operating expenses ceded per the income statement are equal to reinsurance allowances recognized after capitalization.
N/M - we define n/m as not meaningful for increases or decreases greater than 100%.

The table above does not reflect the impact of reinsurance on our net investment income. By ceding business to the assuming companies, we forgo investment income on the reserves ceded. Conversely, the assuming companies will receive investment income on the reserves assumed, which will increase the assuming companies’ profitability on the business that we cede. The net investment income impact to us and the assuming companies has not been quantified. The impact of including foregone investment income would be to substantially reduce the favorable net impact of reinsurance reflected above. The Retail Life and Annuity segment’s reinsurance programs do not materially impact the other income line of our income statement.

For The Three Months Ended September 30, 2020, as compared to The Three Months Ended September 30, 2019

The lower ceded premium and policy fees was driven by lower ceded premiums in the traditional life block.

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Ceded benefits and settlement expenses were higher due to higher ceded claims in the universal life block and higher ceded reserves in the traditional life block, offset by lower ceded reserves in the universal life block and lower claims in the traditional life block.

Ceded other operating expenses decreased due to higher ceding allowances on the universal life and traditional life blocks. Ceded other operating expenses reflect the impact of reinsurance allowances, net of amounts deferred.

For The Nine Months Ended September 30, 2020, as compared to The Nine Months Ended September 30, 2019

The lower ceded premium and policy fees was caused primarily by lower ceded traditional life premiums of $266.8 million, primarily due to fluctuations in the number of policies entering their post level period during the fourth quarter of 2019.

Ceded benefits and settlement expenses were lower due to lower ceded reserves in the traditional life block due to fluctuations the number of policies entering their post level period and lower ceded universal life reserves, partially offset by higher universal life ceded claims.

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Acquisitions

Segment Results of Operations

Segment results were as follows:


	For The Three Months Ended September 30,					For The Nine Months Ended September 30,
	2020		2019		Change	2020		2019		Change
	(Dollars In Thousands)					(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	404,641	$	413,045	(2.0)%	$	1,160,335	$	1,069,932	8.4%
Reinsurance ceded	(63,223)		(63,778)		(0.9)	(162,126)		(193,999)		(16.4)
Net premiums and policy fees	341,418		349,267		(2.2)	998,209		875,933		14.0
Net investment income	405,458		426,510		(4.9)	1,235,231		1,106,782		11.6
Realized gains (losses) - investments/derivatives	(2,878)		(3,300)		(12.8)	(8,609)		(3,300)		n/m
Other income	37,572		37,317		0.7	123,964		68,997		79.7
Total operating revenues	781,570		809,794		(3.5)	2,348,795		2,048,412		14.7
Realized gains (losses) - investments/derivatives	20,630		49,730		(58.5)	50,567		88,085		(42.6)
Total revenues	802,200		859,524		(6.7)	2,399,362		2,136,497		12.3
BENEFITS AND EXPENSES
Benefits and settlement expenses	644,515		629,922		2.3	1,904,913		1,615,121		17.9
Amortization of VOBA	6,643		6,133		8.3	12,829		16,641		(22.9)
Other operating expenses	65,413		70,529		(7.3)	192,932		168,718		14.4
Operating benefits and expenses	716,571		706,584		1.4	2,110,674		1,800,480		17.2
Benefits and settlement expenses related to realized gains (losses)	1,162		4,927		(76.4)	9,041		9,370		(3.5)
Amortization of VOBA related to realized gains (losses)	7,471		1,255		n/m	10,891		1,708		n/m
Total benefits and expenses	725,204		712,766		1.7	2,130,606		1,811,558		17.6
INCOME BEFORE INCOME TAX	76,996		146,758		(47.5)	268,756		324,939		(17.3)
Less: realized gains (losses) - investments/derivatives	20,630		49,730		(58.5)	50,567		88,085		(42.6)
Less: related benefits and settlement expenses	(1,162)		(4,927)		(76.4)	(9,041)		(9,370)		(3.5)
Less: related amortization of VOBA	(7,471)		(1,255)		n/m	(10,891)		(1,708)		n/m
PRE-TAX ADJUSTED OPERATING INCOME	$	64,999	$	103,210	(37.0)%	$	238,121	$	247,932	(4.0)%

N/M - we define n/m as not meaningful for increases or decreases greater than 100%.

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The following table summarizes key data for the Acquisitions segment:


	For The Three Months Ended September 30,							For The Nine Months Ended September 30,
	2020			2019			Change	2020			2019			Change
	(Dollars In Thousands)							(Dollars In Thousands)
Average Life Insurance In-Force(1)
Traditional	$	242,435,281		$	264,696,924		(8.4)%	$	247,093,302		$	243,981,484		1.3%
Universal life	67,637,900			68,517,839			(1.3)	67,952,648			50,120,940			35.6
	$	310,073,181		$	333,214,763		(6.9)%	$	315,045,950		$	294,102,424		7.1%
Average Account Values
Universal life(2)	$	15,570,550		$	15,648,232		(0.5)%	$	15,611,623		$	11,259,707		38.7%
Variable universal life	7,868,732			7,106,265			10.7	7,701,859			3,957,165			94.6
Fixed annuity(2)	10,219,132			10,832,914			(5.7)	10,316,521			10,434,832			(1.1)
Variable annuity	4,858,864			4,669,422			4.1	4,946,172			2,794,917			77.0
	$	38,517,278		$	38,256,833		0.7%	$	38,576,175		$	28,446,621		35.6%
Interest Spread - Fixed Annuities
Net investment income yield	3.91		%	4.00		%		3.96		%	3.96		%
Interest credited to policyholders	3.35		%	3.20		%		3.15		%	3.17		%
Interest spread(3)	0.56		%	0.80		%		0.81		%	0.79		%

(1) Amounts are not adjusted for reinsurance ceded.
(2) Includes general account balances held within variable products and is net of reinsurance ceded. Excludes structured annuity products.
(3) Interest spread on average general account values
N/M - we define n/m as not meaningful for increases or decreases greater than 100%.

For The Three Months Ended September 30, 2020 as compared to The Three Months Ended September 30, 2019

Pre-tax adjusted operating income

Pre-tax adjusted operating income decreased $38.2 million, primarily due to the expected runoff of in-force blocks of business.

Operating revenues

Net premiums and policy fees decreased $7.8 million and net investment income decreased $21.1 million primarily due to the expected runoff of the in-force blocks of business.

Total benefits and expenses

Total benefits and expenses increased $12.4 million which was driven by higher traditional life and universal life claims, a net unfavorable change in reserves and higher credited interest.

For The Nine Months Ended September 30, 2020 as compared to The Nine Months Ended September 30, 2019

Pre-tax adjusted operating income

Pre-tax adjusted operating income decreased $9.8 million, primarily due to expected run off in the in-force blocks of business partly offset by the favorable impact of the GWL&A reinsurance transaction, which added $50.5 million of pre-tax operating income in 2020, an increase of $24.6 million compared to the prior year.

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Operating revenues

Net premiums and policy fees increased $122.3 million primarily due to the premiums associated with the GWL&A reinsurance transaction more than offsetting the expected runoff of the in-force blocks of business. Net investment income increased $128.4 million primarily due to the $172.9 million impact of the GWL&A reinsurance transaction, partly offset by the expected runoff of the other in-force blocks of business.

Total benefits and expenses

Total benefits and expenses increased $319.1 million primarily due to the GWL&A reinsurance transaction, which increased benefits and expenses $358.7 million. This was partly offset by expected runoff of the in-force blocks of business.

Reinsurance

The Acquisitions segment currently reinsures portions of both its life and annuity in-force. The cost of reinsurance to the segment is reflected in the chart shown below. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Impact of reinsurance

Reinsurance impacted the Acquisitions segment line items as shown in the following table:

Acquisitions Segment

Line Item Impact of Reinsurance


	For The Three Months Ended September 30,					For The Nine Months Ended September 30,
	2020		2019		Change	2020		2019		Change
	(Dollars In Thousands)					(Dollars In Thousands)
REVENUES
Reinsurance ceded	$	(63,223)	$	(63,778)	(0.9)%	$	(162,126)	$	(193,999)	(16.4)%
BENEFITS AND EXPENSES
Benefits and settlement expenses	(64,817)		(54,216)		19.6	(147,810)		(170,467)		(13.3)
Amortization of VOBA	(134)		(494)		(72.9)	(482)		(763)		(36.8)
Other operating expenses	(6,573)		(8,143)		(19.3)	(21,405)		(23,892)		(10.4)
Total benefits and expenses	(71,524)		(62,853)		13.8	(169,697)		(195,122)		(13.0)

NET IMPACT OF REINSURANCE(1)	$	8,301	$	(925)	n/m	$	7,571	$	1,123	n/m

(1) Assumes no investment income on reinsurance. Foregone investment income would substantially reduce the favorable impact of reinsurance.
N/M - we define n/m as not meaningful for increases or decreases greater than 100%.

The segment’s reinsurance programs do not materially impact the other income line of our income statement. In addition, net investment income generally has no direct impact on reinsurance cost. However, by ceding business to the assuming companies, we forgo investment income on the reserves ceded to the assuming companies. Conversely, the assuming companies will receive investment income on the reserves assumed which will increase the assuming companies’ profitability on business assumed from the Company. For business ceded under modified coinsurance arrangements, the amount of investment income attributable to the assuming company is included as part of the overall change in policy reserves and, as such, is reflected in benefit and settlement expenses. The net investment income impact to us and the assuming companies has not been quantified as it is not fully reflected in our consolidated financial statements.

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For The Three Months Ended September 30, 2020, as compared to The Three Months Ended September 30, 2019

The net impact of reinsurance was more favorable by $9.2 million primarily due to higher ceded benefit and settlement expenses of $10.6 million.

For The Nine Months Ended September 30, 2020, as compared to The Nine Months Ended September 30, 2019

The net impact of reinsurance was more favorable by $6.4 million primarily due to lower ceded revenue partly offset by lower ceded benefit and settlement expenses due to fluctuations in policies in their post level period.

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Stable Value Products

Segment Results of Operations

Segment results were as follows:


	For The Three Months Ended September 30,					For The Nine Months Ended September 30,
	2020		2019		Change	2020		2019		Change
	(Dollars In Thousands)					(Dollars In Thousands)
REVENUES
Net investment income	$	54,210	$	59,707	(9.2)%	$	169,279	$	184,450	(8.2)%
Other income	—		5		n/m	—		10		n/m
Total operating revenues	54,210		59,712		(9.2)	169,279		184,460		(8.2)
Realized gains (losses) - investments/derivatives	(6,129)		242		n/m	(32,057)		2,658		n/m
Total revenues	48,081		59,954		(19.8)	137,222		187,118		(26.7)
BENEFITS AND EXPENSES
Benefits and settlement expenses	32,408		37,471		(13.5)	102,341		108,532		(5.7)
Amortization of DAC	872		857		1.8	2,439		2,584		(5.6)
Other operating expenses	801		521		53.7	2,380		2,136		11.4
Total benefits and expenses	34,081		38,849		(12.3)	107,160		113,252		(5.4)
INCOME BEFORE INCOME TAX	14,000		21,105		(33.7)	30,062		73,866		(59.3)
Less: realized gains (losses)	(6,129)		242		n/m	(32,057)		2,658		n/m
PRE-TAX ADJUSTED OPERATING INCOME	$	20,129	$	20,863	(3.5)%	$	62,119	$	71,208	(12.8)%

N/M - we define n/m as not meaningful for increases or decreases greater than 100%.

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The following table summarizes key data for the Stable Value Products segment:


	For The Three Months Ended September 30,							For The Nine Months Ended September 30,
	2020			2019			Change	2020			2019			Change
	(Dollars In Thousands)							(Dollars In Thousands)
Sales(1)
GIC	$	75,387		$	—		—%	$	78,387		$	—		n/m
GFA	750,000			—			n/m	1,750,000			1,350,000			29.6%
	$	825,387		$	—		n/m	$	1,828,387		$	1,350,000		35.4%

Average Account Values	$	6,073,850		$	5,754,449		5.6%	$	5,807,089		$	5,663,201		2.5%
Ending Account Values	$	6,017,259		$	5,450,981		10.4%	$	6,017,259		$	5,450,981		10.4%

Operating Spread
Net investment income yield	3.56		%	4.15		%		3.89		%	4.34		%

Interest credited	2.13			2.60				2.35			2.55
Operating expenses	0.11			0.10				0.11			0.11
Operating spread	1.32		%	1.45		%		1.43		%	1.68		%

Adjusted operating spread(2)	1.31		%	1.19		%		1.25		%	1.32		%

(1) Sales are measured at the time the purchase payments are received.
(2) Excludes participation commercial mortgage loan income.
N/M - we define n/m as not meaningful for increases or decreases greater than 100%.

For The Three Months Ended September 30, 2020, as compared to The Three Months Ended September 30, 2019

Pre-tax adjusted operating income

Pre-tax adjusted operating income decreased $0.7 million which primarily resulted from lower participation commercial mortgage loan income, partially offset by an increase in adjusted operating spread and higher average account values. Participation commercial mortgage loan income for the three months ended September 30, 2020, was $0.3 million as compared to $3.7 million for the three months ended September 30, 2019. The adjusted operating spread, which excludes participation commercial mortgage loan income, increased by 12 basis points for the three months ended September 30, 2020, from the prior year, due primarily to a decrease in credited interest, partially offset by a decrease in average yields on investments.

For The Nine Months Ended September 30, 2020, as compared to The Nine Months Ended September 30, 2019

Pre-tax adjusted operating income

Pre-tax adjusted operating income decreased $9.1 million which primarily resulted from lower participating mortgage loan income and a decrease in adjusted operating spread, partially offset by higher average account values. Participation commercial mortgage loan income for the nine months ended September 30, 2020, was $7.5 million as compared to $15.2 million for the nine months ended September 30, 2019. The adjusted operating spread, which excludes participation commercial mortgage loan income, decreased by 7 basis points for the nine months ended September 30, 2020, from the prior year, due primarily to a decrease in average yields on investments, partially offset by a decrease in credited interest.

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Asset Protection

Segment Results of Operations

Segment results were as follows:


	For The Three Months Ended September 30,					For The Nine Months Ended September 30,
	2020		2019		Change	2020		2019		Change
	(Dollars In Thousands)					(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	73,592	$	74,824	(1.6)%	$	221,795	$	225,698	(1.7)%
Reinsurance ceded	(47,529)		(45,650)		4.1	(138,900)		(134,367)		3.4
Net premiums and policy fees	26,063		29,174		(10.7)	82,895		91,331		(9.2)
Net investment income	5,438		7,164		(24.1)	19,144		21,015		(8.9)
Other income	36,697		36,391		0.8	107,751		106,649		1.0

Total operating revenues	68,198		72,729		(6.2)	209,790		218,995		(4.2)
BENEFITS AND EXPENSES
Benefits and settlement expenses	20,315		23,324		(12.9)	59,232		70,945		(16.5)
Amortization of DAC/VOBA	17,173		15,828		8.5	48,459		47,156		2.8
Other operating expenses	21,226		23,940		(11.3)	69,248		73,949		(6.4)
Total benefits and expenses	58,714		63,092		(6.9)	176,939		192,050		(7.9)
INCOME BEFORE INCOME TAX	9,484		9,637		(1.6)	32,851		26,945		21.9

PRE-TAX ADJUSTED OPERATING INCOME	$	9,484	$	9,637	(1.6)%	$	32,851	$	26,945	21.9%

N/M - we define n/m as not meaningful for increases or decreases greater than 100%.

The following table summarizes key data for the Asset Protection segment:


	For The Three Months Ended September 30,								For The Nine Months Ended September 30,
	2020			2019			Change		2020			2019			Change
	(Dollars In Thousands)								(Dollars In Thousands)
Sales(1)
Credit insurance	$	1,504		$	2,177		(30.9)	%	$	4,392		$	6,800		(35.4)	%
Service contracts	114,131			107,498			6.2		293,529			297,928			(1.5)
GAP	21,465			21,726			(1.2)		56,930			58,691			(3.0)
	$	137,100		$	131,401		4.3	%	$	354,851		$	363,419		(2.4)	%
Loss Ratios(2)
Credit insurance	37.0		%	11.3		%			32.1		%	19.5		%
Service contracts	65.9			69.5					62.0			65.2
GAP	132.1			129.0					114.3			126.8

(1) Sales are based on the amount of single premiums and fees received
(2) Incurred claims as a percentage of earned premiums
N/M - we define n/m as not meaningful for increases or decreases greater than 100%.

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For The Three Months Ended September 30, 2020, as compared to The Three Months Ended September 30, 2019

Pre-tax adjusted operating income

Pre-tax adjusted operating income decreased $0.2 million due to a decrease in the GAP product line of $0.4 million due to lower investment income and higher expenses and a decrease of $0.4 million in the credit insurance product line due to higher loss ratios and lower volume. These decreases were offset by the service contract earnings that increased $0.6 million primarily due to lower loss ratios and lower expenses, somewhat offset by lower investment income.

Net premiums and policy fees

Net premiums and policy fees decreased $3.1 million due to a decrease of $1.3 million in service contract premiums primarily due to higher ceded premiums, GAP premiums decreased $1.4 million and credit insurance premiums decreased $0.4 million as a result of lower sales in prior periods and the related impact to earned premiums.

Benefits and settlement expenses

Benefits and settlement expenses decreased $3.0 million due to GAP claims decreasing $1.6 million and service contract claims decreasing $1.6 million due to lower loss ratios. Credit insurance claims increased $0.2 million, primarily due to higher loss ratios.

Sales

Total segment sales increased $5.7 million due to an increase of $6.6 million of service contract sales, a decrease of $0.7 million of credit insurance sales and a decrease of $0.2 million of GAP sales.

For The Nine Months Ended September 30, 2020, as compared to The Nine Months Ended September 30, 2019

Pre-tax adjusted operating income

Pre-tax adjusted operating income increased $5.9 million primarily due to a $4.9 million increase in service contract earnings primarily due to lower loss ratios and lower expenses. GAP product line earnings increased $2.0 million due to lower loss ratios, somewhat offset by higher expenses. Earnings from the credit insurance product line decreased $1.0 million primarily due to lower volume.

Net premiums and policy fees

Net premiums and policy fees decreased $8.4 million due to decreases in all product lines. GAP premiums decreased $5.1 million, credit insurance premiums decreased $1.3 million and service contract premiums decreased $2.0 million as a result of higher ceded premiums and as a result of lower sales in prior periods and the related impact to earned premiums.

Benefits and settlement expenses

Benefits and settlement expenses decreased $11.7 million primarily due to a decrease in GAP and service contract claims of $8.6 million and $3.3 million, respectively due to lower loss ratios. Credit insurance claims increased $0.2. million due to higher loss ratios.

Sales

Total segment sales decreased $8.6 million due to a decrease in all product lines. Service contract sales decreased $4.4 million, credit insurance sales decreased $2.4 million, and GAP sales decreased $1.8 million.

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Reinsurance

The majority of the Asset Protection segment’s reinsurance activity relates to the cession of single premium credit life and credit accident and health insurance, vehicle service contracts, and guaranteed asset protection insurance to producer affiliated reinsurance companies (“PARCs”). These arrangements are coinsurance contracts ceding the business on a first dollar quota share basis at 100% to limit the segment’s exposure and allow the PARCs to share in the underwriting income of the product. Reinsurance contracts do not relieve the Asset Protection segment from obligations to policyholders. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies, to the Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

Impact of Reinsurance

Reinsurance impacted the Asset Protection segment line items as shown in the following table:

Asset Protection Segment

Line Item Impact of Reinsurance


	For The Three Months Ended September 30,					For The Nine Months Ended September 30,
	2020		2019		Change	2020		2019		Change
	(Dollars In Thousands)					(Dollars In Thousands)
REVENUES
Reinsurance ceded	$	(47,529)	$	(45,650)	4.1%	$	(138,900)	$	(134,367)	3.4%
BENEFITS AND EXPENSES
Benefits and settlement expenses	(21,656)		(21,233)		2.0	(62,885)		(60,778)		3.5
Amortization of DAC/VOBA	(1,148)		(969)		18.5	(3,249)		(2,634)		23.3
Other operating expenses	(1,028)		(979)		5.0	(3,464)		(3,119)		11.1
Total benefits and expenses	(23,832)		(23,181)		2.8	(69,598)		(66,531)		4.6
NET IMPACT OF REINSURANCE(1)	$	(23,697)	$	(22,469)	5.5	$	(69,302)	$	(67,836)	2.2

(1) Assumes no investment income on reinsurance. Foregone investment income would substantially change the impact of reinsurance.
N/M - we define n/m as not meaningful for increases or decreases greater than 100%.

For The Three Months Ended September 30, 2020, as compared to The Three Months Ended September 30, 2019

Reinsurance premiums ceded increased $1.9 million primarily due to an increase in ceded service contract premiums, somewhat offset by a decrease in ceded credit insurance premiums.

Benefits and settlement expenses ceded increased $0.4 million primarily due to higher ceded losses in the credit product line.

Amortization of DAC and VOBA ceded increased $0.2 million as the result of changes in ceded activity in the GAP product line. Other operating expenses ceded increased $0.1 million, which was primarily due to an increase in ceded GAP operating expenses, somewhat offset by a decrease in ceded credit operating expenses.

For The Nine Months Ended September 30, 2020, as compared to The Nine Months Ended September 30, 2019

Reinsurance premiums ceded increased $4.5 million which was primarily due to an increase in ceded service contract premiums, somewhat offset by a decrease in ceded credit insurance premiums.

Benefits and settlement expenses ceded increased $2.1 million which was primarily due to higher ceded losses in the service contract product line.

Amortization of DAC and VOBA ceded increased $0.6 million as the result of changes in ceded activity in the GAP product line. Other operating expenses ceded increased $0.3 million as the result of changes in ceded activity in all product lines.

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Corporate and Other

Segment Results of Operations

Segment results were as follows:


	For The Three Months Ended September 30,					For The Nine Months Ended September 30,
	2020		2019		Change	2020		2019		Change
	(Dollars In Thousands)					(Dollars In Thousands)
REVENUES
Gross premiums and policy fees	$	2,538	$	2,793	(9.1)%	$	8,184	$	8,853	(7.6)%
Reinsurance ceded	—		(3)		n/m	—		(139)		n/m
Net premiums and policy fees	2,538		2,790		(9.0)	8,184		8,714		(6.1)
Net investment income	23,943		11,012		n/m	59,462		56,294		5.6
Other income	526		116		n/m	1,095		247		n/m
Total operating revenues	27,007		13,918		94.0	68,741		65,255		5.3
Realized gains (losses) - investments/derivatives	23,216		8,679		n/m	12,397		24,827		(50.1)
Total revenues	50,223		22,597		n/m	81,138		90,082		(9.9)
BENEFITS AND EXPENSES
Benefits and settlement expenses	4,501		4,229		6.4	10,104		12,469		(19.0)
Amortization of DAC/VOBA	—		—		n/m	—		—		n/m
Other operating expenses	54,631		46,252		18.1	162,534		172,461		(5.8)
Total benefits and expenses	59,132		50,481		17.1	172,638		184,930		(6.6)
INCOME (LOSS) BEFORE INCOME TAX	(8,909)		(27,884)		(68.0)	(91,500)		(94,848)		(3.5)
Less: realized gains (losses) - investments/derivatives	23,216		8,679		n/m	12,397		24,827		(50.1)
PRE-TAX ADJUSTED OPERATING INCOME (LOSS)	$	(32,125)	$	(36,563)	(12.1)%	$	(103,897)	$	(119,675)	(13.2)%

N/M - we define n/m as not meaningful for increases or decreases greater than 100%.

For The Three Months Ended September 30, 2020 as compared to The Three Months Ended September 30, 2019

Pre-tax adjusted operating income (loss)

Pre-tax adjusted operating loss was $32.1 million for the three months ended September 30, 2020, as compared to a pre-tax adjusted operating loss of $36.6 million for the three months ended September 30, 2019. The decreased operating loss was primarily due to an increase in investment income due to increased invested asset balances, partially offset by increased operating expenses.

Operating revenues

Net investment income for the segment increased $12.9 million for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019. The increase was primarily due to an increase in invested assets.

Total benefits and expenses

Total benefits and expenses increased $8.7 million for the three months ended September 30, 2020, as compared to the three months ended September 30, 2019, primarily due to an increase in corporate overhead expenses, partially offset by a decrease in interest expense.

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For The Nine Months Ended September 30, 2020 as compared to The Nine Months Ended September 30, 2019

Pre-tax adjusted operating income (loss)

Pre-tax adjusted operating loss was $103.9 million for the nine months ended September 30, 2020, as compared to a pre-tax adjusted operating loss of $119.7 million for the nine months ended September 30, 2019. The decreased operating loss was primarily due to a decrease in operating expenses and an increase in investment income.

Operating revenues

Net investment income for the segment increased $3.2 million for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019. The increase was primarily due to an increase in invested asset balances.

Total benefits and expenses

Total benefits and expenses decreased $12.3 million for the nine months ended September 30, 2020, as compared to the nine months ended September 30, 2019, primarily due to decreases in corporate overhead expenses and benefit and settlement expenses related to blocks in runoff, partially offset by an increase in interest expense.

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CONSOLIDATED INVESTMENTS

As of September 30, 2020, our investment portfolio was approximately $88.9 billion. The types of assets in which we may invest are influenced by various state insurance laws which prescribe qualified investment assets. Within the parameters of these laws, we invest in assets giving consideration to such factors as liquidity and capital needs, investment quality, investment return, matching of assets and liabilities, and the overall composition of the investment portfolio by asset type and credit exposure.

Within our fixed maturity investments, we maintain portfolios classified as “available-for-sale”, “trading”, and “held-to-maturity”. We purchase our available-for-sale investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, we may sell any of our available-for-sale and trading investments to maintain proper matching of assets and liabilities. Accordingly, we classified $67.3 billion, or 92.5%, of our fixed maturities as “available-for-sale” as of September 30, 2020. These securities are carried at fair value on our consolidated condensed balance sheets. Changes in fair value for our available-for-sale portfolio, net of tax and the related impact on certain insurance assets and liabilities are recorded directly to shareowner’s equity. Declines in fair value that are due to credit losses are recorded as realized losses in the consolidated condensed statements of income, net of any applicable non-credit component of the loss, which is recorded as an adjustment to other comprehensive income (loss).

Trading securities are carried at fair value and changes in fair value are recorded on the income statement as they occur. Our trading portfolio accounted for $2.8 billion, or 3.7%, of our fixed maturities and $77.3 million of short-term investments as of September 30, 2020. Changes in fair value on the Modco trading portfolios, including gains and losses from sales, are passed to third party reinsurers through the contractual terms of the related reinsurance arrangements. Partially offsetting these amounts are corresponding changes in the fair value of the embedded derivative associated with the underlying reinsurance arrangement.

Fixed maturities with respect to which we have both the positive intent and ability to hold to maturity are classified as “held-to-maturity”. We classified $2.7 billion, or 3.8%, of our fixed maturities as “held-to-maturity” as of September 30, 2020. These securities are carried at amortized cost on our consolidated condensed balance sheets.

Fair values for private, non-traded securities are determined as follows: 1) we obtain estimates from independent pricing services and 2) we estimate fair value based upon a comparison to quoted issues of the same issuer or issues of other issuers with similar terms and risk characteristics. We analyze the independent pricing services valuation methodologies and related inputs, including an assessment of the observability of market inputs. Upon obtaining this information related to fair value, management makes a determination as to the appropriate valuation amount. For more information about the fair values of our investments please refer to Note 6, Fair Value of Financial Instruments, to the financial statements.

The following table presents the reported values of our invested assets:


	As of
	September 30, 2020				December 31, 2019
	(Dollars In Thousands)
Publicly issued bonds (amortized cost: 2020 - $42,959,814; 2019 - $42,681,872)	$	47,139,761	53.0	%	$	44,737,950	53.1	%
Privately issued bonds (amortized cost: 2020 - $24,262,200; 2019 - $23,310,601)	25,556,044		28.7		24,030,426		28.5
Redeemable preferred stocks (amortized cost: 2020 - $78,366; 2019 - $100,068)	79,763		0.1		99,497		0.1
Fixed maturities	72,775,568		81.8	%	68,867,873		81.7	%
Equity securities (cost: 2020 - $519,972; 2019 - $534,463)	538,385		0.6		553,720		0.7
Commercial mortgage loans	9,765,312		11.0		9,379,401		11.1
Investment real estate	10,195		—		10,321		—
Policy loans	1,640,147		1.8		1,675,121		2.0
Other long-term investments	2,955,438		3.4		2,479,520		2.9
Short-term investments	1,239,028		1.4		1,320,864		1.6
Total investments	$	88,924,073	100.0	%	$	84,286,820	100.0	%

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Included in the preceding table are $2.8 billion and $2.5 billion of fixed maturities and $77.3 million and $91.2 million of short-term investments classified as trading securities as of September 30, 2020 and December 31, 2019, respectively. All of the fixed maturities in the trading portfolio are invested assets that are held pursuant to Modco arrangements under which the economic risks and benefits of the investments are passed to third party reinsurers.

Fixed Maturity Investments

As of September 30, 2020, our fixed maturity investment holdings were approximately $72.8 billion. The approximate percentage distribution of our fixed maturity investments by quality rating is as follows:


	As of
Rating	September 30, 2020				December 31, 2019
	(Dollars In Thousands)
AAA	$	9,891,346	13.6	%	$	9,371,614	13.6	%
AA	7,347,385		10.1		7,587,879		11.0
A	23,754,083		32.6		22,861,846		33.2
BBB	26,694,019		36.7		24,484,792		35.6
Below investment grade	2,408,411		3.3		1,737,861		2.5
Not rated(1)	2,680,324		3.7		2,823,881		4.1
	$	72,775,568	100.0	%	$	68,867,873	100.0	%

(1) Our “not rated” securities are $2.7 billion or 3.7% of our fixed maturity investments, and are held-to-maturity securities issued by affiliates of the Company which are considered variable interest entities (“VIEs”) and are discussed in Note 5, Investment Operations, to the consolidated condensed financial statements. We are not the primary beneficiary of these entities and thus these securities are not eliminated in consolidation. These securities are collateralized by non-recourse funding obligations issued by captive insurance companies that are wholly owned subsidiaries of the Company.

We use various Nationally Recognized Statistical Rating Organizations’ (“NRSRO”) ratings when classifying securities by quality ratings. When the various NRSRO ratings are not consistent for a security, we use the second-highest convention in assigning the rating. When there are no such published ratings, we assign a rating based on the statutory accounting rating system if such ratings are available.

The distribution of our fixed maturity investments by type is as follows:


	As of
Type	September 30, 2020				December 31, 2019
	(Dollars In Thousands)
Corporate securities	$	51,834,489	71.2	%	$	48,400,037	70.3	%
Residential mortgage-backed securities	7,054,780		9.7		6,140,862		8.9
Commercial mortgage-backed securities	2,765,038		3.8		2,840,952		4.1
Other asset-backed securities	1,734,529		2.4		1,924,596		2.8
U.S. government-related securities	1,117,284		1.5		1,079,463		1.6
Other government-related securities	667,647		0.9		625,944		0.9
States, municipals, and political subdivisions	4,841,714		6.7		4,932,641		7.2
Redeemable preferred stocks	79,763		0.1		99,497		0.1
Securities issued by affiliates	2,680,324		3.7		2,823,881		4.1
Total fixed income portfolio	$	72,775,568	100.0	%	$	68,867,873	100.0	%

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The industry segment composition of our fixed maturity securities is presented in the following table:


	As of September 30, 2020		% Fair Value		As of December 31, 2019		% Fair Value
	(Dollars In Thousands)
Banking	$	7,276,936	10.1	%	$	6,403,157	9.3	%
Other finance	965,036		1.3		969,368		1.4
Electric utility	5,726,127		7.9		5,447,830		7.9
Energy	4,514,484		6.2		4,939,246		7.2
Natural gas	1,257,863		1.7		1,120,052		1.6
Insurance	5,703,945		7.8		4,969,799		7.2
Communications	2,806,052		3.9		2,654,395		3.9
Basic industrial	2,360,460		3.2		2,176,559		3.2
Consumer noncyclical	7,066,824		9.7		6,492,483		9.4
Consumer cyclical	2,728,797		3.7		2,597,772		3.8
Finance companies	296,143		0.4		228,037		0.3
Capital goods	3,545,812		4.9		3,425,996		5.0
Transportation	2,199,879		3.0		2,128,364		3.1
Other industrial	692,870		1.0		646,210		0.9
Brokerage	1,654,022		2.3		1,347,694		2.0
Technology	2,496,321		3.4		2,383,634		3.5
Real estate	574,532		0.8		531,000		0.8
Other utility	48,149		0.1		37,938		0.1
Commercial mortgage-backed securities	2,765,038		3.8		2,840,952		4.1
Other asset-backed securities	1,734,529		2.4		1,924,596		2.8
Residential mortgage-backed non-agency securities	6,074,638		8.3		5,265,776		7.6
Residential mortgage-backed agency securities	980,142		1.3		875,086		1.3
U.S. government-related securities	1,117,284		1.5		1,079,463		1.6
Other government-related securities	667,647		0.9		625,944		0.9
State, municipals, and political divisions	4,841,714		6.7		4,932,641		7.1
Securities issued by affiliates	2,680,324		3.7		2,823,881		4.0
Total	$	72,775,568	100.0	%	$	68,867,873	100.0	%

The total Modco trading portfolio fixed maturities by rating is as follows:


	As of
Rating	September 30, 2020				December 31, 2019
	(Dollars In Thousands)
AAA	$	297,956	10.7	%	$	280,067	11.1	%
AA	306,099		11.0		309,165		12.2
A	895,147		32.2		834,808		33.0
BBB	1,159,137		41.6		979,157		38.7
Below investment grade	125,046		4.5		124,370		5.0
	$	2,783,385	100.0	%	$	2,527,567	100.0	%

A portion of our bond portfolio is invested in residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”), and other asset-backed securities (collectively referred to as asset-backed securities or “ABS”). ABS are securities that are backed by a pool of assets. These holdings as of September 30, 2020, were approximately $11.6 billion. Mortgage-backed securities (“MBS”) are constructed from pools of mortgages and may have cash flow volatility as a result of changes in the rate at which prepayments of principal occur with respect to the underlying loans. Excluding limitations on access to lending and other extraordinary economic conditions, prepayments of principal on the underlying loans can be expected to accelerate with decreases in market interest rates and diminish with increases in interest rates.

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The following tables include the percentage of our collateral grouped by rating category and categorizes the estimated fair value by year of security origination for our Prime, Non-Prime, Commercial, and Other asset-backed securities as of September 30, 2020 and December 31, 2019.


	As of September 30, 2020
	Prime(1)						Non-Prime(1)						Commercial						Other asset-backed						Total
	Fair			Amortized			Fair			Amortized			Fair			Amortized			Fair			Amortized			Fair			Amortized
	Value			Cost			Value			Cost			Value			Cost			Value			Cost			Value			Cost
	(Dollars In Millions)
Rating $
AAA	$	6,004.8		$	5,835.7		$	2.5		$	2.4		$	1,700.7		$	1,622.2		$	530.7		$	515.0		$	8,238.7		$	7,975.3
AA	0.4			0.4			0.1			0.1			515.5			503.3			274.6			266.5			790.6			770.3
A	977.6			931.2			8.3			7.2			469.2			456.9			770.4			775.2			2,225.5			2,170.5
BBB	4.7			4.7			1.3			1.2			75.0			80.6			130.2			126.7			211.2			213.2
Below	24.3			25.1			30.8			29.1			4.6			10.0			28.6			31.1			88.3			95.3
	$	7,011.8		$	6,797.1		$	43.0		$	40.0		$	2,765.0		$	2,673.0		$	1,734.5		$	1,714.5		$	11,554.3		$	11,224.6

Rating %
AAA	85.7		%	85.8		%	5.7		%	6.0		%	61.5		%	60.7		%	30.7		%	30.1		%	71.3		%	71.1		%
AA	—			—			0.2			0.2			18.6			18.8			15.8			15.5			6.8			6.9
A	13.9			13.7			19.4			18.0			17.0			17.1			44.4			45.2			19.3			19.3
BBB	0.1			0.1			3.0			3.0			2.7			3.0			7.5			7.4			1.8			1.9
Below	0.3			0.4			71.7			72.8			0.2			0.4			1.6			1.8			0.8			0.8
	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%

Estimated Fair Value of Security by Year of Security Origination
2016 and prior	$	1,952.5		$	1,872.4		$	40.5		$	37.6		$	2,267.0		$	2,206.5		$	1,091.4		$	1,068.9		$	5,351.4		$	5,185.4
2017	776.6			742.7			2.5			2.4			267.1			249.4			397.9			398.8			1,444.1			1,393.3
2018	1,172.0			1,126.0			—			—			147.3			134.3			145.2			147.8			1,464.5			1,408.1
2019	1,305.5			1,273.6			—			—			71.9			71.3			87.0			86.9			1,464.4			1,431.8
2020	1,805.2			1,782.4			—			—			11.7			11.5			13.0			12.1			1,829.9			1,806.0
Total	$	7,011.8		$	6,797.1		$	43.0		$	40.0		$	2,765.0		$	2,673.0		$	1,734.5		$	1,714.5		$	11,554.3		$	11,224.6

(1) Included in Residential Mortgage-Backed securities.

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	As of December 31, 2019
	Prime(1)						Non-Prime(1)						Commercial						Other asset-backed						Total
	Fair			Amortized			Fair			Amortized			Fair			Amortized			Fair			Amortized			Fair			Amortized
	Value			Cost			Value			Cost			Value			Cost			Value			Cost			Value			Cost
	(Dollars In Millions)
Rating $
AAA	$	5,182.1		$	5,080.1		$	3.1		$	3.1		$	1,680.7		$	1,650.3		$	649.3		$	636.6		$	7,515.2		$	7,370.1
AA	1.5			1.5			0.1			0.1			578.1			570.0			250.0			240.5			829.7			812.1
A	869.5			851.8			9.9			9.9			503.5			490.7			854.1			860.5			2,237.0			2,212.9
BBB	3.8			3.9			1.3			1.3			78.6			78.9			140.3			138.3			224.0			222.4
Below	32.6			33.0			37.0			37.0			—			—			30.9			31.5			100.5			101.5
	$	6,089.5		$	5,970.3		$	51.4		$	51.4		$	2,840.9		$	2,789.9		$	1,924.6		$	1,907.4		$	10,906.4		$	10,719.0

Rating %
AAA	85.1		%	85.0		%	6.0		%	6.0		%	59.1		%	59.2		%	33.7		%	33.4		%	68.9		%	68.8		%
AA	—			—			0.2			0.2			20.4			20.4			13.0			12.6			7.6			7.6
A	14.3			14.3			19.2			19.2			17.7			17.6			44.4			45.1			20.5			20.6
BBB	0.1			0.1			2.6			2.6			2.8			2.8			7.3			7.2			2.1			2.1
Below	0.5			0.6			72.0			72.0			—			—			1.6			1.7			0.9			0.9
	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%	100.0		%

Estimated Fair Value of Security by Year of Security Origination
2015 and prior	$	1,788.0		$	1,752.3		$	48.3		$	48.3		$	1,885.6		$	1,855.1		$	1,032.0		$	1,008.3		$	4,753.9		$	4,664.0
2016	371.6			360.1			—			—			492.9			486.3			128.6			130.2			993.1			976.6
2017	843.6			822.8			3.1			3.1			256.9			251.6			481.9			485.6			1,585.5			1,563.1
2018	1,374.2			1,332.3			—			—			147.1			139.1			198.0			199.1			1,719.3			1,670.5
2019	1,712.1			1,702.8			—			—			58.4			57.8			84.1			84.2			1,854.6			1,844.8
Total	$	6,089.5		$	5,970.3		$	51.4		$	51.4		$	2,840.9		$	2,789.9		$	1,924.6		$	1,907.4		$	10,906.4		$	10,719.0

(1) Included in Residential Mortgage-Backed securities

The majority of our RMBS holdings as of September 30, 2020, were super senior or senior bonds in the capital structure. Our total non-agency portfolio has a weighted-average life of 1.6 years. The following table categorizes the weighted-average life for our non-agency portfolio, by category of material holdings, as of September 30, 2020:


						Weighted-Average
Non-agency portfolio						Life

Prime						1.64

Sub-prime						1.07

Commercial Mortgage Loans

We invest a portion of our investment portfolio in commercial mortgage loans. As of September 30, 2020 our commercial mortgage loan holdings were approximately $9.9 billion, $9.8 billion net of allowance for credit losses. We have specialized in making loans on either credit-oriented commercial properties or credit-anchored strip shopping centers and apartments. Our underwriting procedures relative to our commercial loan portfolio are based, in our view, on a conservative and disciplined approach. We concentrate on a small number of commercial real estate asset types associated with the necessities of life (retail, multi-family, senior living, professional office buildings, and warehouses). We believe that these asset types tend to weather economic downturns better than other commercial asset classes in which we have chosen not to participate. We believe this disciplined approach has helped to maintain a relatively low delinquency and foreclosure rate throughout our history. The majority of our commercial mortgage loans portfolio was underwritten and funded by us. From time to time, we may acquire loans in conjunction with an acquisition.

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Our commercial mortgage loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, and net of an allowance for credit losses. See Note 2, Summary of Significant Accounting Policies, for a detailed discussion of the Company’s policies with respect to the measurement of the allowance for credit losses. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Amortization of premiums and discounts is recorded using the effective yield method. Interest income, amortization of premiums and discounts, and prepayment fees are reported in net investment income.

Certain of the commercial mortgage loans have call options that occur within the next 10 years. However, if interest rates were to significantly increase, we may be unable to exercise the call options on our existing commercial mortgage loans commensurate with the significantly increased market rates. As of September 30, 2020, assuming the loans are called at their next call dates, approximately $8.1 million of principal would become due for the remainder of 2020, $763.7 million in 2021 through 2025, and $56.7 million in 2026 through 2029.

We offer a type of commercial mortgage loan under which we will permit a loan-to-value ratio of up to 85% in exchange for a participation interest in the cash flows from the underlying real estate. As of September 30, 2020 and December 31, 2019, approximately $805.2 million and $717.0 million, respectively, of our total commercial mortgage loans principal balance have this participation feature. Cash flows received as a result of this participation feature are recorded as interest income. During the three and nine months ended September 30, 2020 and 2019, we recognized $0.9 million and $3.8 million, and $17.3 million and $18.0 million, respectively, of participation commercial mortgage loan income.

The following table includes a breakdown of our commercial mortgage loan portfolio:


Commercial Mortgage Loan Portfolio Profile
	As of September 30, 2020			As of December 31, 2019
	(Dollars In Thousands)
Total number of loans	1,819			1,832
Total amortized cost	$	9,940,362		$	9,379,401
Total unpaid principal balance	$	9,852,228		$	9,271,041
Allowance for credit losses - funded commercial mortgage loans	$	(175,050)		$	(4,884)
Average loan size	$	5,465		$	5,061

Weighted-average amortization	21.1 years			20.6 years
Weighted-average coupon	4.40		%	4.48		%
Weighted-average LTV	53.81		%	53.8		%
Weighted-average debt coverage ratio	1.74			1.73

Total number of unfunded commitments	134			100
Total unfunded commitments balance	$	917,418		$	754,418
Allowance for credit losses - unfunded commitments	$	(19,797)		$	—

We record commercial mortgage loans net of an allowance for credit losses. This allowance is calculated and recorded at a loan level, based on analysis and input data for loans with similar risk characteristics. As of September 30, 2020 and December 31, 2019, there were allowances for commercial mortgage loan and unfunded commitment credit losses of $194.8 million and $4.9 million, respectively.

While our commercial mortgage loans do not have quoted market values, as of September 30, 2020 we estimated the fair value of our commercial mortgage loans to be $10.5 billion (using an internal fair value model which calculates the value of most loans by using the loan’s discounted cash flows to the loan’s call or maturity date), which was approximately 5.85% more than the amortized cost, less any related loan loss reserve.

At the time of origination, our commercial mortgage lending criteria targets that the loan-to-value ratio on each commercial mortgage loan is 75% or less. We target projected rental payments from credit anchors (i.e., excluding rental payments from smaller local tenants) of 70% of the property’s projected operating expenses and debt service.

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As of September 30, 2020, we had $1.2 million of invested assets that consisted of nonperforming commercial mortgage loans, restructured commercial mortgage loans, or commercial mortgage loans that were foreclosed and were converted to real estate properties. During the nine months ended September 30, 2020 we recognized two troubled debt restructurings as a result of granting concession to borrowers which included loan terms unavailable from other lenders. During the nine months ended September 30, 2020, we did not recognize any commercial mortgage loans that were foreclosed and were converted to real estate properties. We did not identify any loans whose principal was permanently impaired during the nine months ended September 30, 2020. It is our policy to write off loan amounts that are deemed uncollectible. No amounts were written off during the nine months ended September 30, 2020.

It is our policy to limit accrued interest income on loans to 90 days of interest. For loans in nonaccrual status, interest income is recognized on a cash basis. For the period ended September 30, 2020, an immaterial amount of accrued interest was excluded from the amortized cost basis pursuant to our nonaccrual policy.

We use the same methodology and assumptions to estimate the allowance for credit losses for unfunded loan commitments as for funded commercial mortgage loan receivables. During the nine months ended September 30, 2020, the allowance for credit losses for unfunded loan commitments was $19.8 million, which was a slight decrease of $0.3 million from Q2 2020.

Unrealized Gains and Losses — Available-for-Sale Securities

The information presented below relates to investments at a certain point in time and is not necessarily indicative of the status of the portfolio at any time after September 30, 2020, the balance sheet date. Information about unrealized gains and losses is subject to rapidly changing conditions, including volatility of financial markets and changes in interest rates. Management considers a number of factors in determining if an unrealized loss is related to a credit loss, including the expected cash to be collected and the intent, likelihood, and/or ability to hold the security until recovery. Consistent with our long-standing practice, we do not utilize a “bright line test” to determine whether a credit loss has occurred. On a quarterly basis, we perform an analysis on every security with an unrealized loss to determine whether a credit loss has occurred. This analysis includes reviewing several metrics including collateral, expected cash flows, ratings, and liquidity. Furthermore, since the timing of recognizing realized gains and losses is largely based on management’s decisions as to the timing and selection of investments to be sold, the tables and information provided below should be considered within the context of the overall unrealized gain/(loss) position of the portfolio. We had an overall net unrealized gain of $5.5 billion, prior to tax and the related impact of certain insurance assets and liabilities offsets, as of September 30, 2020, and an overall net unrealized gain of $2.8 billion as of December 31, 2019.

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For fixed maturity securities held that are in an unrealized loss position as of September 30, 2020, the fair value, amortized cost, unrealized loss, allowance for expected credit losses (“ACL”), and total time period that the security has been in an unrealized loss position are presented in the table below:


	Fair Value		% Fair Value		Amortized Cost		% Amortized Cost		ACL		% ACL		Unrealized Loss		% Unrealized Loss
	(Dollars In Thousands)
<= 90 days	$	2,154,534	38.7	%	$	2,191,532	37.0	%	$	—	—	%	$	(36,998)	10.7	%
>90 days but <= 180 days	1,557,636		27.9		1,676,279		28.2		—		—		(118,643)		34.4
>180 days but <= 270 days	313,825		5.6		336,370		5.7		(53)		0.3		(22,492)		6.5
>270 days but <= 1 year	112,576		2.0		123,013		2.1		—		—		(10,437)		3.0
>1 year but <= 2 years	294,847		5.3		316,804		5.3		—		—		(21,957)		6.4
>2 years but <= 3 years	419,003		7.5		465,342		7.8		(1,844)		9.5		(44,495)		12.9
>3 years but <= 4 years	191,179		3.4		198,627		3.3		—		—		(7,448)		2.2
>4 years but <= 5 years	42,429		0.8		47,615		0.8		—		—		(5,186)		1.5
>5 years	488,942		8.8		583,565		9.8		(17,502)		90.2		(77,121)		22.4
Total	$	5,574,971	100.0	%	$	5,939,147	100.0	%	$	(19,399)	100.0	%	$	(344,777)	100.0	%

The range of maturity dates for securities in an unrealized loss position as of September 30, 2020, varies, with 13.8% maturing in less than 5 years, 19.0% maturing between 5 and 10 years, and 67.2% maturing after 10 years. The following table shows the credit rating of securities in an unrealized loss position as of September 30, 2020:


							%								%
S&P or Equivalent	Fair		%		Amortized		Amortized						Unrealized		Unrealized
Designation	Value		Fair Value		Cost		Cost		ACL		% ACL		Loss		Loss
	(Dollars In Thousands)
AAA/AA/A	$	2,282,604	41.0	%	$	2,356,594	39.7	%	$	—	—	%	$	(73,990)	21.5	%
BBB	2,075,669		37.2		2,200,190		37.0		—		—		(124,521)		36.1
Investment grade	4,358,273		78.2	%	4,556,784		76.7	%	—		—	%	(198,511)		57.6	%
BB	1,057,201		18.9		1,187,016		20.0		—		—		(129,815)		37.7
B	145,192		2.6		161,432		2.7		(645)		3.3		(15,595)		4.5
CCC or lower	14,305		0.3		33,915		0.6		(18,754)		96.7		(856)		0.2
Below investment grade	1,216,698		21.8	%	1,382,363		23.3	%	(19,399)		100.0	%	(146,266)		42.4	%
Total	$	5,574,971	100.0	%	$	5,939,147	100.0	%	$	(19,399)	100.0	%	$	(344,777)	100.0	%

As of September 30, 2020, the Barclays Investment Grade Index was priced at 127 bps versus a 10 year average of 133 bps. Similarly, the Barclays High Yield Index was priced at 547 bps versus a 10 year average of 509 bps. As of September 30, 2020, the five, ten, and thirty-year U.S. Treasury obligations were trading at levels of 0.3%, 0.7%, and 1.5%, as compared to 10 year averages of 1.5%, 2.2%, and 3.0%, respectively.

As of September 30, 2020, 57.6% of the unrealized loss was associated with securities that were rated investment grade. We have examined the performance of the underlying collateral and cash flows and expect that our investments will continue to perform in accordance with their contractual terms. Factors such as credit enhancements within the deal structures and the underlying collateral performance/characteristics support the recoverability of the investments. Based on the factors discussed, we concluded than an allowance for credit losses was not necessary. However, from time to time, we may sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield enhancement, asset/liability management, and liquidity requirements.

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Expectations that investments in mortgage-backed and asset-backed securities will continue to perform in accordance with their contractual terms are based on assumptions that a market participant would use in determining the current fair value. It is reasonably possible that the underlying collateral of these investments will perform worse than current market expectations and that such an event may lead to adverse changes in the cash flows on our holdings of these types of securities. This could lead to potential future write-downs within our portfolio of mortgage-backed and asset-backed securities. Expectations that our investments in corporate securities and/or debt obligations will continue to perform in accordance with their contractual terms are based on evidence gathered through our normal credit surveillance process. Although we do not anticipate such events, it is reasonably possible that issuers of our investments in corporate securities will perform worse than current expectations. Such events may lead us to recognize potential future write-downs within our portfolio of corporate securities. It is also possible that such unanticipated events would lead us to dispose of those certain holdings and recognize the effects of any such market movements in our financial statements.

As of September 30, 2020, we held a total of 645 positions that were in an unrealized loss position. Included in that amount were 127 positions of below investment grade securities with a fair value of $1.2 billion that were in an unrealized loss position. Total unrealized losses related to below investment grade securities were $146.3 million, $82.7 million of which had been in an unrealized loss position for more than twelve months. Below investment grade securities in an unrealized loss position were 1.4% of invested assets.

As of September 30, 2020, securities in an unrealized loss position that were rated as below investment grade represented 21.8% of the total fair value and 42.4% of the total unrealized loss. We have the ability and intent to hold these securities to maturity. After a review of each security and its expected cash flows, we believe the decline in fair value to be temporary.

The following table includes the fair value, amortized cost, unrealized loss, ACL, and total time period that the security has been in an unrealized loss position for all below investment grade securities as of September 30, 2020:


	Fair Value		% Fair Value		Amortized Cost		% Amortized Cost		ACL		% ACL		Unrealized Loss		% Unrealized Loss
	(Dollars In Thousands)
<= 90 days	$	290,515	23.8	%	$	302,104	21.9	%	$	—	0.1	%	$	(11,589)	8.0	%
>90 days but <= 180 days	286,613		23.6		321,857		23.3		—		—		(35,244)		24.1
>180 days but <= 270 days	94,086		7.7		105,177		7.6		(53)		0.3		(11,038)		7.5
>270 days but <= 1 year	16,764		1.4		22,470		1.6		—		—		(5,706)		3.9
>1 year but <= 2 years	50,640		4.2		62,304		4.5		—		—		(11,664)		8.0
>2 years but <= 3 years	200,478		16.5		225,802		16.3		(1,844)		9.5		(23,480)		16.1
>3 years but <= 4 years	45,978		3.8		48,856		3.5		—		—		(2,878)		2.0
>4 years but <= 5 years	15,681		1.3		17,466		1.3		—		—		(1,785)		1.2
>5 years	215,943		17.7		276,327		20.0		(17,502)		90.1		(42,882)		29.2
Total	$	1,216,698	100.0	%	$	1,382,363	100.0	%	$	(19,399)	100.0	%	$	(146,266)	100.0	%

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We have no material concentrations of issuers or guarantors of fixed maturity securities. The industry segment composition of all securities in an unrealized loss position held as of September 30, 2020, is presented in the following table:


	Fair Value		% Fair Value		Amortized Cost		% Amortized Cost		ACL		% ACL		Unrealized Loss		% Unrealized Loss
	(Dollars In Thousands)
Banking	$	451,395	8.1	%	$	462,088	7.8	%	$	—	—	%	$	(10,693)	3.1	%
Other finance	90,930		1.6		100,296		1.7		—		—		(9,366)		2.7
Electric utility	331,698		5.9		347,967		5.9		(53)		0.3		(16,216)		4.7
Energy	1,137,453		20.4		1,290,200		21.7		(15,504)		79.9		(137,243)		39.8
Natural gas	21,753		0.4		23,512		0.4		(1,199)		6.2		(560)		0.2
Insurance	370,301		6.6		393,027		6.6		—		—		(22,726)		6.6
Communications	76,452		1.4		80,000		1.3		(1,998)		10.3		(1,550)		0.4
Basic industrial	95,299		1.7		97,546		1.6		—		—		(2,247)		0.7
Consumer noncyclical	357,871		6.4		375,314		6.3		—		—		(17,443)		5.1
Consumer cyclical	255,013		4.6		283,955		4.8		—		—		(28,942)		8.4
Finance companies	92,916		1.7		96,627		1.6		—		—		(3,711)		1.1
Capital goods	145,479		2.6		156,164		2.6		—		—		(10,685)		3.1
Transportation	284,877		5.1		306,821		5.2		—		—		(21,944)		6.4
Other industrial	12,851		0.2		13,000		0.2		—		—		(149)		—
Brokerage	83,482		1.5		85,472		1.4		—		—		(1,990)		0.6
Technology	95,057		1.7		99,268		1.7		—		—		(4,211)		1.2
Real estate	20,794		0.4		21,051		0.4		—		—		(257)		0.1
Other utility	—		—		—		—		—		—		—		—
Commercial mortgage-backed securities	383,029		6.9		410,466		6.9		—		—		(27,437)		8.0
Other asset-backed securities	691,679		12.4		710,080		12.0		(645)		3.3		(17,756)		5.1
Residential mortgage-backed non-agency securities	183,063		3.3		183,948		3.1		—		—		(885)		0.3
Residential mortgage-backed agency securities	365		—		369		—		—		—		(4)		—
U.S. government-related securities	252,321		4.5		255,540		4.3		—		—		(3,219)		0.9
Other government-related securities	30,104		0.5		32,766		0.6		—		—		(2,662)		0.8
States, municipals, and political divisions	110,789		2.1		113,670		1.9		—		—		(2,881)		0.7
Total	$	5,574,971	100.0	%	$	5,939,147	100.0	%	$	(19,399)	100.0	%	$	(344,777)	100.0	%

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We have no material concentrations of issuers or guarantors of fixed maturity securities. The industry segment composition of all securities in an unrealized loss position held as of December 31, 2019, is presented in the following table:


	Fair Value		% Fair Value		Amortized Cost		% Amortized Cost		Unrealized Loss		% Unrealized Loss
	(Dollars In Thousands)
Banking	$	343,955	3.8	%	$	349,861	3.7	%	$	(5,906)	1.8	%
Other finance	134,604		1.5		142,979		1.5		(8,375)		2.6
Electric utility	1,600,110		17.4		1,661,652		17.5		(61,542)		18.9
Energy	747,114		8.1		824,578		8.7		(77,464)		23.8
Natural gas	277,024		3.0		283,821		3.0		(6,797)		2.1
Insurance	435,074		4.7		453,430		4.8		(18,356)		5.6
Communications	265,373		2.9		281,086		3.0		(15,713)		4.8
Basic industrial	292,054		3.2		299,647		3.2		(7,593)		2.3
Consumer noncyclical	768,446		8.4		814,268		8.6		(45,822)		14.1
Consumer cyclical	313,898		3.4		330,322		3.5		(16,424)		5.0
Finance companies	23,371		0.3		24,132		0.3		(761)		0.2
Capital goods	226,853		2.5		233,706		2.5		(6,853)		2.1
Transportation	317,788		3.5		326,209		3.4		(8,421)		2.6
Other industrial	112,940		1.2		115,200		1.2		(2,260)		0.7
Brokerage	98,572		1.1		101,330		1.1		(2,758)		0.8
Technology	116,155		1.3		123,424		1.3		(7,269)		2.2
Real estate	—		—		—		—		—		—
Other utility	6,495		—		6,764		—		(269)		0.2
Commercial mortgage-backed securities	487,511		5.3		490,803		5.1		(3,292)		1.0
Other asset-backed securities	696,605		7.6		711,531		7.5		(14,926)		4.6
Residential mortgage-backed non-agency securities	938,299		10.2		943,696		9.9		(5,397)		1.7
Residential mortgage-backed agency securities	133,877		1.5		134,802		1.4		(925)		0.3
U.S. government-related securities	736,968		8.0		742,284		7.8		(5,316)		1.6
Other government-related securities	29,192		0.3		31,183		0.3		(1,991)		0.6
States, municipals, and political divisions	69,377		0.8		70,607		0.7		(1,230)		0.4
Total	$	9,171,655	100.0	%	$	9,497,315	100.0	%	$	(325,660)	100.0	%

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Risk Management and Impairment Review

We monitor the overall credit quality of our portfolio within established guidelines. The following table includes our available-for-sale fixed maturities by credit rating as of September 30, 2020:


			Percent of
Rating	Fair Value		Fair Value
	(Dollars In Thousands)
AAA	$	9,593,390	14.3	%
AA	7,041,286		10.5
A	22,858,936		34.0
BBB	25,534,882		37.9
Investment grade	65,028,494		96.7
BB	2,039,854		3.0
B	220,006		0.3
CCC or lower	23,505		—
Below investment grade	2,283,365		3.3
Total	$	67,311,859	100.0	%

Not included in the table above are $2.7 billion of investment grade and $125.0 million of below investment grade fixed maturities classified as trading securities and $2.7 billion of fixed maturities classified as held-to-maturity.

Limiting bond exposure to any creditor group is another way we manage credit risk. We held no credit default swaps on the positions listed below as of September 30, 2020. The following table summarizes our ten largest fixed maturity exposures to an individual creditor group as of September 30, 2020:


	Fair Value of
	Funded		Unfunded		Total
Creditor	Securities		Exposures		Fair Value
	(Dollars In Millions)
Berkshire Hathaway Inc	$	303.0	$	—	$	303.0
JP Morgan Chase & Co	296.4		1.9		298.3
UnitedHealth Group Inc	289.9		—		289.9
Raytheon Technologies	287.8		—		287.8
AT&T Inc	286.6		—		286.6
Microsoft Corp	284.3		—		284.3
Duke Energy Corp	280.3		—		280.3
Exelon Corp	271.3		—		271.3
Comcast Corp	267.8		—		267.8
Apple Inc	266.9		—		266.9
Total	$	2,834.3	$	1.9	$	2,836.2

Determining whether a decline in the current fair value of invested assets is a credit loss is both objective and subjective, and can involve a variety of assumptions and estimates, particularly for investments that are not actively traded in established markets. We review our positions on a monthly basis for possible credit concerns and review our current exposure, credit enhancement, and delinquency experience.

Management considers a number of factors when determining the impairment status of individual securities. These include the economic condition of various industry segments and geographic locations and other areas of identified risks. Since it is possible for the impairment of one investment to affect other investments, we engage in ongoing risk management to safeguard against and limit any further risk to our investment portfolio. Special attention is given to correlative risks within specific industries, related parties, and business markets.

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For certain securitized financial assets with contractual cash flows, including RMBS, CMBS, and other asset-backed securities (collectively referred to as asset-backed securities or “ABS”), GAAP requires us to periodically update our best estimate of cash flows over the life of the security. If the fair value of a securitized financial asset is less than its cost or amortized cost and there has been a decrease in the present value of the expected cash flows since the last revised estimate, a credit loss is recognized. Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral. Projections of expected future cash flows may change based upon new information regarding the performance of the underlying collateral. In addition, we consider our intent and ability to retain a temporarily depressed security until recovery.

For securities which the Company has the intent and ability to hold the security until the recovery of the amortized cost basis, analysis of expected cash flows is used to measure the amount of the credit loss, if any, and the Company uses the effective interest rate implicit in the security at the date of acquisition to discount expected cash flows. For floating rate securities, the Company’s policy is to lock in the interest rate at the first instance of an impairment. Estimates of expected cash flows are not probability-weighted, but will reflect the Company’s best estimate based on past events, current conditions, and reasonable and supportable forecasts of future events. To the extent the amortized cost basis of the security exceeds the present value of future cash flows expected to be collected, this difference represents a credit loss. Credit losses are recorded in current earnings with a corresponding adjustment to the allowance for credit losses, except that the credit loss recognized cannot exceed the difference between the book value and fair value of the security as of the date of the analysis. In future periods, recoveries in the present value of expected cash flows are recorded in current earnings as a reversal of the previously recognized allowance for credit losses. Based on our analysis, for the three and nine months ended September 30, 2020, we recognized approximately $38.5 million and $120.5 million, respectively, of credit losses in earnings.

There are certain risks and uncertainties associated with determining whether declines in fair values are the result of credit losses. These include significant changes in general economic conditions and business markets, trends in certain industry segments, interest rate fluctuations, rating agency actions, changes in significant accounting estimates and assumptions, commission of fraud, and legislative actions. We continuously monitor these factors as they relate to the investment portfolio in determining the status of each investment.

We have deposits with certain financial institutions which exceed federally insured limits. We have reviewed the creditworthiness of these financial institutions and believe that there is minimal risk of a material loss.

Certain European countries have experienced varying degrees of financial stress, which could have a detrimental impact on regional or global economic conditions and on sovereign and non-sovereign obligations. The chart shown below includes our non-sovereign fair value exposures in these countries as of September 30, 2020. As of September 30, 2020, we had no material unfunded exposure and had no material direct sovereign exposure.

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					Total Gross
	Non-sovereign Debt				Funded
Financial Instrument and Country	Financial		Non-financial		Exposure
	(Dollars In Millions)
Securities:
United Kingdom	$	1,247.0	$	1,396.3	$	2,643.3
France	516.6		523.6		1,040.2
Netherlands	372.7		339.2		711.9
Germany	148.3		718.9		867.2
Switzerland	354.4		180.1		534.5
Spain	140.8		378.8		519.6
Belgium	—		202.4		202.4
Norway	4.2		167.2		171.4
Finland	140.6		—		140.6
Ireland	61.6		137.8		199.4
Italy	15.4		160.3		175.7
Luxembourg	—		32.4		32.4
Sweden	2.0		53.4		55.4
Denmark	72.7		—		72.7
Portugal	—		25.6		25.6
Total securities	3,076.3		4,316.0		7,392.3
Derivatives:
Germany	81.6		—		81.6
United Kingdom	175.3		—		175.3
Switzerland	43.5		—		43.5
France	19.5		—		19.5
Total derivatives	319.9		—		319.9
Total securities	$	3,396.2	$	4,316.0	$	7,712.2

Realized Gains and Losses

The following table sets forth realized gains (losses) - investments/derivatives for the periods shown:

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	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars In Thousands)
Fixed maturity gains - sales	$	2,750	$	20,155	$	49,189	$	34,801
Fixed maturity losses - sales	(69)		(4,469)		(4,891)		(12,916)
Equity gains and losses	16,918		6,117		(652)		44,292
Net credit losses recognized in operations	(38,459)		—		(120,540)		—
Net impairment losses recognized in operations	—		(10,818)		—		(14,658)
Commercial mortgage loans	(2,174)		(1,575)		(101,256)		(1,435)
Modco trading portfolio	44,918		67,674		108,223		252,147
Other	(1,065)		315		(2,825)		365
Total realized gains (losses) - investments	$	22,819	$	77,399	$	(72,752)	$	302,596
Derivatives related to VA contracts:
Interest rate futures	$	2,257	$	727	$	(3,565)	$	(16,575)
Equity futures	(1,187)		5,220		131,912		37,517
Currency futures	(9,536)		9,181		1,438		11,028
Equity options	(41,584)		(3,957)		66,647		(97,354)

Interest rate swaps	(57,657)		149,766		363,644		342,561
Total return swaps	(31,465)		(1,950)		30,680		(50,522)
Embedded derivative - GLWB	72,519		(86,635)		(332,202)		(189,624)
Funds withheld derivative	45,787		(350)		(103,494)		80,198
Total derivatives related to VA contracts	(20,866)		72,002		155,060		117,229
Derivatives related to FIA contracts:
Embedded derivative	(8,642)		(4,335)		(38,065)		(67,968)
Funds withheld derivative	(2,804)		—		(9,586)		—
Equity futures	518		962		(6,550)		964
Equity options	24,870		4,785		15,031		60,026
Other derivatives	483		—		258		—
Total derivatives related to FIA contracts	14,425		1,412		(38,912)		(6,978)
Derivatives related to IUL contracts:
Embedded derivative	15,648		6,261		1,409		(18,395)
Equity futures	(230)		91		(2,374)		347
Equity options	6,535		586		583		9,372
Total derivatives related to IUL contracts	21,953		6,938		(382)		(8,676)
Embedded derivative - Modco reinsurance treaties	(25,438)		(44,027)		(55,864)		(199,704)
Derivatives with PLC(1)	19,833		7,583		22,179		14,852
Other derivatives	5,430		(1,622)		10,818		(3,011)
Total realized gains (losses) - derivatives	15,337		42,286		92,899		(86,288)
Total realized gains (losses) - investments/derivatives	$	38,156	$	119,685	$	20,147	$	216,308

(1) These derivatives include the interest support agreement, two yearly renewable term (“YRT”) premium support agreements, and three portfolio maintenance agreements between certain of our subsidiaries and PLC.

Realized gains (losses) on investments reflect portfolio management activities designed to maintain proper matching of assets and liabilities and to enhance long-term investment portfolio performance. The change in net realized gains (losses) - investments, excluding changes in the allowance for credit losses and Modco trading portfolio activity during the three and nine months ended September 30, 2020, primarily reflects the normal operation of our asset/liability program within the context of the changing interest rate and spread environment.

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Realized losses are comprised of credit losses and actual sales of investments. These credit losses resulted from our analysis of circumstances and our belief that credit events, loss severity, changes in credit enhancement, and/or other adverse conditions of the respective issuers have caused, or will lead to, a deficiency in the contractual cash flows related to these investments. These credit losses impairments are presented in the chart below:


	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars In Thousands)
Other MBS	$	10	$	(13)	$	(645)	$	(94)
Corporate securities	(38,469)		(10,805)		(119,895)		(14,564)


Total	$	(38,459)	$	(10,818)	$	(120,540)	$	(14,658)

As previously discussed, management considers several factors when determining whether a credit loss has occurred. Although we purchase securities with the intent to hold them until maturity, we may change our position as a result of a change in circumstances. Any such decision is consistent with our classification of all but a specific portion of our investment portfolio as available-for-sale. For the nine months ended September 30, 2020, we sold securities in an unrealized loss position with a fair value of $33.1 million. For such securities, the proceeds, realized loss, and total time period that the security had been in an unrealized loss position are presented in the table below:


	Proceeds		% Proceeds		Realized Loss		% Realized Loss
	(Dollars In Thousands)
<= 90 days	$	8,520	25.8	%	$	(21)	0.4	%
>90 days but <= 180 days	2,202		6.7		(208)		4.2
>180 days but <= 270 days	3,849		11.6		(51)		1.0
>270 days but <= 1 year	—		—		—		—
>1 year	18,491		55.9		(4,611)		94.4
Total	$	33,062	100.0	%	$	(4,891)	100.0	%

For the three and nine months ended September 30, 2020, we sold securities in an unrealized loss position with a fair value (proceeds) of $8.2 million and $33.1 million, respectively. The losses realized on the sale of these securities were $0.1 million and $4.9 million, respectively. We made the decision to exit these holdings in conjunction with our overall asset/liability management process.

For the three and nine months ended September 30, 2020, we sold securities in an unrealized gain position with a fair value of $415.4 million and $1.4 billion, respectively. The gains realized on the sale of these securities were $2.8 million and $49.2 million, respectively.

For the three and nine months ended September 30, 2020, net gains of $44.9 million and $108.2 million related to changes in fair value on our Modco trading portfolios, were included in realized gains (losses) - investments/derivatives. Of this amount, approximately $30.1 million of gains were realized through the sale of certain securities, which will be reimbursed to our reinsurance partners over time through the reinsurance settlement process for this block of business. The Modco embedded derivative, included those associated with the trading portfolios had realized pre-tax losses of $25.4 million and $55.9 million during the three and nine months ended September 30, 2020. The losses on the embedded derivative were due to lower treasury yields.

We use various derivative instruments to manage risks related to certain life insurance and annuity products. We can use these derivatives as economic hedges against risks inherent in the products. These risks have a direct impact on the cost of these products and are correlated with the equity markets, interest rates, foreign currency levels, and overall volatility. The hedged risks are recorded through the recognition of embedded derivatives associated with the products. These products include the GLWB rider associated with the variable annuity, fixed indexed annuity products as well as indexed universal life products. During the three and nine months ended September 30, 2020, we experienced net realized losses of $20.9 million and net realized gains of approximately $155.1 million on derivatives related to VA contracts. These net gains and losses on derivatives related to VA contracts were affected by capital market impacts, changes in our non-performance risk, unlocking of assumptions, and variations in actual sub-account fund performance from the indices included in our hedging program during the three and nine months ended September 30, 2020.

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The Funds Withheld derivative associated with Shades Creek had pre-tax realized gains of $45.8 million and pre-tax losses of $103.5 million for the three and nine months ended September 30, 2020, and the Funds Withheld derivative associated with Protective Life Reinsurance Bermuda Ltd. (“PL Re”) had pre-tax realized losses of $2.8 million and $9.6 million for the three and nine months ended September 30, 2020.

Certain of our subsidiaries have derivatives with PLC. These derivatives consist of an interest support agreement, two YRT premium support agreements, and three portfolio maintenance agreements with PLC. We recognized a gain of $17.8 million and a gain of $19.4 million related to the interest support agreement for the three and nine months ended September 30, 2020. We recognized gains of $0.8 million and $3.8 million related to the YRT premium support agreements for the three and nine months ended September 30, 2020.

We entered into two separate portfolio maintenance agreements in October 2012 and one portfolio maintenance agreement in January 2016. We recognized a gain of $1.3 million and a loss of $1.0 million for the three and nine months ended September 30, 2020.

We also use various swaps and other types of derivatives to mitigate risk related to other exposures. For the three and nine months ended September 30, 2020, these contracts generated $5.4 million and $10.8 million in gains.

LIQUIDITY AND CAPITAL RESOURCES

The Holding Company

Overview

Our primary sources of funding are from our insurance operations and revenues from investments. These sources of cash support our operations and are used to pay dividends to PLC.

The states in which we and our insurance subsidiaries are domiciled impose certain restrictions on the ability to pay dividends. These restrictions are based in part on the prior year’s statutory income and/or surplus.

Debt and other capital resources

Our primary sources of capital are from retained income from our insurance operations and capital infusions from our parent, PLC. Additionally, we have access to the Credit Facility discussed below.

On May 3, 2018, we amended the Credit Facility (as amended the “Credit Facility”). We have the ability to borrow under the Credit Facility on an unsecured basis up to an aggregate principal amount of $1.0 billion. We have the right in certain circumstances to request that the commitment under the Credit Facility be increased up to a maximum principal amount of $1.5 billion. We are not aware of any non-compliance with the financial debt covenants of the Credit Facility as of September 30, 2020. PLC had a combined outstanding balance of $255 million, with $215.0 million bearing an interest at a rate of LIBOR plus 1.00%, and $40.0 million bearing an interest rate of Prime as of September 30, 2020 and no outstanding balance as of December 31, 2019.

Liquidity

Liquidity refers to a company’s ability to generate adequate amounts of cash to meet its needs. We meet our liquidity requirements primarily through positive cash flows from our operating subsidiaries. Primary sources of cash from the operating subsidiaries are premiums, deposits for policyholder accounts, investment sales and maturities, and investment income. Primary uses of cash include benefit payments, withdrawals from policyholder accounts, investment purchases, policy acquisition costs, interest payments, and other operating expenses. We believe that we have sufficient liquidity to fund our cash needs under normal operating scenarios.

In the event of significant unanticipated cash requirements beyond our normal liquidity needs, we have additional sources of liquidity available depending on market conditions and the amount and timing of the liquidity need. These additional sources of liquidity include cash flows from operations, the sale of liquid assets, accessing our credit facility, and other sources described herein. Our decision to sell investment assets could be impacted by accounting rules, including rules relating to the likelihood of a requirement to sell securities before recovery of our cost basis. Under stressful market and economic conditions, liquidity may broadly deteriorate, which could negatively impact our ability to sell investment assets. If we require on short notice significant amounts of cash in excess of normal requirements, we may have difficulty selling investment assets in a timely manner, be forced to sell them for less than we otherwise would have been able to realize, or both.

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The liquidity requirements of our regulated insurance subsidiaries primarily relate to the liabilities associated with their various insurance and investment products, operating expenses, and income taxes. Liabilities arising from insurance and investment products include the payment of policyholder benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans, and obligations to redeem funding agreements.

We maintain investment strategies intended to provide adequate funds to pay benefits and expected surrenders, withdrawals, loans, and redemption obligations without forced sales of investments. In addition, our insurance subsidiaries hold highly liquid, high-quality short-term investment securities and other liquid investment grade fixed maturity securities to fund our expected operating expenses, surrenders, and withdrawals. We were committed as of September 30, 2020 to fund commercial mortgage loans in the amount of $917.4 million.

Our cash flows are used to fund an investment portfolio that provides for future benefit payments. We employ a formal asset/liability program to manage the cash flows of our investment portfolio relative to our long-term benefit obligations. As of September 30, 2020, we held cash and short-term investments of approximately $1.6 billion.

The following chart includes the cash flows provided by or used in operating, investing, and financing activities for the following periods:


	For The Nine Months Ended September 30,
	2020		2019
	(Dollars In Thousands)
Net cash used in operating activities	$	(154,383)	$	(13,755)
Net cash used in investing activities	(1,520,306)		(1,712,784)
Net cash provided by financing activities	1,884,690		1,798,439
Total	$	210,001	$	71,900

For The Nine Months Ended September 30, 2020 as compared to the Nine Months Ended September 30, 2019

Net cash used in operating activities - Cash flows from operating activities are affected by the timing of premiums received, investment income, and benefits and expenses paid. Principal sources of cash inflows from operating activities include sales of our products and services as well as income from investments. Due to the nature of our business and the fact that many of the products we sell produce financing and investing cash flows it is important to consider cash flows generated by investing and financing activities in conjunction with those generated by operating activities.

Net cash used in investing activities - Changes in cash from investing activities primarily related to our investment portfolio.

Net cash provided by financing activities - Changes in cash from financing activities included $102.7 million of outflows from secured financing liabilities for the nine months ended September 30, 2020, as compared to the $142.6 million of outflows for the nine months ended September 30, 2019 and $2.0 billion of inflows of investment product and universal life net activity as compared to $1.1 billion in the prior year. In addition, we did not receive a capital contribution from our parent during 2020 as compared to a contribution of $850.0 million for the nine months ended September 30, 2019.

Through our subsidiaries, we are members of the FHLB of Cincinnati and the FHLB of New York. FHLB advances provide an attractive funding source for short-term borrowing and for the sale of funding agreements. Membership in the FHLB requires that we purchase FHLB capital stock based on a minimum requirement and a percentage of the dollar amount of advances outstanding. Our borrowing capacity is determined by criteria established by each respective bank. In addition, our obligations under the advances must be collateralized. We maintain control over any such pledged assets, including the right of substitution. As of September 30, 2020, we had $1.6 billion of funding agreement-related advances and accrued interest outstanding under the FHLB program.

While we anticipate that the cash flows of our operating subsidiaries will be sufficient to meet our investment commitments and operating cash needs in a normal credit market environment, we recognize that investment commitments scheduled to be funded may, from time to time, exceed the funds then available. Therefore, we have established repurchase agreement programs for certain of our insurance subsidiaries to provide liquidity when needed. We expect that the rate received on its investments will equal or exceed its borrowing rate. Under this program, we may, from time to time, sell an investment security at a specific price and agree to repurchase that security at another specified price at a later date. These borrowings are typically for a term less than 90 days. The fair value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty against credit exposure. Cash received is invested in fixed maturity securities, and the agreements provide for net settlement in the event of default or on termination of the agreements. As of

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September 30, 2020, the fair value of securities pledged under the repurchase program was $153.7 million, and the repurchase obligation of $150.0 million was included in our consolidated condensed balance sheets (at an average borrowing rate of 14 basis points). During the nine months ended September 30, 2020, the maximum balance outstanding at any one point in time related to these programs was $565.0 million. The average daily balance was $94.4 million (at an average borrowing rate of 50 basis points) during the nine months ended September 30, 2020. As of December 31, 2019, the fair value of securities pledged under the repurchase program was $282.2 million and the repurchase obligation of $270.0 million was included in our consolidated condensed balance sheets (at an average borrowing rate of 163 basis points). During the year ended December 31, 2019, the maximum balance outstanding at any one point in time related to these programs was $900.0 million. The average daily balance was $212.2 million (at an average borrowing rate of 214 basis points) during the year ended December 31, 2019.

We participate in securities lending, primarily as an investment yield enhancement, whereby securities that are held as investments are loaned out to third parties for short periods of time. We require collateral at least equal to 102% of the fair value of the loaned securities to be separately maintained. The loaned securities’ fair value is monitored on a daily basis and collateral is adjusted accordingly. We maintain ownership of the securities at all times and are entitled to receive from the borrower any payments for interest received on such securities during the loan term. Securities lending transactions are accounted for as secured borrowings. As of September 30, 2020, securities with a fair value of $80.2 million were loaned under this program. As collateral for the loaned securities, we receive cash, which is primarily reinvested in short-term agreements, which are collateralized by U.S. Government or U.S. Government Agency securities, and government money market funds. These investments are recorded in short-term investments with a corresponding liability recorded in secured financing liabilities to account for its obligation to return the collateral. As of September 30, 2020, the fair value of the collateral related to this program was $82.8 million and we have an obligation to return $82.8 million of collateral to the securities borrowers.

Statutory Capital

A life insurance company’s statutory capital is computed according to rules prescribed by the National Association of Insurance Commissioners (“NAIC”), as modified by state law. Generally speaking, other states in which a company does business defer to the interpretation of the domiciliary state with respect to NAIC rules, unless inconsistent with the other state’s regulations. Statutory accounting rules are different from GAAP and are intended to reflect a more conservative view, for example, requiring immediate expensing of policy acquisition costs. The NAIC’s risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. The achievement of long-term growth will require growth in the statutory capital of our insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as retained statutory earnings or our equity contributions. In general, dividends up to specified levels are considered ordinary and may be paid without prior approval of the insurance commissioner of the state of domicile. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as an ordinary dividend to us from our insurance subsidiaries in 2020 is approximately $138.4 million.

State insurance regulators and the NAIC have adopted risk-based capital (“RBC”) requirements for life insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks. The requirements provide a means of measuring the minimum amount of statutory surplus appropriate for an insurance company to support its overall business operations based on its size and risk profile. A company’s risk-based statutory surplus is calculated by applying factors and performing calculations relating to various asset, premium, claim, expense, and reserve items. Regulators can then measure the adequacy of a company’s statutory surplus by comparing it to RBC. We manage our capital consumption by using the ratio of our total adjusted capital, as defined by the insurance regulators, to our company action level RBC (known as the RBC ratio), also as defined by insurance regulators.

Statutory reserves established for VA contracts are sensitive to changes in the equity markets and are affected by the level of account values relative to the level of any guarantees and product design. As a result, the relationship between reserve changes and equity market performance may be non-linear during any given reporting period. Market conditions greatly influence the capital required due to their impact on the valuation of reserves and derivative investments mitigating the risk in these reserves. Risk mitigation activities may result in material and sometimes counterintuitive impacts on statutory surplus and RBC ratio. Notably, as changes in these market and non-market factors occur, both our potential obligation and the related statutory reserves and/or required capital can vary at a non-linear rate.

Our statutory surplus is impacted by credit spreads as a result of accounting for the assets and liabilities on our fixed market value adjusted (“MVA”) annuities. Statutory separate account assets supporting the fixed MVA annuities are recorded at fair value. In determining the statutory reserve for the fixed MVA annuities, we are required to use current crediting rates based on U.S. Treasuries. In many capital market scenarios, current crediting rates based on U.S. Treasuries are highly correlated with market rates implicit in the fair value of statutory separate account assets. As a result, the change in the statutory reserve from

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period to period will likely substantially offset the change in the fair value of the statutory separate account assets. However, in periods of volatile credit markets, actual credit spreads on investment assets may increase or decrease sharply for certain sub-sectors of the overall credit market, resulting in statutory separate account asset market value gains or losses. As actual credit spreads are not fully reflected in current crediting rates based on U.S. Treasuries, the calculation of statutory reserves will not substantially offset the change in fair value of the statutory separate account assets resulting in a change in statutory surplus.

We cede material amounts of insurance and transfer related assets to other insurance companies through reinsurance. However, notwithstanding the transfer of related assets, we remain liable with respect to ceded insurance should any reinsurer fail to meet the obligations that it assumed. We evaluate the financial condition of our reinsurers and monitor the associated concentration of credit risk. For the three and nine months ended September 30, 2020, we ceded premiums to third party reinsurers amounting to $303.7 million and $733.6 million. In addition, we had receivables from reinsurers amounting to $4.7 billion as of September 30, 2020. We review reinsurance receivable amounts for collectability and establish bad debt reserves if deemed appropriate.

A proposed Rehabilitation Plan (“Rehabilitation Plan”) was filed by the Receiver of SRUS on June 30, 2020. The Rehabilitation Plan presents the following two options to each cedent: 1) remain in business with SRUS and be governed by the Rehabilitation Plan, or 2) recapture business ceded to SRUS. Due to SRUS’s financial status, neither option pays 100% of outstanding claims. Certain financial terms and conditions will be imposed on the cedents based on the election made, the type of business ceded, the manner in which the business is collateralized, and the amount of losses sustained by a cedent. The Company is currently working to evaluate the impact of both options and to provide feedback/objections to the Receiver on the Rehabilitation Plan. On October 9, 2020, the Receiver filed a proposed order setting forth a schedule to present the Rehabilitation Plan for Court approval, which order contemplates possible modifications to the Rehabilitation Plan to be filed with the Court by March 16, 2021.

The Company continues to monitor SRUS and the actions of the receiver through discussions with legal counsel and review of publicly available information. An allowance for credit losses related to SRUS is included in the overall reinsurance allowance for credit losses. See Note 2, Summary of Significant Accounting Policies. As of September 30, 2020, management does not believe that the ultimate outcome of the rehabilitation process will have a material impact on the Company’s financial position or results of operations.

Captive Reinsurance Companies

Our life insurance subsidiaries are subject to a regulation entitled “Valuation of Life Insurance Policies Model Regulation,” commonly known as “Regulation XXX,” and a supporting guideline entitled “The Application of the Valuation of Life Insurance Policies Model Regulation,” commonly known as “Guideline AXXX”. The regulation and supporting guideline require insurers to establish statutory reserves for term and universal life insurance policies with long-term premium guarantees that are consistent with the statutory reserves required for other individual life insurance policies with similar guarantees. Many market participants believe that these levels of reserves are non-economic. We use captive reinsurance companies to implement reinsurance and capital management actions to satisfy these reserve requirements by financing the non-economic reserves either through the issuance of non-recourse funding obligations by the captives or obtaining letters of credit from third-party financial institutions.

Our captive reinsurance companies assume business from affiliates only. Our captives are capitalized to a level we believe is sufficient to support the contractual risks and other general obligations of the respective captive entity. All of our captive reinsurance companies are wholly owned subsidiaries and are located domestically. The captive insurance companies are subject to regulations in the state of domicile.

The NAIC, through various committees, subgroups and dedicated task forces, is reviewing the use of captives and special purpose vehicles used to transfer insurance risk in relation to existing state laws and regulations, and several committees have adopted or exposed for comment white papers and reports that, if or when implemented, could impose additional requirements on the use of captives and other reinsurers.

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The NAIC has adopted Actuarial Guideline XLVIII (“AG48”) and the substantially similar “Term and Universal Life Insurance Reserve Financing Model Regulation” (the “Reserve Model”) which establish national standards for new reserve financing arrangements for term life insurance and universal life insurance with secondary guarantees. AG48 and the Reserve Model govern collateral requirements for captive reinsurance arrangements. In order to obtain reserve credit, AG48 and the Reserve Model require a minimum level of funds, consisting of primary and other securities, to be held by or on behalf of ceding insurers as security under each captive life reinsurance treaty. As a result of AG48 and the Reserve Model, the implementation of new captive structures in the future may be less capital efficient, lead to lower product returns and/or increased product pricing or result in reduced sales of certain products. In some circumstances, AG48 and the Reserve Model could impact the Company’s ability to engage in certain reinsurance transactions with non-affiliates.

We also use a captive reinsurance company to reinsure risks associated with GLWB and guaranteed minimum death benefits (“GMDB”) riders which helps us to manage those risks on an economic basis. In an effort to mitigate the equity market risks relative to our RBC ratio, we reinsure these risks to Shades Creek. The purpose of Shades Creek is to reduce the volatility in RBC due to non-economic variables included within the RBC calculation.

During 2012, PLC entered into an intercompany capital support agreement with Shades Creek. The agreement provides through a guarantee that PLC will contribute assets or purchase surplus notes (or cause an affiliate or third party to contribute assets or purchase surplus notes) in amounts necessary for Shades Creek’s regulatory capital levels to equal or exceed minimum thresholds as defined by the agreement. As of September 30, 2020, Shades Creek maintained capital levels in excess of the required minimum thresholds. The maximum potential future payment amount which could be required under the capital support agreement will be dependent on numerous factors, including the performance of equity markets, the level of interest rates, performance of associated hedges, and related policyholder behavior.

We use an affiliated Bermuda domiciled reinsurance company, PL Re, to reinsure certain fixed annuity business as a part of our capital management strategy.

See Note 15, Subsequent Events for additional information on our captive reinsurance companies.

Ratings

Various Nationally Recognized Statistical Rating Organizations (“rating organizations”) review the financial performance and condition of insurers, including us and our insurance subsidiaries, and publish their financial strength ratings as indicators of an insurer’s ability to meet policyholder and contract holder obligations. These ratings are important to maintaining public confidence in an insurer’s products, its ability to market its products and its competitive position. The following table summarizes the current financial strength ratings of our significant member companies from the major independent rating organizations:

Standard &

Ratings

A.M. Best

Fitch

Poor’s

Moody’s

Insurance company financial strength rating:

Protective Life Insurance Company

A+

AA-

West Coast Life Insurance Company

A+

AA-

Protective Life and Annuity Insurance Company

A+

AA-

—

Protective Property & Casualty Insurance Company

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MONY Life Insurance Company

A+

Our ratings are subject to review and change by the rating organizations at any time and without notice. A downgrade or other negative action by a rating organization with respect to the financial strength ratings of us and our insurance subsidiaries could adversely affect sales, relationships with distributors, the level of policy surrenders and withdrawals, competitive position in the marketplace, and the cost or availability of reinsurance. The rating agencies may take various actions, positive or negative, with respect to the debt and financial strength ratings of PLC and its subsidiaries, including as a result of PLC’s status as a subsidiary of Dai-ichi Life.

LIABILITIES

Many of our products contain surrender charges and other features that are designed to reward persistency and penalize the early withdrawal of funds. Certain stable value and annuity contracts have market-value adjustments that protect us against investment losses if interest rates are higher at the time of surrender than at the time of issue.

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As of September 30, 2020, we had policy liabilities and accruals of approximately $54.9 billion. Our interest-sensitive life insurance policies have a weighted average minimum credited interest rate of approximately 3.47%.

Contractual Obligations

There have been no material additions or changes outside of the ordinary course of business to our contractual obligations as compared to the amounts disclosed within our 2019 Annual Report on Form 10-K filed on March 25, 2020. For additional details related to our commitments, see Note 11, Commitments and Contingencies in our unaudited condensed consolidated financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

We have entered into operating leases that do not result in an obligation being recorded on the balance sheet. Refer to Note 11, Commitments and Contingencies, of the consolidated condensed financial statements for more information.

The Company uses the same methodology and assumptions to estimate the allowance for credit losses for unfunded loan commitments as for funded commercial mortgage loan receivables. As of September 30, 2020, the allowance for credit losses for unfunded loan commitments was $19.8 million. As of January 1, 2020, the Company established an allowance for credit losses for unfunded loan commitments of $10.6 million upon adoption of ASU No. 2016-13. During the nine months ended September 30, 2020, the Company established an additional allowance for credit losses of $9.2 million. Refer to Note 9, Commercial Mortgage Loans, of the consolidated condensed financial statements for more information.

MARKET RISK EXPOSURES

Our financial position and earnings are subject to various market risks including changes in interest rates, the yield curve, spreads between risk-adjusted and risk-free interest rates, foreign currency rates, used vehicle prices, equity price risks and issuer defaults. We analyze and manage the risks arising from market exposures of financial instruments, as well as other risks, through an integrated asset/liability management process. The primary focus of our asset/liability program is the management of interest rate risk within the insurance operations. Our asset/liability management programs and procedures involve the monitoring of asset and liability durations for various product lines; cash flow testing under various interest rate scenarios; and the continuous rebalancing of assets and liabilities with respect to yield, credit and market risk, and cash flow characteristics to maintain an appropriate balance between risk and profitability for each product category, and for us as a whole.

It is our policy to maintain asset and liability durations within one year of one another, although, from time to time, a broader interval may be allowed.

We are exposed to credit risk within our investment portfolio and through derivative counterparties. Credit risk relates to the uncertainty of an obligor’s continued ability to make timely payments in accordance with the contractual terms of the instrument or contract. We manage credit risk through established investment policies which attempt to address quality of obligors and counterparties, credit concentration limits, diversification requirements, and acceptable risk levels under expected and stressed scenarios. Derivative counterparty credit risk is measured as the amount owed to us, net of collateral held, based upon current market conditions. In addition, we periodically assess exposure related to potential payment obligations between us and our counterparties. We minimize the credit risk in derivative financial instruments by entering into transactions with high quality counterparties (A-rated or higher at the time we enter into the contract), and we maintain credit support annexes with certain of those counterparties.

We utilize a risk management strategy that incorporates the use of derivative financial instruments to reduce exposure to certain risks, including but not limited to, interest rate risk, currency exchange risk, volatility risk, and equity market risk. These strategies are developed through our analysis of data from financial simulation models and other internal and industry sources, and are then incorporated into our risk management program. See Note 7, Derivative Financial Instruments, to the consolidated financial statements included in this report for additional information on our financial instruments.

Derivative instruments expose us to credit and market risk and could result in material changes from period to period. We attempt to minimize our credit risk by entering into transactions with highly rated counterparties. We manage the market risk by establishing and monitoring limits as to the types and degrees of risk that may be undertaken. We monitor our use of derivatives in connection with our overall asset/liability management programs and risk management strategies. In addition, all derivative programs are monitored by our risk management department.

Derivative instruments that are used as part of our interest rate risk management strategy include interest rate swaps, interest rate futures, interest rate caps, and interest rate swaptions.

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We may use the following types of derivative contracts to mitigate our exposure to certain guaranteed benefits related to VA contracts, fixed indexed annuities, and indexed universal life:

•Foreign Currency Futures

•Variance Swaps

•Interest Rate Futures

•Equity Options

•Equity Futures

•Credit Derivatives

•Interest Rate Swaps

•Interest Rate Swaptions

•Volatility Futures

•Volatility Options

•Funds Withheld Agreement

•Total Return Swaps

Other Derivatives

Certain of our subsidiaries have derivatives with PLC. These derivatives consist of an interest support agreement, YRT premium support arrangements, and portfolio maintenance agreements with PLC.

We have a funds withheld account that consists of various derivative instruments held by us that is used to hedge the GLWB and GMDB riders and fixed indexed annuity products. The economic performance of derivatives in the funds withheld account is ceded to subsidiaries of PLC. The funds withheld account is accounted for as a derivative financial instrument.

We believe that our asset/liability management programs and procedures and certain product features provide protection against the effects of changes in interest rates under various scenarios. Additionally, we believe our asset/liability management programs and procedures provide sufficient liquidity to enable us to fulfill our obligation to pay benefits under our various insurance and deposit contracts. However, our asset/liability management programs and procedures incorporate assumptions about the relationship between short-term and long-term interest rates (i.e., the slope of the yield curve), relationships between risk-adjusted and risk-free interest rates, market liquidity, spread movements, implied volatility, policyholder behavior, and other factors, and the effectiveness of our asset/liability management programs and procedures may be negatively affected whenever actual results differ from those assumptions.

In the ordinary course of our commercial mortgage lending operations, we may commit to provide a commercial mortgage loan before the property to be mortgaged has been built or acquired. The commercial mortgage loan commitment is a contractual obligation to fund a commercial mortgage loan when called upon by the borrower. The commitment is not recognized in our financial statements until the commitment is actually funded. The commercial mortgage loan commitment contains terms, including the rate of interest, which may be different than prevailing interest rates. As of September 30, 2020, we had outstanding commercial mortgage loan commitments of $917.4 million at an average rate of 3.91%.

Impact of Continued Low Interest Rate Environment

Significant changes in interest rates expose us to the risk of not realizing anticipated spreads between the interest rate earned on investments and the interest rate credited to in-force policies and contracts. In addition, certain of our insurance and investment products guarantee a minimum guaranteed interest rate (“MGIR”). In periods of prolonged low interest rates, the interest spread earned may be negatively impacted to the extent our ability to reduce policyholder crediting rates is limited by the guaranteed minimum credited interest rates. Additionally, those policies without account values may exhibit lower profitability in periods of prolonged low interest rates due to reduced investment income.

The tables below present account values by range of current minimum guaranteed interest rates and current crediting rates for our universal life and deferred fixed annuity products as of September 30, 2020 and December 31, 2019:

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Credited Rate Summary

As of September 30, 2020


				1-50 bps			More than
Minimum Guaranteed Interest Rate	At			above			50 bps
Account Value	MGIR			MGIR			above MGIR			Total
	(Dollars In Millions)
Universal Life Insurance
2%	$	—		$	114		$	2,054		$	2,168
>2% - 3%	4,072			1,469			1,290			6,831
>3% - 4%	9,526			475			36			10,037
>4% - 5%	2,285			384			171			2,840
>5% - 6%	318			—			—			318
Subtotal	16,201			2,442			3,551			22,194
Fixed Annuities
1%	$	257		$	548		$	2,035		$	2,840
>1% - 2%	523			220			2,189			2,932
>2% - 3%	1,453			65			3			1,521
>3% - 4%	273			—			—			273
>4% - 5%	247			—			—			247
>5% - 6%	1			—			—			1
Subtotal	2,754			833			4,227			7,814
Total	$	18,955		$	3,275		$	7,778		$	30,008

Percentage of Total	63		%	11		%	26		%	100		%

Credited Rate Summary

As of December 31, 2019


				1-50 bps			More than
Minimum Guaranteed Interest Rate	At			above			50 bps
Account Value	MGIR			MGIR			above MGIR			Total
	(Dollars In Millions)
Universal Life Insurance
2%	$	—		$	78		$	1,735		$	1,813
>2% - 3%	4,119			1,401			1,608			7,128
>3% - 4%	9,157			567			507			10,231
>4% - 5%	2,439			443			1			2,883
>5% - 6%	326			—			—			326
Subtotal	16,041			2,489			3,851			22,381
Fixed Annuities
1%	$	225		$	493		$	2,020		$	2,738
>1% - 2%	443			227			1,897			2,567
>2% - 3%	1,518			83			2			1,603
>3% - 4%	282			3			—			285
>4% - 5%	251			—			—			251
>5% - 6%	2			—			—			2
Subtotal	2,721			806			3,919			7,446
Total	$	18,762		$	3,295		$	7,770		$	29,827

Percentage of Total	63		%	11		%	26		%	100		%

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We are active in mitigating the impact of a continued low interest rate environment through product design, as well as adjusting crediting rates on current in-force policies and contracts. We also manage interest rate and reinvestment risks through our asset/liability management process. Our asset/liability management programs and procedures involve the monitoring of asset and liability durations; cash flow testing under various interest rate scenarios; and the regular rebalancing of assets and liabilities with respect to yield, credit and market risk, and cash flow characteristics. These programs also incorporate the use of derivative financial instruments primarily to reduce our exposure to interest rate risk, inflation risk, currency exchange risk, volatility risk, and equity market risk.

IMPACT OF INFLATION

Inflation increases the need for life insurance. Many policyholders who once had adequate insurance programs may increase their life insurance coverage to provide the same relative financial benefit and protection. Higher interest rates may result in higher sales of certain of our investment products.

The higher interest rates that have traditionally accompanied inflation could also affect our operations. Policy loans increase as policy loan interest rates become relatively more attractive. As interest rates increase, disintermediation of stable value and annuity account balances and individual life policy cash values may increase. The fair value of our fixed-rate, long-term investments may decrease, we may be unable to implement fully the interest rate reset and call provisions of our commercial mortgage loans, and our ability to make attractive commercial mortgage loans, including participation commercial mortgage loans, may decrease. In addition, participation commercial mortgage loan income may decrease. The difference between the interest rate earned on investments and the interest rate credited to life insurance and investment products may also be adversely affected by rising interest rates. During the periods covered by this report, we believe inflation has not had a material impact on our business.

RECENTLY ISSUED ACCOUNTING STANDARDS

See Note 2, Summary of Significant Accounting Policies, to the consolidated condensed financial statements for information regarding recently issued accounting standards.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

See Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Market Risk Exposures”.

Item 4. Controls and Procedures

(a) Disclosure controls and procedures

In order to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized, and reported on a timely basis, the Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rule 13a -15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on their evaluation as of the end of the period covered by this Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective. It should be noted that any system of controls, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of any control system is based in part upon certain judgments, including the costs and benefits of controls and the likelihood of future events. Because of these and other inherent limitations of control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within the Company have been detected.

(b) Changes in internal control over financial reporting

During the second quarter of 2019, the Company began the conversion and integration of administrative processing into its internal control over financial reporting for Great West & Annuity Insurance Company and certain of its affiliates (“GWL&A”) acquired on June 1, 2019. See Note 3, Significant Transactions, for additional information regarding the transaction with GWL&A. The conversion to the Company’s operating environment was still in process, but not yet completed as of September 30, 2020. The Company has, therefore, included in its internal controls over financial reporting certain additional controls associated with the GWL&A systems that have not yet been integrated into the Company’s operating environment.

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Other than as described in the preceding paragraph, there were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2020, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company’s internal controls exist within a dynamic environment and the Company continually strives to improve its internal controls and procedures to enhance the quality of its financial reporting.

PART II

Item 1A. Risk Factors

The operating results of companies in the insurance industry have historically been subject to significant fluctuations. The factors which could affect the Company’s future results include, but are not limited to, general economic conditions and known trends and uncertainties. In addition to other information set forth in this report, you should carefully consider the risk factors discussed in Part I, Item 1A, Risk Factors, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, which could materially affect the Company’s business, financial condition, or future results of operations which are discussed more fully below.

The novel coronavirus (COVID-19) global pandemic has adversely impacted our business, and the ultimate effect on our business, results of operations, and financial condition will depend on future developments that are highly uncertain, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

Beginning in 2020, the global pandemic related to the novel coronavirus, COVID-19, began to impact the worldwide economy and our results of operations. Because of the size and breadth of this pandemic, all of the direct and indirect consequences of COVID-19 are not yet known and may not emerge for some time. The COVID-19 pandemic has created a higher risk of mortality, negatively impacted the U.S. and global economy, created significant volatility and disruption in capital markets, significantly increased unemployment levels, and fueled concerns that it will lead to a severe global recession. In addition, the pandemic resulted in temporary closures of many businesses and schools and the imposition of social distancing and sheltering in place requirements in many states and local communities. As a result, our ability to sell products through our regular channels and the demand for our products and services could be significantly impacted. The extent to which the COVID-19 pandemic impacts our business, results of operations, or financial condition 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.

Risks presented by the ongoing effects of the COVID-19 pandemic include the following:

•Premiums, Revenues and Policy, and Contractholder Liabilities. We expect that the impact of COVID-19 on general economic activity may negatively impact our premiums, policy fees, other revenues, and our liabilities for certain life and annuity policy/contracts. The degree and type of the impact will depend on the extent and duration of the economic contraction, as well as potential equity market volatility associated with the economic environment.

•Claims and Claims Expense. As a result of the pandemic and ensuing conditions, we have experienced, and we may continue to experience, an elevated incidence and level of life insurance claims. We expect to incur higher claims expense in our life insurance and deferred annuity businesses, partially offset by lower life contingent payments in our payout annuity and structured settlement businesses, as a result of COVID-19 due to increases in mortality. In addition, the anticipated and unknown risks related to COVID-19 may cause additional uncertainty in the process of estimating claims expense reserves. For example, the behavior of claimants and policyholders may change in unexpected ways, and actions taken by governmental bodies, both legislative and regulatory, in reaction to COVID-19 and their related impacts are hard to predict. We are also subject to credit risk in our insurance operations (both with respect to policyholder receivables and reinsurance receivables) which may be exacerbated in times of economic distress. A prolonged continuation of the pandemic or a significant and protracted increase in claims could have a material and adverse effect on our business, results of operations, or financial condition.

•Investments. The disruption in the financial markets related to COVID-19 may adversely affect our investment portfolio, specifically resulting in lower investment income and returns, and lead to further impairments, credit spread widening, credit quality deterioration, ratings downgrades, equity market declines, and the need to establish additional reserves for potential losses related to our commercial mortgage portfolio. Additionally, higher volatility in the equity and credit markets increases hedging costs. There is uncertainty regarding future treasury rates and risk spreads, which may lead to lower investment returns and difficulty forecasting financial results. Disruption in financial markets may also influence overall market liquidity and availability of assets for sale and purchase.

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•Legislative and/or Regulatory Action. Federal, state, and local government actions to address and contain the impact of COVID-19 may adversely affect us. Many state insurance departments are requiring insurers to extend the time allowed for premium payments to avoid the canceling of policies. While many of these consumer accommodations have already expired, they vary in requirements and effective dates, making it difficult to anticipate exact financial impacts. If these extensions continue, premium waivers may significantly exceed our expectations, and our earnings may be negatively impacted. If policyholder lapse and surrender rates or premium waivers significantly exceed our expectations, we may need to change our assumptions, models, or reserves.

•Operational Disruptions and Heightened Cybersecurity Risks. Our operations could be disrupted if key members of our senior management or a significant percentage of our workforce or the workforce of our independent distributors, agents, brokers, or service providers are unable to continue to work because of illness, government directives, or otherwise. Currently, approximately 90% of our employees are working remotely with only a limited number of employees working at certain facilities. The current period of companywide remote work arrangements could introduce additional operational risk, including but not limited to cybersecurity risks, and impair our ability to effectively manage our business.

In addition, a significant interruption of our or third-party system capabilities could result in a deterioration of our ability to write and process new business, provide customer service, pay claims in a timely manner, or perform other necessary administrative and business functions. Having shifted to remote working arrangements, we are more dependent on remote internet and telecommunications services, and we potentially face a heightened risk of cybersecurity attacks and data security incidents.

•Financial Reporting and Controls. Currently, the Company does not expect COVID-19 to affect its ability to timely and accurately account for the assets and liabilities on its balance sheet; however, this could change in future periods. Market dislocations, decreases in observable market activity, or unavailability of information arising, in each case, from the spread of COVID-19, may restrict our access to key inputs used to derive certain estimates and assumptions made in connection with financial reporting or otherwise. Restricted access to such inputs may make our financial statement balances and estimates and assumptions used to run our business subject to greater variability and subjectivity. It is possible that the lingering effects of COVID-19 could cause the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform an intangible asset impairment test and result in an impairment charge being recorded for that period. Although the Company has not experienced a negative effect on its internal controls over financial reporting due to COVID-19, it may experience a negative effect in the future. Further, as the vast majority of our employees are expected to work from home, new processes, procedures, and controls could be required to respond to changes in our business environment. Should any key employees become ill from COVID-19 and unable to work, our ability to operate our internal controls may be adversely affected.

•Reliance on the Performance of Third Parties. We rely on outside parties, including independent third-party distribution channels, data processing servicers, and investment fund managers, among others. While we closely monitor the business continuity activities of these third parties, successful implementation and execution of their business continuity strategies are largely outside of our control. If one or more of these third parties experience operational failures as a result of the impacts from the spread of COVID-19 and governmental reactions thereto, or claim that they cannot perform due to a force majeure, our business, results of operations, or financial condition could be adversely impacted.

Any of the above events could cause, contribute to, or exacerbate the risks and uncertainties enumerated in our Annual Report on Form 10-K or otherwise in this report, and could materially adversely affect our business, results of operations, or financial condition. We have implemented risk management and business continuity plans, performed stress testing, and taken other precautions with respect to the COVID-19 global pandemic. However, such measures may not adequately protect our business from the full impacts of the pandemic.

The Company’s risk management policies, practices, and procedures could leave it exposed to unidentified or unanticipated risks, which could negatively affect its business or result in losses.

The Company has developed risk management policies and procedures and expects to continue enhancing them in the future. Nonetheless, the Company’s policies and procedures to identify, monitor, and manage both internal and external risks may not predict future exposures, which could be different or significantly greater than expected.

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These identified risks may not be the only risks facing the Company. Additional risks and uncertainties not currently known to the Company may adversely affect its business, financial condition and/or results of operations.

The Company may be subject to regulations of, or regulations influenced by, international regulatory authorities or initiatives.

The NAIC and the Company’s state regulators may be influenced by the initiatives of international regulatory bodies, and those initiatives may not translate readily into the legal system under which U.S. insurers must operate. There is increasing pressure to conform to international standards due to the globalization of the business of insurance and the systemic nature of recent financial crises. In addition to developments at the NAIC and in the United States, the Financial Stability Board (“FSB”), consisting of representatives of national financial authorities of the G20 nations, and the G20 have issued a series of proposals intended to produce significant changes in how financial companies, particularly companies that are members of large and complex financial groups, should be regulated.

The International Association of Insurance Supervisors (“IAIS”), at the direction of the FSB, has published an evolving method for identifying “global systemically important insurers” (“G-SIIs”) and high-level policy measures that will apply to G-SIIs. The FSB, working with national authorities and the IAIS, has designated insurance groups as G-SIIs in the past. The IAIS is developing the policy measures which include higher capital requirements and enhanced supervision. The FSB has not published a new list of G-SIIs since 2016 because the IAIS has developed a holistic framework for the assessment and mitigation of systemic risk in the insurance sector (the “Holistic Framework”). The Holistic Framework was approved by the IAIS in November 2019 and is expected to be introduced in countries for assessment beginning in 2020. The Holistic Framework proposes enhanced supervisory and corrective measures and disclosures for any build-up of systemic risk in liquidity risk, macroeconomic exposure, counterparty exposure and substitutability. Since the Holistic Framework is expected to produce an improved system for assessing and mitigating systemic risk in the insurance sector, the FSB has decided to suspend G-SII identification until November 2022, at which point it will review whether to resume or discontinue the G-SII designation system. Although none of PLC, the Company, or Dai-ichi Life has been designated as a G-SII, the list of designated insurers may be updated in the future by the FSB. It is possible that due to the size and reach of the combined Dai-ichi Life group, or a change in the method of identifying G-SIIs, the combined group, including PLC and the Company, could be designated as a G-SII.

The IAIS has also developed a common framework (“ComFrame”) for the supervision of internationally active insurance groups (“IAIGs”). ComFrame was adopted by the IAIS in November 2019 and is currently in an implementation phase. The IAIS plans to integrate into ComFrame in the future a new global capital measurement standard for insurance groups deemed to be IAIGs that could exceed the sum of state or other local capital requirements and contemplates “group wide supervision” across national boundaries and legal entities, which could require each IAIG to conduct its own risk and solvency assessment to monitor and manage its overall solvency. It is likely that the combined Dai-ichi Life group will be deemed an IAIG, in which case it, and PLC and the Company, may be subject to supervision requirements, capital measurement standards, and enhanced disclosures beyond those applicable to any competitors who are not designated as an IAIG.

PLC’s sole shareowner, Dai-ichi Life, is also subject to regulation by the Japanese Financial Services Authority (“JFSA”). Under applicable laws and regulations, Dai-ichi Life is required to provide notice to or obtain the consent of the JFSA prior to taking certain actions or engaging in certain transactions, either directly or indirectly through its subsidiaries, including PLC, the Company, and its consolidated subsidiaries, which could limit the ability of PLC and the Company to engage in certain transactions or business initiatives.

While it is not yet known how or the extent to which the Company will be impacted by these regulations, the Company may experience increased costs of compliance, increased disclosure, less flexibility in capital management, and more burdensome regulation and capital requirements for specific lines of business. In addition, such regulations could impact the business of the Company and its reserve and capital requirements, financial condition, or results of operations.

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The Company’s use of affiliate and captive reinsurance companies to finance statutory reserves related to its fixed annuity and term and universal life products and to reduce volatility affecting its variable annuity products may be limited or adversely affected by regulatory action, pronouncements, and interpretations.

The Company currently uses a captive reinsurance company to finance certain statutory reserves based on a regulation entitled “Valuation of Life Insurance Policies Model Regulation,” commonly known as “Regulation XXX,” and a supporting guideline entitled “The Application of the Valuation of Life Insurance Policies Model Regulation,” commonly known as “Guideline AXXX,” which are associated with term life insurance and universal life insurance with secondary guarantees, respectively, as well as to reduce the volatility in statutory risk-based capital associated with certain guaranteed minimum withdrawal and death benefit riders associated with certain of the Company’s variable annuity products.

The NAIC has adopted Actuarial Guideline XLVIII (“AG48”) and the substantially similar “Term and Universal Life Insurance Reserve Financing Model Regulation” (the “Reserve Model”) which establish national standards for new reserve financing arrangements for term life insurance and universal life insurance with secondary guarantees. AG48 and the Reserve Model govern collateral requirements for captive reinsurance arrangements. In order to obtain reserve credit, AG48 and the Reserve Model require a minimum level of funds, consisting of primary and other securities, to be held by or on behalf of ceding insurers as security under each captive life reinsurance treaty. As a result of AG48 and the Reserve Model, the implementation of new captive structures in the future may be less capital efficient, lead to lower product returns and/or increased product pricing, or result in reduced sales of certain products. In some circumstances, AG48 and the Reserve Model could impact the Company’s ability to engage in certain reinsurance transactions with non-affiliates.

The NAIC’s 2020 Valuation Manual includes changes to current rules and regulations applicable to the determination of variable annuity reserves and risk-based capital. The changes are intended to decrease incentives for insurers to establish variable annuities captives and will apply to both in-force and new business. The new rules and regulations have a January 1, 2020 effective date and an optional 3- to 7-year transition period from current rules and regulations, which the Company may elect to utilize.

The NAIC adopted revisions to the Part A Laws and Regulations Preamble (the “Preamble”) of the NAIC Financial Regulation Standards and Accreditation Program that includes within the definition of “multi-state insurer” certain insurer-owned captives and special purpose vehicles that are single-state licensed but assume reinsurance from cedants operating in multiple states. The revised definition subjects certain captives, including XXX/AXXX captives, variable annuity and long-term care captives, to all of the accreditation standards applicable to other traditional multi-state insurers, including standards related to capital and surplus requirements, risk-based capital requirements, investment laws, and credit for reinsurance laws. Although we do not expect the revised definition to affect our existing life insurance captives (or our ability to engage in life insurance captive transactions in the future), such application will likely prevent us from engaging in variable annuity captive transactions on the same or a similar basis as in the past and, if applied retroactively, would likely cause PLC to recapture business from and unwind PLC’s existing variable annuity captive (“VA Captive”).

As of April 1, 2020, the Company uses an affiliated Bermuda domiciled reinsurance company, Protective Life Reinsurance Bermuda Ltd. (“PL Re”) to reinsure certain fixed annuity business. PL Re is licensed as a Class C entity for affiliate reinsurance and holds reserves based on Bermuda insurance regulations.

Any regulatory action or change in interpretation that materially adversely affects the Company’s use or materially increases the Company’s cost of using captives or reinsurers for the affected business, either retroactively or prospectively, could have a material adverse impact on the Company’s financial condition or results of operations. If the Company were required to discontinue its use of captives or affiliate reinsurers for intercompany reinsurance transactions on a retroactive basis, adverse impacts would include early termination fees payable to third party finance providers with respect to certain structures, diminished capital position, and higher cost of capital. Additionally, finding alternative means to support policy liabilities efficiently is an unknown factor that would be dependent, in part, on future market conditions and the Company’s ability to obtain required regulatory approvals. On a prospective basis, discontinuation of the use of captives or affiliate reinsurers could impact the types, amounts and pricing of products offered by the Company and its subsidiaries.

Laws, rules, and regulations promulgated in connection with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act may adversely affect the results of operations or financial condition of the Company.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) enacted in July 2010 made sweeping changes to the regulation of financial services entities, products and markets. We cannot predict with certainty how the Dodd-Frank Act will continue to affect the financial markets generally, or impact our business, ratings, results of operations, financial condition or liquidity.

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Among other things, the Dodd-Frank Act imposed a comprehensive new regulatory regime on the over-the-counter (“OTC”) derivatives marketplace and granted new joint regulatory authority to the SEC and the U.S. Commodity Futures Trading Commission (“CFTC”) over OTC derivatives. While the SEC and CFTC continue to promulgate rules required by the Dodd-Frank Act, most rules have been finalized and, as a result, certain of the Company’s derivatives operations are subject to, among other things, new recordkeeping, reporting and documentation requirements and new clearing requirements for certain swap transactions (currently, certain interest rate swaps and index-based credit default swaps; cleared swaps require the posting of margin to a clearinghouse via a futures commission merchant and, in some case, to the futures commission merchant as well).

In 2015, U.S. federal banking regulators and the CFTC adopted regulations that require swap dealers, security-based swap dealers, major swap participants, and major security-based swap participants (“Swap Entities”) to post margin to, and collect margin from, their OTC swap counterparties (the “Margin Rules”). Under the Margin Rules, the Company is considered a “financial end-user” that, when facing a Swap Entity, is required to post and collect variation margin for its non-cleared swaps. In addition, depending on its derivatives exposure, the Company may be required to post and collect initial margin as well. The initial margin requirements of the Margin Rules have been phased-in over a period of five years based on the average aggregate notional amount of the Swap Entity’s (combined with all of its affiliates) and its counterparty’s (combined with all of its affiliates) swap positions. It is anticipated that the Company will not be subject to the initial margin requirements until the “Phase 5” deadline under the Margin Rules, which deadline is currently set for September 1, 2021. The Basel Committee on Banking Supervision (“BCBS”) and the International Organization of Securities Commissions (“IOSCO”) recommended extending this deadline to September 1, 2021, and that extension was approved by the CFTC and US Prudential Regulators during the second quarter. The variation margin requirement took effect on September 1, 2016, for swaps where both the Swap Entity (and its affiliates) and its counterparty (and its affiliates) have an average daily aggregate notional amount of swaps for March, April, and May of 2016 that exceeds $3 trillion. Otherwise, the variation margin requirement, to which we are subject, took effect on March 1, 2017.

Other regulatory requirements relating to derivatives may indirectly impact us. For example, non-U.S. counterparties of the Company may also be subject to non-U.S. regulation of their derivatives transactions with the Company. In addition, counterparties regulated by the Prudential Regulators (which consist of the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Federal Housing Finance Agency) are subject to liquidity, leverage, and capital requirements that impact their derivatives transactions with the Company. Collectively, these new requirements have increased the direct and indirect costs of our derivatives activities and may further increase them in the future.

Pursuant to the Dodd-Frank Act, in December 2013, the Federal Insurance Office (“FIO”) issued a report on how to modernize and improve the system of insurance regulation in the United States and, in December 2014, the FIO published its report on the breadth and scope of the global reinsurance market. In this reinsurance report, the FIO indicates that reinsurance collateral continues to be at the forefront of its thinking with regard to potential direct federal involvement in insurance regulation. Specifically, the FIO’s reinsurance report argues that federal officials are well-positioned to make determinations regarding whether a foreign jurisdiction has sufficiently effective regulation and, in doing so, consider other prudential issues pending in the U.S. and between the U.S. and affected foreign jurisdictions. The reinsurance report notes that work continues towards initiating negotiations for covered agreements with leading reinsurance jurisdictions that may have the effect of preempting inconsistent state laws. The U.S. entered into such covered agreements with the E.U. in 2017 and with the United Kingdom in 2018. It remains to be seen whether the U.S. will negotiate covered agreements with other major U.S. trading partners. More generally, it remains to be seen whether either of the FIO’s reports will affect the manner in which insurance and reinsurance are regulated in the U.S. and therefore affect the Company’s business.

The Dodd-Frank Act also established the Financial Stability Oversight Council (the “FSOC”), which is authorized to determine whether an insurance company is systematically significant and to recommend that it should be subject to enhanced prudential standards and to supervision by the Board of Governors of the Federal Reserve System. In April 2012, the Financial Stability Oversight Council (the “FSOC”) approved its final rule for designating non-bank financial companies as systemically important financial institutions (“SIFI”). Under the final rule, the Company’s assets, liabilities, and operations do not currently satisfy the financial thresholds that serve as the first step of the three-stage process to designate a non-bank financial company as a SIFI. In December 2019, the FSOC released final interpretive guidance for designating non-bank SIFIs that incorporates an activities-based approach (“ABA”) and that provides that the FSOC will pursue entity-specific determinations only if a potential risk or threat cannot be addressed through an ABA. While recent developments suggest that it is unlikely that FSOC will be designating additional non-bank financial companies as systematically significant, there can be no assurance of that unless and until FSOC’s authority to do so has been rescinded.

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The Consumer Financial Protection Bureau (“CFPB”) has supervisory authority over certain non-banks whose activities or products it determines pose risks to consumers, and has issued regulations under the Home Mortgage Disclosure Act (“HMDA”). Those regulations relate to reporting data relative to Company loans made on multi-family apartments, seniors living housing, manufactured housing communities, and any mixed-use properties which contain a residential component, and could require the Company to, among other things, collect and disclose extensive data related to its lending practices. The CFPB has amended Regulation C of the HMDA, to raise the reporting threshold based on the number of originated loans effective July 1, 2020. At its current volume, the Company expects that it will no longer be subject to the HMDA reporting requirements under the revised threshold. However, the Company may become subject to reporting requirements in the future, and it is unclear how burdensome compliance with the rules under the HMDA may become.

The Company and certain of its subsidiaries sell products that may be regulated by the CFPB. The CFPB continues to bring enforcement actions involving a growing number of issues, including actions brought jointly with state Attorneys General, which could directly or indirectly affect the Company or any of its subsidiaries. The Company is unable at this time to predict the impact of these activities on the Company.

Pursuant to Section 171 of the Dodd-Frank Act, the Board of Governors of the Federal Reserve System (“the Board”) has released a notice of proposed rulemaking that proposes a method, termed the Building Block Approach (the “BBA”), for measuring and prescribing minimum capital for U.S. insurance depository institution holding companies. The Board retains the right to apply the BBA to insurance firms designated by the FSOC as systemically important. The BBA prescribes generally higher minimum levels of group capital than current state-based standards. While it is not currently subject to the BBA, the Company is unable to predict the impact that the BBA may have on competing NAIC and international group capital standards.

Although the full impact of the Dodd-Frank Act cannot be determined until all of the various studies mandated by the law are conducted and all implementing regulations are adopted, many of the legislation’s requirements could have an adverse impact on the financial services and insurance industries. In addition, the Dodd-Frank Act could make it more expensive for us to conduct business, require us to make changes to our business model or satisfy increased capital requirements.

New and amended regulations regarding the standard of care or standard of conduct applicable to investment professionals, insurance agencies, and financial institutions that recommend or sell annuities or life insurance products may have a material adverse impact on our ability to sell annuities and other products and to retain in-force business and on our financial condition or results of operations.

Sales of life insurance policies and annuity contracts offered by the Company are subject to regulations relating to sales practices adopted by a variety of federal and state regulatory authorities. Certain annuities and life insurance policies such as variable annuities and variable universal life insurance are regulated under the federal securities laws administered by the SEC. On June 5, 2019, the SEC adopted a comprehensive package of rulemakings and interpretations relating to the standard of conduct applicable to broker-dealers, investment advisers, and their representatives when making certain recommendations to retail customers. Regulation Best Interest (“Regulation BI”), a new rule establishing a “best interest” standard of conduct for broker-dealers and their natural associated persons applies when making recommendations to retail customers of any securities transaction or investment strategy involving securities or regarding the opening of an account. Specifically, Regulation BI requires a broker-dealer (or associated person) to act in the retail customer’s best interest and not place its (or his or her) own interests ahead of the retail customer’s interests. In addition to Regulation BI, the SEC also adopted a new rule and amended existing rules to require broker-dealers and registered investment advisers to provide a brief relationship summary to retail investors (“Form CRS Rules”). The Form CRS Rules are intended to assist retail investors with their initial selection of, and ongoing decision to maintain an existing relationship with, a financial professional or firm by summarizing in one place certain specified information about the broker-dealer or investment adviser. The obligations under Regulation BI and Form CRS became effective on June 30, 2020. The rulemaking package also included two interpretations: (i) the investment adviser interpretation, which clarifies certain aspects of the standard of conduct applicable to registered investment advisers under section 206 of the Investment Advisers Act of 1940 (“Advisers Act”), and (ii) the “solely incidental” interpretation, which clarifies the broker-dealer exclusion from the definition of “investment adviser” under section 202 of the Advisers Act.

In addition, broker-dealers, insurance agencies and other financial institutions sell the Company’s annuities to employee benefit plans governed by provisions of the Employee Retirement Income Security Act (“ERISA”) and Individual Retirement Accounts (“IRAs”) that are governed by similar provisions under the Internal Revenue Code (the “Code”). Consequently, our activities and those of the firms that sell the Company’s products are subject to restrictions that require ERISA fiduciaries to perform their duties solely in the interests of ERISA plan participants and beneficiaries, and that prohibit ERISA fiduciaries from causing a covered plan or retirement account to engage in certain prohibited transactions absent an exemption. The DOL issued its fiduciary rule package on June 29, 2020 and published in the Federal Register on July 7, 2020.

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The NAIC has finalized revisions to the Suitability in Annuity Transactions Model Regulation which is intended to impose a higher standard of care on insurers who sell annuities. NAIC’s work largely mirrors the SEC’s Regulation Best Interest, which also introduces a higher standard of care for broker-dealers. Likewise, several states are considering or have adopted legislation or regulatory measures that would implement new requirements and standards applicable to the sale of annuities and, in some cases, life insurance products. These standards vary widely in scope, applicability, and timing of implementation. The adoption and enactment of these or any revised standards as law or regulation could have a material adverse effect upon the manner in which the Company’s products are sold and impact the overall market for such products.

There remains significant uncertainty surrounding the final form that these regulations may take. Our current distributors may continue to move forward with their plans to limit the number of products they offer, including the types of products offered by the Company. The Company may find it necessary to change sales representative and/or broker compensation, to limit the assistance or advice it can provide to owners of the Company’s annuities, to replace or engage additional distributors, or otherwise change the manner in which it designs, supervises, and supports sales of its annuities and, where applicable, life insurance products. In addition, the Company continues to incur expenses in connection with initial and ongoing compliance obligations with respect to such rules, and in the aggregate these expenses may be significant. Any of the foregoing regulatory, legislative, or judicial measures or the reaction to such activity by consumers or other members of the insurance industry could have a material adverse impact on our ability to sell annuities and other products, to retain in-force business, and on our financial condition or results of operations.

The Company’s ability to maintain competitive unit costs is dependent upon the level of new sales and persistency of existing business.

The Company’s ability to maintain competitive unit costs is dependent upon a number of factors, such as the level of new sales, persistency of existing business, and expense management. A decrease in sales or persistency without a corresponding reduction in expenses may result in higher unit costs. Additionally, a decrease in persistency of existing business may result in fluctuations in the level of DAC or VOBA amortization or higher or more rapid amortization of DAC or VOBA and thus higher unit costs and lower reported earnings. Although many of the Company’s products contain surrender charges, the charges decrease over time and may not be sufficient to cover the unamortized DAC or VOBA with respect to the insurance policy or annuity contract being surrendered. Some of the Company’s products do not contain surrender charge features and such products can be surrendered or exchanged without penalty. A decrease in persistency may also result in higher claims.

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Item 6. Exhibits


Exhibit
Number						Document
*3.1						2011 Amended and Restated Charter of Protective Life Insurance Company dated as of June 27, 2011, incorporated by reference to Exhibit 3(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed March 29, 2012 (No. 001-31901).
*3.2						2011 Amended and Restated By-Laws of Protective Life Insurance Company dated as of June 27, 2011, incorporated by reference to Exhibit 3(b) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed March 29, 2012 (No. 001-31901).
31.1						Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2						Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1						Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2						Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS						XBRL Instance Document - the instance document does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document
101.SCH						Inline XBRL Taxonomy Extension Schema Document
101.CAL						Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF						Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB						Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE						Inline XBRL Taxonomy Extension Presentation Linkbase Document
104						Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

*						Incorporated by Reference.

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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	PROTECTIVE LIFE INSURANCE COMPANY


Date: November 13, 2020		By:	/s/ PAUL R. WELLS
			Paul R. Wells
			Chief Accounting Officer

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