10-Q 1 plc3311610-q.htm PLC Q1 10-Q 2016 10-Q

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
 
ý  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2016
 
or
 
o  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 001-11339
 
PROTECTIVE LIFE CORPORATION
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
95-2492236
(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)
 
Registrant’s telephone number, including area code (205) 268-1000
 
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 ý No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes ý No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
 
Accelerated Filer o
 
 
 
Non-accelerated filer x
 
Smaller Reporting Company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No ý
 
Number of shares of Common Stock, $0.01 Par Value, outstanding as of April 18, 2016:  1,000

 


1


PROTECTIVE LIFE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED MARCH 31, 2016
 
TABLE OF CONTENTS
 
PART I
 
 
 
 
Page
Item 1.
Financial Statements (unaudited):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
 
 
 
Item 1A.
 
Item 2.
 
Item 6.
 
 
 


1


PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
 
 
Successor Company
 
Predecessor Company
 
For The Three Months Ended March 31, 2016
 
February 1, 2015
to
March 31, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands, 
Except Per Share Amounts)
Revenues
 

 
 

 
 

Premiums and policy fees
$
852,795

 
$
509,008

 
$
261,866

Reinsurance ceded
(310,327
)
 
(141,401
)
 
(89,956
)
Net of reinsurance ceded
542,468


367,607


171,910

Net investment income
475,117

 
288,872

 
175,180

Realized investment gains (losses):
 

 
 

 
 

Derivative financial instruments
(73,499
)
 
33,641

 
(123,274
)
All other investments
81,728

 
(35,056
)
 
81,153

Other-than-temporary impairment losses
(2,769
)
 

 
(636
)
Portion recognized in other comprehensive income (before taxes)
152

 

 
155

Net impairment losses recognized in earnings
(2,617
)



(481
)
Other income
103,716

 
67,263

 
36,421

Total revenues
1,126,913


722,327


340,909

Benefits and expenses
 

 
 

 
 

Benefits and settlement expenses, net of reinsurance ceded: (2016 and 2015 Successor - $299,873 and $117,208); (2015 Predecessor - $87,674)
714,545

 
486,299

 
267,287

Amortization of deferred policy acquisition costs and value of business acquired
30,746

 
27,897

 
4,072

Other operating expenses, net of reinsurance ceded: (2016 and 2015 Successor - $48,311 and $35,036); (2015 Predecessor - $17,056)
209,780

 
115,304

 
68,368

Total benefits and expenses
955,071


629,500


339,727

Income before income tax
171,842

 
92,827

 
1,182

Income tax expense (benefit)
56,494

 
29,966

 
(327
)
Net income
$
115,348


$
62,861


$
1,509

 
 
 
 
 
 
Net income - basic
 

 
 

 
$
0.02

Net income - diluted
 

 
 

 
$
0.02

Cash dividends paid per share
 

 
 

 
$

 
 
 
 
 
 
Average shares outstanding - basic
 

 
 

 
80,452,848

Average shares outstanding - diluted
 

 
 

 
81,759,287

 
See Notes to Consolidated Condensed Financial Statements


2


PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
 
Successor Company
 
Predecessor Company
 
For The Three Months Ended March 31, 2016
 
February 1, 2015
to
March 31, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Net income
$
115,348

 
$
62,861

 
$
1,509

Other comprehensive income (loss):
 

 
 

 
 

Change in net unrealized gains (losses) on investments, net of income tax: (Successor 2016 - $236,350; 2015 - $(157,355)); (Predecessor 2015 - $259,738)
438,936

 
(292,233
)
 
482,370

Reclassification adjustment for investment amounts included in net income, net of income tax: (Successor 2016 - $(1,028); 2015 - $(131)); (Predecessor 2015 - $(2,244))
(1,910
)
 
(242
)
 
(4,166
)
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: (Successor 2016 - $159; 2015 - $0); (Predecessor 2015 - $(131))
294

 

 
(243
)
Change in accumulated (loss) gain - derivatives, net of income tax: (Successor 2016 - $0; 2015 - $(12)); (Predecessor 2015 - $5)

 
(23
)
 
9

Reclassification adjustment for derivative amounts included in net income, net of income tax: (Successor 2016 - $0; 2015 - $31); (Predecessor 2015 - $13)

 
59

 
23

Change in postretirement benefits liability adjustment, net of income tax: (Successor 2016 - $0; 2015 - $0); (Predecessor 2015 - $(6,475))

 

 
(12,025
)
Total other comprehensive income (loss)
437,320


(292,439
)

465,968

Total comprehensive income (loss)
$
552,668


$
(229,578
)

$
467,477

 
See Notes to Consolidated Condensed Financial Statements


3


PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
 
 
Successor Company
 
As of
March 31, 2016
 
As of
December 31, 2015
 
(Dollars In Thousands)
Assets
 

 
 

Fixed maturities, at fair value (amortized cost: Successor 2016 - $39,049,618; 2015 - $38,457,049)
$
37,139,180

 
$
35,573,250

Fixed maturities, at amortized cost (fair value: Successor 2016 - $2,757,674; 2015 - $515,000)
2,783,302

 
593,314

Equity securities, at fair value (cost: Successor 2016 - $715,478; 2015 - $732,485)
722,149

 
739,263

Mortgage loans (related to securitizations: Successor 2016 - $331,612; 2015 - $359,181)
5,689,960

 
5,662,812

Investment real estate, net of accumulated depreciation (2016 - $170; 2015 - $133)
8,231

 
11,118

Policy loans
1,684,088

 
1,699,508

Other long-term investments
765,739

 
622,567

Short-term investments
449,278

 
268,718

Total investments
49,241,927


45,170,550

Cash
354,144

 
396,072

Accrued investment income
489,820

 
473,598

Accounts and premiums receivable
111,457

 
62,459

Reinsurance receivables
5,515,548

 
5,536,751

Deferred policy acquisition costs and value of business acquired
1,868,995

 
1,558,808

Goodwill
732,443

 
732,443

Other intangibles, net of accumulated amortization (Successor 2016 - $48,197; 2015 - $37,869)
634,803

 
645,131

Property and equipment, net of accumulated depreciation (Successor 2016 - $10,537; 2015 - $8,277)
102,875

 
102,865

Other assets
156,109

 
153,222

Income tax receivable
9,845

 

Assets related to separate accounts
 
 
 

Variable annuity
12,789,776

 
12,829,188

Variable universal life
819,259

 
827,610

Total assets
$
72,827,001


$
68,488,697

 
See Notes to Consolidated Condensed Financial Statements


4


PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(continued)
(Unaudited)
 
 
Successor Company
 
As of
March 31, 2016
 
As of
December 31, 2015
 
(Dollars In Thousands)
Liabilities
 

 
 

Future policy benefits and claims
$
30,391,287

 
$
29,703,897

Unearned premiums
730,845

 
723,536

Total policy liabilities and accruals
31,122,132

 
30,427,433

Stable value product account balances
2,098,870

 
2,131,822

Annuity account balances
10,765,723

 
10,719,862

Other policyholders’ funds
1,212,476

 
1,069,572

Other liabilities
2,131,005

 
1,693,310

Income tax payable

 
49,957

Deferred income taxes
1,344,066

 
997,281

Non-recourse funding obligations
2,866,735

 
685,684

Repurchase program borrowings
660,000

 
438,185

Debt
1,525,507

 
1,588,806

Subordinated debt securities
446,903

 
448,763

Liabilities related to separate accounts
 

 
 

Variable annuity
12,789,776

 
12,829,188

Variable universal life
819,259

 
827,610

Total liabilities
67,782,452


63,907,473

Commitments and contingencies - Note 10
0

 
0

Shareowner’s equity
 

 
 

Common Stock, Successor: 2016 and 2015 - $.01 par value; shares authorized: 5,000; shares issued: 1,000

 

Additional paid-in-capital
5,554,059

 
5,554,059

Treasury stock, at cost

 

Retained earnings
294,304

 
268,299

Accumulated other comprehensive income (loss):
 

 
 

Net unrealized gains (losses) on investments, net of income tax: (Successor 2016 - $(435,963); 2015 - $(671,285))
(809,646
)
 
(1,246,672
)
Net unrealized (losses) gains relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (Successor 2016 - $(53); 2015 - $(212))
(99
)
 
(393
)
Postretirement benefits liability adjustment, net of income tax: (Successor 2016 - $3,194; 2015 - $3,194)
5,931

 
5,931

Total shareowner’s equity
5,044,549


4,581,224

Total liabilities and shareowner’s equity
$
72,827,001


$
68,488,697

 
See Notes to Consolidated Condensed Financial Statements


5


PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF SHAREOWNER’S EQUITY
(Unaudited)

 
Common
Stock
 
Additional
Paid-In-
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareowner’s
equity
 
(Dollars In Thousands)
Successor Company
 

 
 

 
 

 
 

 
 

 
 

Balance, December 31, 2015
$

 
$
5,554,059

 
$

 
$
268,299

 
$
(1,241,134
)
 
$
4,581,224

Net income for the three months ended March 31, 2016
 

 
 

 
 

 
115,348

 
 

 
115,348

Other comprehensive income
 

 
 

 
 

 
 

 
437,320

 
437,320

Comprehensive income for the three months ended March 31, 2016
 

 
 

 
 

 
 

 
 

 
552,668

Dividends to parent
 
 
 
 
 
 
(89,343
)
 
 
 
(89,343
)
Balance, March 31, 2016
$

 
$
5,554,059

 
$

 
$
294,304

 
$
(803,814
)
 
$
5,044,549



 
See Notes to Consolidated Condensed Financial Statements


6


PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 

 
Successor Company
 
Predecessor Company
 
For The Three
Months Ended
March 31, 2016
 
February 1, 2015
to
March 31, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Cash flows from operating activities
 
 
 

 
 

Net income
$
115,348

 
$
62,861

 
$
1,509

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

 
 

Realized investment (gains) losses
(5,612
)
 
1,415

 
42,602

Amortization of DAC and VOBA
30,746

 
27,897

 
4,072

Capitalization of DAC
(80,228
)
 
(49,191
)
 
(22,489
)
Depreciation and amortization expense
13,829

 
8,335

 
820

Deferred income tax
111,312

 
28,509

 
30,791

Accrued income tax
(59,802
)
 
80,549

 
(32,803
)
Interest credited to universal life and investment products
156,748

 
130,209

 
79,088

Policy fees assessed on universal life and investment products
(314,612
)
 
(188,403
)
 
(90,288
)
Change in reinsurance receivables
21,203

 
11,571

 
(85,081
)
Change in accrued investment income and other receivables
(55,181
)
 
(6,242
)
 
(5,789
)
Change in policy liabilities and other policyholders’ funds of traditional life and health products
(28,581
)
 
(112,286
)
 
176,980

Trading securities:
 

 
 

 
 

Maturities and principal reductions of investments
23,280

 
27,556

 
17,946

Sale of investments
112,158

 
31,584

 
26,422

Cost of investments acquired
(131,030
)
 
(75,342
)
 
(27,289
)
Other net change in trading securities
22,791

 
51,908

 
(26,901
)
Amortization of premiums and accretion of discounts on investments and mortgage loans
97,131

 
67,285

 
12,930

Change in other liabilities
90,571

 
(222,769
)
 
238,592

Other, net
(10,303
)
 
77,909

 
(149,889
)
Net cash provided by (used in) operating activities
$
109,768

 
$
(46,645
)
 
$
191,223















See Notes to Consolidated Condensed Financial Statements


 

7


PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)


 
Successor Company
 
Predecessor Company

 
For The Three
Months Ended
March 31, 2016
 
February 1, 2015
to
March 31, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)

Cash flows from investing activities
 

 
 

 
 

Maturities and principal reductions of investments, available-for-sale
$
290,533

 
$
45,713

 
$
59,028

Sale of investments, available-for-sale
468,021

 
712,281

 
191,062

Cost of investments acquired, available-for-sale
(1,348,046
)
 
(1,188,255
)
 
(149,887
)
Change in investments, held-to-maturity
(2,208,000
)
 
(20,000
)
 

Mortgage loans:
 

 
 

 
 

New lendings
(271,230
)
 
(248,508
)
 
(100,530
)
Repayments
226,869

 
223,644

 
45,741

Change in investment real estate, net
2,644

 
21

 
7

Change in policy loans, net
15,420

 
16,502

 
6,365

Change in other long-term investments, net
7,648

 
(34,077
)
 
(25,339
)
Change in short-term investments, net
(199,246
)
 
11,049

 
(40,314
)
Net unsettled security transactions
123,117

 
5,100

 
37,510

Purchase of property and equipment
(3,649
)
 
(709
)
 
(649
)
Amounts received from reinsurance transaction
325,800

 

 

Net cash (used in) provided by investing activities
$
(2,570,119
)
 
$
(477,239
)
 
$
22,994

Cash flows from financing activities
 

 
 

 
 

Borrowings under line of credit arrangements and debt
$
90,000

 
$
155,000

 
$

Principal payments on line of credit arrangement and debt
(127,888
)
 
(110,700
)
 
(60,000
)
Issuance (repayment) of non-recourse funding obligations
2,179,700

 
20,000

 

Repurchase program borrowings
221,815

 
460,123

 

Dividends to shareowners
(89,343
)
 

 

Investment product deposits and change in universal life deposits
697,099

 
462,674

 
169,233

Investment product withdrawals
(552,960
)
 
(471,218
)
 
(240,147
)
Other financing activities, net

 
68

 
(4
)
Net cash provided by (used in) financing activities
$
2,418,423

 
$
515,947

 
$
(130,918
)
Change in cash
(41,928
)
 
(7,937
)
 
83,299

Cash at beginning of period
396,072

 
462,710

 
379,411

Cash at end of period
$
354,144

 
$
454,773

 
$
462,710












See Notes to Consolidated Condensed Financial Statements



8


PROTECTIVE LIFE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 
1.                                      BASIS OF PRESENTATION
 
Basis of Presentation
 
On February 1, 2015, Protective Life Corporation (the “Company”) became a wholly owned subsidiary of The Dai-ichi Life Insurance Company, Limited, a kabushiki kaisha organized under the laws of Japan (“Dai-ichi Life”), when DL Investment (Delaware), Inc. a wholly owned subsidiary of Dai-ichi Life, merged with and into the Company (the "Merger"). Prior to February 1, 2015, and for the periods reported as “predecessor”, the Company’s stock was publicly traded on the New York Stock Exchange. Subsequent to the Merger date, the Company remains as an SEC registrant within the United States. The Company is a holding company with subsidiaries that provide financial services through the production, distribution, and administration of insurance and investment products. 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. Founded in 1907, Protective Life Insurance Company (“PLICO”) is the Company’s largest operating subsidiary.
 
In conjunction with the Merger, the Company elected to apply “pushdown” accounting by applying the guidance allowed by ASC Topic 805, Business Combinations, including the initial recognition of most of the Company’s assets and liabilities at fair value as of the acquisition date, and similarly recognizing goodwill calculated based on the terms of the transaction and the fair value of the new basis of net assets of the Company. The new basis of accounting will be the basis of the accounting records for assets and liabilities held at the acquisition date in the preparation of future financial statements and related disclosures after the Merger date.
 
These 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. Such accounting principles differ from statutory reporting practices used by insurance companies in reporting to state regulatory authorities. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair statement of the results for the interim periods presented. Operating results for the three months ended March 31, 2016 (Successor Company) are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2016 (Successor Company). The year-end consolidated condensed financial data included herein was derived from audited financial statements but does not include all disclosures required by GAAP within this report. 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, 2015 (Successor Company).
 
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.
 
Entities Included
 
The consolidated condensed financial statements for the predecessor and successor periods presented in this report include the accounts of Protective Life Corporation and subsidiaries and its 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 significant accounting policies, see Note 2 to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (Successor Company). There were no significant changes to the Company's accounting policies during the three months ended March 31, 2016 (Successor Company).
 
Accounting Pronouncements Recently Adopted
 
Accounting Standards Update ("ASU") No. 2015-02-Consolidation-Amendments to the Consolidation Analysis. This Update makes several targeted changes to generally accepted accounting principles, including a) eliminating the presumption that a general partner should consolidate a limited partnership and b) eliminating the consolidation model specific to limited partnerships. The amendments also clarify when fees and related party relationships should be considered in the consolidation of variable interest entities. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2015. The Update did not impact the Company's financial position or results of operations, and the Company is prepared to comply with the revised guidance in future periods.

ASU No. 2015-03-Interest-Imputation of Interest. The objective of this Update is to eliminate diversity in practice related to the presentation of debt issuance costs. The amendments in this Update require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. The Update is effective for fiscal years beginning after December 15, 2015, and

9


requires revised presentation of debt issuance costs in all periods presented in the financial statements. The Update did not impact the Company's financial position or results of operations, and the Company is prepared to comply with the revised guidance in future periods.

ASU No. 2015-15 - Interest - Imputation of Interest - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. The objective of this Update is to clarify the SEC Staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements given the lack of guidance on the topic in ASU No. 2015-03. This Update reflects the SEC Staff’s decision to not object when an entity defers and presents debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. The Update did not impact the Company's financial position or results of operations, and the Company is prepared to comply with the revised guidance in future periods.

ASU No. 2015-05 - Intangibles - Goodwill and Other - Internal-Use Software. The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. The Update is effective for annual and interim periods beginning after December 15, 2015. The Update did not impact the Company's financial position or results of operations, and the Company is prepared to comply with the revised guidance in future periods.

 Accounting Pronouncements Not Yet Adopted
 
ASU No. 2014-09-Revenue from Contracts with Customers (Topic 606). This Update provides for significant revisions to the recognition of revenue from contracts with customers across various industries. Under the new guidance, entities are required to apply a prescribed 5-step process to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The accounting for revenues associated with insurance products is not within the scope of this Update. The Update was originally effective for annual and interim periods beginning after December 15, 2016. However, in August 2015, the FASB issued ASU No. 2015-14 - Revenues from Contracts with Customers: Deferral of the Effective Date, to defer the effective date of ASU No. 2014-09 by one year to annual and interim periods beginning after December 15, 2017. Early adoption will be allowed, but not before the original effective date. The Company is reviewing its policies and processes to ensure compliance with the requirements in this Update, upon adoption, and assessing the impact this standard will have on its non-insurance operations.
 
ASU No. 2014-15-Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This Update will require management to assess an entity’s ability to continue as a going concern, and will require footnote disclosures in certain circumstances. Under the updated guidance, management should consider relevant conditions and evaluate whether it is probable that the entity will be unable to meet its obligations within one year after the issuance date of the financial statements. The Update is effective for annual periods ending December 31, 2016 and for annual and interim periods thereafter, with early adoption permitted. The amendments in this Update will not impact the Company’s financial position or results of operations. However, the new guidance will require a formal assessment of going concern by management based on criteria prescribed in the new guidance. The Company is reviewing its policies and processes to ensure compliance with the new guidance.
  
ASU No. 2015-09 - Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts. The amendments in this Update require additional disclosures for short-duration contracts issued by insurance entities. The additional disclosures focus on the liability for unpaid claims and claim adjustment expenses and include incurred and paid claims development information by accident year in tabular form, along with a reconciliation of this information to the statement of financial position. For accident years included in the development tables, the amendments also require disclosure of the total incurred-but-not-reported liabilities and expected development on reported claims, along with claims frequency information unless impracticable. Finally, the amendments require disclosure of the historical average annual percentage payout of incurred claims. With the exception of the current reporting period, claims development information may be presented as supplementary information. The Update is effective for annual periods beginning after December 15, 2015 and interim periods beginning after December 15, 2016. The Company does not anticipate that the additional disclosures introduced in this Update will be material to its financial statements.

ASU No. 2016-01 - Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most notably, the Update requires that equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net income. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2017. The Company is reviewing its policies and processes to ensure compliance with the revised guidance.

ASU No. 2016-02 - Leases. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of leases. The most significant change will relate to the accounting model used by lessees. The Update will require all leases with terms greater than 12 months to be recorded on the balance sheet in the form of a lease asset and liability. The amendments in the Update are effective for annual and interim periods beginning after December 15, 2018. The Company is reviewing its policies and processes to ensure compliance with the revised guidance.
        

10


3.                                      REINSURANCE AND FINANCING TRANSACTIONS
 
On January 15, 2016, PLICO completed the transaction contemplated by the Master Agreement, dated September 30, 2015 (the “Master Agreement”), with Genworth Life and Annuity Insurance Company (“GLAIC”). Pursuant to the Master Agreement, effective January 1, 2016, PLICO entered into a reinsurance agreement (the “Reinsurance Agreement”) under the terms of which PLICO coinsures certain term life insurance business of GLAIC (the “GLAIC Block”). In connection with the reinsurance transaction, on January 15, 2016, Golden Gate Captive Insurance Company (“Golden Gate”), a wholly owned subsidiary of PLICO, and Steel City, LLC (“Steel City”), a newly formed wholly owned subsidiary of the Company, entered into an 18-year transaction to finance $2.188 billion of “XXX” reserves related to the acquired GLAIC Block and the other term life insurance business reinsured to Golden Gate by PLICO and West Coast Life Insurance Company (“WCL”), a direct wholly owned subsidiary of PLICO. Steel City issued notes with an aggregate initial principal amount of $2.188 billion to Golden Gate in exchange for a surplus note issued by Golden Gate with an initial principal amount of $2.188 billion. Through the structure, Hannover Life Reassurance Company of America (Bermuda) Ltd., The Canada Life Assurance Company (Barbados Branch) and Nomura Americas Re Ltd. (collectively, the “Risk-Takers”) provide credit enhancement to the Steel City notes for the 18-year term in exchange for credit enhancement fees. The transaction is “non-recourse” to PLICO, WCL and the Company, meaning that none of these companies are liable to reimburse the Risk-Takers for any credit enhancement payments required to be made. In connection with the transaction, the Company has entered into certain support agreements under which it guarantees or otherwise supports certain obligations of Golden Gate or Steel City, including a guarantee of the fees to the Risk-Takers. As a result of the financing transaction described above, the $800 million of Golden Gate Series A Surplus Notes held by the Company were contributed to PLICO and then subsequently contributed to Golden Gate, which resulted in the extinguishment of these notes. Also on January 15, 2016, Golden Gate paid an extraordinary dividend of $300 million to PLICO as approved by the Vermont Department of Financial Regulation.
 
The transactions described above resulted in an increase to total assets and total liabilities of $2.8 billion. Of the $2.8 billion increase in total assets, $0.6 billion was the result of the reinsurance transaction with GLAIC which included a $280 million increase in VOBA. The remaining $2.2 billion increase to total assets and liabilities is associated with the financing transaction between Golden Gate and Steel City.

The Company considered whether the Reinsurance Agreement constituted the purchase of a business for accounting and reporting purposes pursuant to ASC 805, Business Combinations. While the transaction included a continuation of the revenue-producing activities associated with the reinsured policies, it did not result in the acquisition of a market distribution system, sales force or production techniques. Based on Management’s decision not to pursue distribution opportunities or future sales related to the reinsured policies, the Company accounted for the transaction as a reinsurance agreement under ASC 944, Insurance Contracts and asset acquisition under ASC 805. Accordingly, the Company recorded the assets and liabilities acquired under the reinsurance agreement at fair value and recognized an intangible asset (value of business acquired or “VOBA”) equal to the excess of the fair value of assets acquired over liabilities assumed, measured in accordance with the Company's accounting policies for insurance and reinsurance contracts that it issues or holds pursuant to ASC 944.

4.                                      DAI-ICHI MERGER
 
On February 1, 2015 the Company, subsequent to required approvals from the Company’s shareholders and relevant regulatory authorities, became a wholly owned subsidiary of Dai-ichi Life as contemplated by the Agreement and Plan of Merger (the “Merger Agreement”) with Dai-ichi Life and DL Investment (Delaware), Inc., a Delaware corporation and wholly owned subsidiary of Dai-ichi Life, which provided for the Merger of DL Investment (Delaware), Inc. with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Dai-ichi Life. On February 1, 2015 each share of the Company’s common stock outstanding was converted into the right to receive $70 per share, without interest (the “Per Share Merger Consideration”). The aggregate cash consideration paid in connection with the Merger for the outstanding shares of common stock was approximately $5.6 billion and paid directly to the shareowners of record by Dai-ichi Life. The Merger provided Dai-ichi Life with a platform for growth in the United States, where it did not previously have a significant presence. In connection with the completion of the Merger, the Company’s previously publicly traded equity was delisted from the NYSE, although the Company remains an SEC registrant for financial reporting purposes in the United States.
 
The Merger was accounted for under the acquisition method of accounting under ASC Topic 805. In accordance with ASC Topic 805-20-30, all identifiable assets acquired and liabilities assumed were measured at fair value as of the acquisition date. On the date of the Merger, goodwill of $735.7 million represented the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in the Merger, and reflected the Company’s assembled workforce, future growth potential and other sources of value not associated with identifiable assets. During the measurement period subsequent to February 1, 2015, the Company made adjustments to provisional amounts related to certain tax balances that resulted in a decrease to goodwill of $3.3 million from the amount recorded at the Merger date. The balance of goodwill associated with the Merger as of December 31, 2015 (Successor Company) and March 31, 2016 (Successor Company) was $732.4 million. None of the goodwill is tax deductible.


11


The following table summarizes the consideration paid for the acquisition and the preliminary determination of the fair value of assets acquired and liabilities assumed at the acquisition date:
 
 
Fair Value
 
As of
 
February 1, 2015
 
(Dollars In Thousands)
Assets
 

Fixed maturities
$
38,363,025

Equity securities
745,512

Mortgage loans
5,580,229

Investment real estate
7,456

Policy loans
1,751,872

Other long-term investments
686,507

Short-term investments
316,167

Total investments
47,450,768

Cash
462,710

Accrued investment income
484,021

Accounts and premiums receivable
112,182

Reinsurance receivables
5,724,020

Value of business acquired
1,276,886

Goodwill
735,712

Other intangibles
683,000

Property and equipment
104,364

Other assets
120,762

Income tax receivable
15,458

Assets related to separate accounts
 

Variable annuity
12,970,587

Variable universal life
819,188

Total assets
$
70,959,658

Liabilities
 

Future policy and benefit claims
$
30,195,841

Unearned premiums
682,183

Total policy liabilities and accruals
30,878,024

Stable value product account balances
1,932,277

Annuity account balances
10,941,661

Other policyholders’ funds
1,388,083

Other liabilities
2,188,863

Deferred income taxes
1,535,556

Non-recourse funding obligations
621,798

Repurchase program borrowings
50,000

Debt
1,519,211

Subordinated debt securities
560,351

Liabilities related to separate accounts
 

Variable annuity
12,970,587

Variable universal life
819,188

Total liabilities
65,405,599

Net assets acquired
$
5,554,059

 
 

12


Treatment of certain acquisition related costs
 
The Company recorded costs related to the Merger in either the predecessor or successor periods based on the specific facts and circumstances underlying each individual transaction. Certain of these costs were fully contingent on the consummation of the Merger on February 1, 2015 (Successor Company). These costs are not expensed in either the Predecessor or Successor Company Statement of Comprehensive Income (Loss). Liabilities for payment of these contingent costs are included in the opening balance sheet as of February 1, 2015 (Successor Company), and the nature and amount of the costs are discussed below.
 
Fees in the amount of $28.8 million which were paid to the Company’s financial advisor related to the Merger were recorded as liabilities as of the acquisition date. In accordance with the terms of the contract, payment of these fees was contingent on the successful closing of the Merger, and became payable on the date thereof.
 
Certain of the Company’s stock-based compensation arrangements provided for acceleration of benefits on the completion of a change-in-control event. Upon the completion of the Merger, benefits in the amount of $138.2 million became payable to eligible employees under these arrangements. Such accounts were recorded as liabilities as of the acquisition closing date. The portion of this payable that represented expense accelerated on the merger date was $25.4 million.

Treatment of Benefit Plans
 
At or immediately prior to the Merger, each stock appreciation right with respect to shares of Common Stock granted under any Stock Plan (each, a “SAR”) that were outstanding and unexercised immediately prior to the Merger and that had a base price per share of Common Stock underlying such SAR (the “Base Price”) that was less than the Per Share Merger Consideration (each such SAR, an “In-the-Money SAR”), whether or not exercisable or vested, was cancelled and converted into the right to receive an amount in cash less any applicable withholding taxes, determined by multiplying (i) the excess of the Per Share Merger Consideration over the Base Price of such In-the-Money SAR by (ii) the number of shares of Common Stock subject to such In-the-Money SAR (such amount, the “SAR Consideration”).
 
At or immediately prior to the effective time of the Merger, each restricted stock unit with respect to a share of Common Stock granted under any Stock Plan (each, a “RSU”) that was outstanding immediately prior to the Merger, whether or not vested, was cancelled and converted into the right to receive an amount in cash, without interest, less any applicable withholding taxes, determined by multiplying (i) the Per Share Merger Consideration by (ii) the number of RSUs.
 
The number of performance shares earned for each award of performance shares granted under any Stock Plan was calculated by determining the number of performance shares that would have been paid if the subject award period had ended on the December 31 immediately preceding the Merger (based on the conditions set for payment of performance share awards for the subject award period), provided that the number of performance shares earned for each award were not less than the aggregate number of performance shares at the target performance level. Each performance share earned that was outstanding immediately prior to the Merger, whether or not vested, was cancelled and converted into the right to receive an amount in cash, without interest, less any applicable withholding taxes, determined by multiplying (i) the Per Share Merger Consideration by (ii) the number of Performance Shares.
 
5.                                      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 each 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.

The excess of Closed Block liabilities over Closed Block assets (adjusted to exclude the impact of related amounts in accumulated other comprehensive income (loss) (“AOCI”)) at the acquisition date of October 1, 2013, represented the estimated maximum future post-tax earnings from the Closed Block that would be recognized in income from continuing operations over the period the policies and contracts in the Closed Block remain in force. In connection with the acquisition of MONY, the Company developed an actuarial calculation of the expected timing of MONY’s Closed Block’s earnings as of October 1, 2013. Pursuant to the acquisition of the Company by Dai-ichi Life, this actuarial calculation of the expected timing of MONY’s Closed Block earnings was recalculated and reset as of February 1, 2015, along with the establishment of a policyholder dividend obligation as of such date.

If the actual cumulative earnings from the Closed Block are greater than the expected cumulative earnings, only the expected earnings will be recognized in the Company’s net income. Actual cumulative earnings in excess of expected cumulative earnings at any point in time are recorded as a policyholder dividend obligation because they will ultimately be paid to Closed Block policyholders as an additional policyholder dividend unless offset by future performance that is less favorable than originally expected. If a policyholder dividend obligation has been previously established and the actual Closed Block earnings in a subsequent period are less than the expected earnings for that period, the policyholder dividend obligation would be reduced (but not below

13


zero). If, over the period the policies and contracts in the Closed Block remain in force, the actual cumulative earnings of the Closed Block are less than the expected cumulative earnings, only actual earnings would be recognized in income from continuing operations. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside the Closed Block.

Many expenses related to Closed Block operations, including amortization of VOBA, are charged to operations outside of the Closed Block; accordingly, net revenues of the Closed Block do not represent the actual profitability of the Closed Block operations. Operating costs and expenses outside of the Closed Block are, therefore, disproportionate to the business outside of the Closed Block.

Summarized financial information for the Closed Block as of  March 31, 2016 (Successor Company) and December 31, 2015 (Successor Company) is as follows:
 
Successor Company
 
As of
March 31, 2016
 
As of
December 31, 2015
 
(Dollars In Thousands)
Closed block liabilities
 

 
 

Future policy benefits, policyholders’ account balances and other policyholder liabilities
$
5,973,811

 
$
6,010,520

Policyholder dividend obligation
96,508

 

Other liabilities
98,312

 
22,917

Total closed block liabilities
6,168,631

 
6,033,437

Closed block assets
 

 
 

Fixed maturities, available-for-sale, at fair value
$
4,518,308

 
$
4,426,090

Equity securities, available-for-sale, at fair value

 

Mortgage loans on real estate
246,596

 
247,162

Policy loans
739,428

 
746,102

Cash and other invested assets
117,966

 
34,420

Other assets
155,317

 
166,445

Total closed block assets
5,777,615

 
5,620,219

Excess of reported closed block liabilities over closed block assets
391,016

 
413,218

Portion of above representing accumulated other comprehensive income:
 

 
 

Net unrealized investment gains (losses) net of policyholder dividend obligation of $(103,908) (Successor) and $(179,360) (Successor)

 
(18,597
)
Future earnings to be recognized from closed block assets and closed block liabilities
$
391,016

 
$
394,621


Reconciliation of the policyholder dividend obligation is as follows:
 
 
Successor Company
 
Predecessor Company
 
For The Three Months Ended March 31, 2016
 
February 1, 2015
to
March 31, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Policyholder dividend obligation, beginning of period
$

 
$
323,432

 
$
366,745

Applicable to net revenue (losses)
(19,572
)
 
(12,855
)
 
(1,369
)
Change in net unrealized investment gains (losses) allocated to the policyholder dividend obligation; includes deferred tax benefits of $55,951 (Successor); $20,692 (2015 - Successor); $47,277 (2015 - Predecessor)
116,080

 
(59,119
)
 
135,077

Policyholder dividend obligation, end of period
$
96,508

 
$
251,458

 
$
500,453

 

14


Closed Block revenues and expenses were as follows:
 
 
Successor Company
 
Predecessor Company
 
For The Three Months Ended March 31, 2016
 
February 1, 2015
to
March 31, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Revenues
 

 
 

 
 

Premiums and other income
$
43,919

 
$
31,460

 
$
15,065

Net investment income
50,867

 
32,848

 
19,107

Net investment gains
187

 
634

 
568

Total revenues
94,973

 
64,942

 
34,740

Benefits and other deductions
 

 
 

 
 

Benefits and settlement expenses
80,055

 
55,771

 
31,152

Other operating expenses
1,025

 

 

Total benefits and other deductions
81,080

 
55,771

 
31,152

Net revenues before income taxes
13,893

 
9,171

 
3,588

Income tax expense
4,863

 
3,210

 
1,256

Net revenues
$
9,030


$
5,961


$
2,332


6.                                      INVESTMENT OPERATIONS
 
Net realized gains (losses) for all other investments are summarized as follows:
 
 
Successor Company
 
Predecessor Company
 
For The Three Months Ended March 31, 2016
 
February 1, 2015
to
March 31, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Fixed maturities
$
5,721

 
$
373

 
$
6,891

Equity securities
(166
)
 

 

Impairments on corporate securities
(2,617
)
 

 
(481
)
Modco trading portfolio
78,154

 
(33,160
)
 
73,062

Other investments
(1,981
)
 
(2,269
)
 
1,200

Total realized gains (losses) - investments
$
79,111

 
$
(35,056
)
 
$
80,672

 
For the three months ended March 31, 2016 (Successor Company) and for the period of February 1, 2015 to March 31, 2015 (Successor Company), gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $9.0 million and $1.5 million and gross realized losses were $3.5 million and $1.1 million, respectively, including $2.6 million of impairment losses for the three months ended March 31, 2016 (Successor Company).
 
For the period of January 1, 2015 to January 31, 2015 (Predecessor Company), gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $6.9 million and gross realized losses were $0.5 million, including $0.4 million of impairment losses.
 
For the three months ended March 31, 2016 (Successor Company) and for the period of February 1, 2015 to March 31, 2015 (Successor Company), the Company sold securities in an unrealized gain position with a fair value (proceeds) of $309.2 million and $282.9 million, respectively. The gains realized on the sale of these securities were $9.0 million and $1.5 million, respectively.
 
For the period of January 1, 2015 to January 31, 2015 (Predecessor Company), the Company sold securities in an unrealized gain position with a fair value (proceeds) of $172.6 million. The gain realized on the sale of these securities was $6.9 million.
 
For the three months ended March 31, 2016 (Successor Company) and for the period of February 1, 2015 to March 31, 2015 (Successor Company), the Company sold securities in an unrealized loss position with a fair value (proceeds) of $53.7 million and $20.7 million, respectively. The loss realized on the sale of these securities was $3.5 million and $1.1 million, respectively. The Company made the decision to exit these holdings in conjunction with our overall asset liability management process.
 

15


For the period of January 1, 2015 to January 31, 2015 (Predecessor Company), the Company sold securities in an unrealized loss position with a fair value (proceeds) of $0.4 million. The loss realized on the sale of these securities were immaterial to the Company. The Company made the decision to exit these holdings in conjunction with our overall asset liability management process.
  
The amortized cost and fair value of the Company’s investments classified as available-for-sale as of March 31, 2016 (Successor Company) and December 31, 2015 (Successor Company), are as follows:
 
Successor Company
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI(1)
As of March 31, 2016
 
 
 
 
 
 
 
(Dollars In Thousands)
 
 
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
 
$
1,849,678

 
$
31,231

 
$
(10,032
)
 
$
1,870,877

 
$

Commercial mortgage-backed securities
 
1,465,623

 
9,163

 
(12,089
)
 
1,462,697

 

Other asset-backed securities
 
992,128

 
813

 
(29,403
)
 
963,538

 

U.S. government-related securities
 
1,433,945

 
7,171

 
(2,236
)
 
1,438,880

 

Other government-related securities
 
18,667

 
40

 
(71
)
 
18,636

 

States, municipals, and political subdivisions
 
1,729,964

 
2,865

 
(71,269
)
 
1,661,560

 

Corporate securities
 
28,760,422

 
141,011

 
(1,976,233
)
 
26,925,200

 
152

Preferred stock
 
64,362

 
396

 
(1,795
)
 
62,963

 

 
 
36,314,789

 
192,690

 
(2,103,128
)
 
34,404,351

 
152

Equity securities
 
708,667

 
14,414

 
(7,743
)
 
715,338

 

Short-term investments
 
406,230

 

 

 
406,230

 

 
 
$
37,429,686

 
$
207,104

 
$
(2,110,871
)
 
$
35,525,919

 
$
152

As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
 
$
1,773,099

 
$
9,286

 
$
(17,112
)
 
$
1,765,273

 
$

Commercial mortgage-backed securities
 
1,328,317

 
428

 
(41,858
)
 
1,286,887

 

Other asset-backed securities
 
813,056

 
2,758

 
(18,763
)
 
797,051

 

U.S. government-related securities
 
1,566,260

 
449

 
(34,532
)
 
1,532,177

 

Other government-related securities
 
18,483

 

 
(743
)
 
17,740

 

States, municipals, and political subdivisions
 
1,729,732

 
682

 
(126,814
)
 
1,603,600

 

Corporate securities
 
28,499,691

 
26,369

 
(2,682,274
)
 
25,843,786

 
(605
)
Preferred stock
 
64,362

 
192

 
(1,867
)
 
62,687

 

 
 
35,793,000

 
40,164

 
(2,923,963
)
 
32,909,201

 
(605
)
Equity securities
 
724,226

 
13,255

 
(6,477
)
 
731,004

 

Short-term investments
 
206,991

 

 

 
206,991

 

 
 
$
36,724,217

 
$
53,419

 
$
(2,930,440
)
 
$
33,847,196

 
$
(605
)
 
(1)These amounts are included in the gross unrealized gains and gross unrealized losses columns above.
 
     As of March 31, 2016 (Successor Company) and December 31, 2015 (Successor Company), the Company had an additional $2.7 billion and $2.7 billion of fixed maturities, $6.8 million and $8.3 million of equity securities, and $43.0 million and $61.7 million of short-term investments classified as trading securities, respectively.
 

16


The amortized cost and fair value of available-for-sale and held-to-maturity fixed maturities as of March 31, 2016 (Successor Company), 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.
 
 
Successor Company
 
Available-for-sale
 
Held-to-maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Due in one year or less
$
885,886

 
$
884,908

 
$

 
$

Due after one year through five years
6,375,825

 
6,292,647

 

 

Due after five years through ten years
7,616,323

 
7,541,535

 

 

Due after ten years
21,436,755

 
19,685,261

 
2,783,302

 
2,757,674

 
$
36,314,789

 
$
34,404,351

 
$
2,783,302

 
$
2,757,674

 
During the three months ended March 31, 2016 (Successor Company) the Company recorded pre-tax other-than-temporary impairments of investments of $2.8 million, all of which related to fixed maturities. Credit impairments recorded in earnings during the three months ended March 31, 2016 (Successor Company), were $2.6 million. During the three months ended March 31, 2016 (Successor Company), $0.2 million of non-credit impairment losses were recorded in other comprehensive income.

For the period of February 1, 2015 to March 31, 2015 (Successor Company), the Company did not record any pre-tax other-than-temporary impairments of investments.
 
There were no other-than-temporary impairments related to fixed maturities or equity securities that the Company intended to sell or expected to be required to sell for the three months ended March 31, 2016 (Successor Company) and for the period of February 1, 2015 to March 31, 2015 (Successor Company).
 
During the period of January 1, 2015 to January 31, 2015 (Predecessor Company), the Company recorded pre-tax other-than-temporary impairments of investments of $0.6 million, all of which related to fixed maturities. Credit impairments recorded in earnings during the period were $0.5 million. During the period of January 1, 2015 to January 31, 2015 (Predecessor Company), $0.1 million of non-credit losses were recorded in other comprehensive income. There were no other-than-temporary impairments related to fixed maturities or equity securities that the Company intended to sell or expected to be required to sell for the period of January 1, 2015 to January 31, 2015 (Predecessor Company).
 
     The following chart is a rollforward of available-for-sale credit losses on fixed maturities held by the Company for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (loss):
 
 
Successor Company
 
Predecessor Company
 
For The Three Months Ended March 31, 2016
 
February 1, 2015
to
March 31, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Beginning balance
$
22,761

 
$

 
$
15,478

Additions for newly impaired securities
2,092

 

 

Additions for previously impaired securities
525

 

 
221

Reductions for previously impaired securities due to a change in expected cash flows
(22,759
)
 

 

Reductions for previously impaired securities that were sold in the current period

 

 

Ending balance
$
2,619

 
$

 
$
15,699



17


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 March 31, 2016 (Successor Company):
 
 
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
$
352,723

 
$
(6,366
)
 
$
148,132

 
$
(3,666
)
 
$
500,855

 
$
(10,032
)
Commercial mortgage-backed securities
380,635

 
(6,994
)
 
455,075

 
(5,095
)
 
835,710

 
(12,089
)
Other asset-backed securities
664,648

 
(22,415
)
 
104,692

 
(6,988
)
 
769,340

 
(29,403
)
U.S. government-related securities
42,995

 
(106
)
 
150,137

 
(2,130
)
 
193,132

 
(2,236
)
Other government-related securities
8,000

 
(29
)
 
6,231

 
(42
)
 
14,231

 
(71
)
States, municipalities, and political subdivisions
549,109

 
(27,255
)
 
945,325

 
(44,014
)
 
1,494,434

 
(71,269
)
Corporate securities
9,499,291

 
(946,756
)
 
11,643,681

 
(1,029,477
)
 
21,142,972

 
(1,976,233
)
Preferred stock
22,800

 
(368
)
 
19,512

 
(1,427
)
 
42,312

 
(1,795
)
Equities
212,942

 
(7,055
)
 
21,150

 
(688
)
 
234,092

 
(7,743
)
 
$
11,733,143

 
$
(1,017,344
)
 
$
13,493,935

 
$
(1,093,527
)
 
$
25,227,078

 
$
(2,110,871
)
 
RMBS had a gross unrealized loss greater than twelve months of $3.7 million as of March 31, 2016 (Successor Company). 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.
 
CMBS had a gross unrealized loss greater than twelve months of $5.1 million as of March 31, 2016 (Successor Company). 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 had a gross unrealized loss greater than twelve months of $7.0 million as of March 31, 2016 (Successor Company). This category predominately includes student-loan backed auction rate securities, the underlying collateral, of which is at least 97% guaranteed by the Federal Family Education Loan Program (“FFELP”). These unrealized losses have occurred within the Company’s auction rate securities (“ARS”) portfolio since the market collapse during 2008. 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 states, municipalities, and political subdivisions category had gross unrealized losses greater than twelve months of $44.0 million as of March 31, 2016 (Successor Company). These declines were entirely related to changes in interest rates.
 
The corporate securities category had gross unrealized losses greater than twelve months of $1.0 billion as of March 31, 2016 (Successor Company). The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered include credit ratings, the financial health of the issuer, the continued access of the issuer to capital markets, and other pertinent information.

     As of March 31, 2016 (Successor Company), the Company had a total of 2,108 positions that were in an unrealized loss position, but the Company does not consider these unrealized loss positions to be other-than-temporary. 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, and 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.
 

18


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, 2015 (Successor Company):
 
 
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
$
977,433

 
$
(17,112
)
 
$

 
$

 
$
977,433

 
$
(17,112
)
Commercial mortgage-backed securities
1,233,518

 
(41,858
)
 

 

 
1,233,518

 
(41,858
)
Other asset-backed securities
633,274

 
(18,763
)
 

 

 
633,274

 
(18,763
)
U.S. government-related securities
1,291,476

 
(34,532
)
 

 

 
1,291,476

 
(34,532
)
Other government-related securities
17,740

 
(743
)
 

 

 
17,740

 
(743
)
States, municipalities, and political subdivisions
1,566,752

 
(126,814
)
 

 

 
1,566,752

 
(126,814
)
Corporate securities
24,283,448

 
(2,682,274
)
 

 

 
24,283,448

 
(2,682,274
)
Preferred stock
34,685

 
(1,867
)
 

 

 
34,685

 
(1,867
)
Equities
248,493

 
(6,477
)
 

 

 
248,493

 
(6,477
)
 
$
30,286,819

 
$
(2,930,440
)
 
$

 
$

 
$
30,286,819

 
$
(2,930,440
)
 
The book value of the Company’s investment portfolio was marked to fair value as of February 1, 2015 (Successor Company), in conjunction with the Dai-ichi Merger which resulted in the elimination of previously unrealized gains and losses from accumulated other comprehensive income. The level of interest rates as of February 1, 2015 (Successor Company) resulted in an increase in the carrying value of the Company’s investments. Since February 1, 2015 (Successor Company), interest rates have increased resulting in net unrealized losses in the Company’s investment portfolio.

The Company does not consider these unrealized loss positions to be other-than-temporary, 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, and does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of the securities.

As of March 31, 2016 (Successor Company), the Company had securities in its available-for-sale portfolio which were rated below investment grade of $1.8 billion and had an amortized cost of $2.0 billion. In addition, included in the Company’s trading portfolio, the Company held $282.7 million of securities which were rated below investment grade. Approximately $297.6 million of the below investment grade securities were not publicly traded.

The change in unrealized gains (losses), net of income tax, on fixed maturity and equity securities, classified as available-for-sale is summarized as follows:
 
 
Successor Company
 
Predecessor Company
 
For The Three Months Ended March 31, 2016
 
February 1, 2015
to
March 31, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Fixed maturities
$
632,685

 
$
(343,199
)
 
$
670,229

Equity securities
(70
)
 
1,511

 
10,226

 

19


The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of March 31, 2016 (Successor Company) and December 31, 2015 (Successor Company), are as follows:
 
Successor Company
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI
As of March 31, 2016
 
 
 
 
 
 
 
(Dollars In Thousands)
 
 
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Securities issued by affiliates:
 
 
 
 
 
 
 
 
 
 
Red Mountain LLC
 
$
612,302

 
$

 
$
(64,382
)
 
$
547,920

 
$

Steel City LLC
 
2,171,000

 
38,754

 

 
2,209,754

 

 
 
$
2,783,302

 
$
38,754

 
$
(64,382
)
 
$
2,757,674

 
$

Successor Company
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI
As of December 31, 2015
 
 
 
 
 
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Securities issued by affiliates:
 
 
 
 
 
 
 
 
 
 
Red Mountain LLC
 
$
593,314

 
$

 
$
(78,314
)
 
$
515,000

 
$

 
 
$
593,314

 
$

 
$
(78,314
)
 
$
515,000

 
$

 
During the three months ended March 31, 2016 (Successor Company), the period of February 1, 2015 to March 31, 2015 (Successor Company), and the period of January 1, 2015 to January 31, 2015 (Predecessor Company), the Company did not record any other-than-temporary impairments on held-to-maturity securities. The Company’s held-to-maturity securities had $64.4 million of gross unrecognized holding losses as of March 31, 2016 (Successor Company). The Company does not consider these unrecognized holding losses to be other-than-temporary based on certain positive factors associated with the securities which include credit ratings of the guarantor, financial health of the issuer and guarantor, continued access of the issuer to capital markets and other pertinent information. These held-to-maturity securities are issued by affiliates of the Company which are considered variable interest entities ("VIE's"). 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.
 
The Company’s held-to-maturity securities had $78.3 million of gross unrecognized holding losses as of December 31, 2015 (Successor Company). The Company does not consider these unrecognized holding losses to be other-than-temporary based on certain positive factors associated with the securities which include credit ratings of the guarantor, financial health of the issuer and guarantor, continued access of the issuer to capital markets and other pertinent information.

Variable Interest Entities
 
The Company holds certain investments in entities in which its ownership interests could possibly be considered variable interests under Topic 810 of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC” or “Codification”) (excluding debt and equity securities held as trading, available for sale, or held to maturity). The Company reviews the characteristics of each of these applicable entities and compares those characteristics to applicable criteria to determine whether the entity is a VIE. If the entity is determined to be a VIE, the Company then performs a detailed review to determine whether the interest would be considered a variable interest under the guidance. The Company then performs a qualitative review of all variable interests with the entity and determines whether the Company is the primary beneficiary. ASC 810 provides that an entity is the primary beneficiary of a VIE if the entity has 1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and 2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.
 
Based on this analysis, the Company had an interest in two subsidiaries as of March 31, 2016 (Successor Company), Red Mountain LLC ("Red Mountain") and Steel City LLC ("Steel City"), that were determined to be VIEs. As of December 31, 2015 (Successor Company), the Company had an interest in one subsidiary, Red Mountain, that was determined to be a VIE.

The activity most significant to Red Mountain is the issuance of a note in connection with a financing transaction involving Golden Gate V Vermont Captive Insurance Company (“Golden Gate V”) and the Company in which Golden Gate V issued non-recourse funding obligations to Red Mountain and Red Mountain issued the note to Golden Gate V. Credit enhancement on the Red Mountain Note is provided by an unrelated third party. For details of this transaction, see Note 9, Debt and Other Obligations. The Company had the power, via its 100% ownership through an affiliate, to direct the activities of the VIE, but did not have the obligation to absorb losses related to the primary risks or sources of variability to the VIE. The variability of loss would be borne primarily by the third party in its function as provider of credit enhancement on the Red Mountain Note. Accordingly, it was determined that the Company is not the primary beneficiary of the VIE. The Company’s risk of loss related to the VIE is limited to its investment of $10,000. Additionally, the Company has guaranteed Red Mountain’s payment obligation for the credit

20


enhancement fee to the unrelated third party provider. As of March 31, 2016 (Successor Company), no payments have been made or required related to this guarantee.

Steel City, a newly formed wholly owned subsidiary of the Company, entered into a financing agreement on January 15, 2016 involving Golden Gate Captive Insurance Company, in which Golden Gate issued non-recourse funding obligations to Steel City and Steel City issued three notes (the “Steel City Notes”) to Golden Gate. Credit enhancement on the Steel City Notes is provided by unrelated third parties. For details of the financing transaction, see Note 9, Debt and Other Obligations. The activity most significant to Steel City is the issuance of the Steel City Notes. The Company had the power, via its 100% ownership, to direct the activities of the VIE, but did not have the obligation to absorb losses related to the primary risks or sources of variability to the VIE. The variability of loss would be borne primarily by the third parties in their function as providers of credit enhancement on the Steel City Notes. Accordingly, it was determined that the Company is not the primary beneficiary of the VIE. The Company’s risk of loss related to the VIE is limited to its investment of $10,000. Additionally, the Company has guaranteed Steel City’s payment obligation for the credit enhancement fee to the unrelated third party providers. As of March 31, 2016 (Successor Company), no payments have been made or required related to this guarantee.

7.                                      MORTGAGE LOANS
 
Mortgage Loans
 
The Company invests a portion of its investment portfolio in commercial mortgage loans. As of March 31, 2016 (Successor Company), the Company’s mortgage loan holdings were approximately $5.7 billion. The Company has specialized in making loans on either credit-oriented commercial properties or credit-anchored strip shopping centers and apartments. The Company’s underwriting procedures relative to its commercial 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 types associated with the necessities of life (retail, multi-family, senior living, professional office buildings, and warehouses). The Company believes that these asset types tend to weather economic downturns better than other commercial 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 mortgage loans 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 valuation allowances. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Amortization of premiums and accretion of discounts is recorded using the effective yield method. Interest income, amortization of premiums and accretion of discounts and prepayment fees are reported in net investment income.
 
As of February 1, 2015, all mortgage loans were measured at fair value. Each mortgage loan was individually analyzed to determine the fair value. Each loan was either analyzed and assigned a discount rate or given an impairment, based on whether facts and circumstances which, as of the acquisition date, indicated less than full projected collections of contractual principal and interest payments. Various market factors were considered in determining the net present value of the expected cash flow stream or underlying real estate collateral, including the characteristics of the borrower, the underlying collateral, underlying credit worthiness of the tenants, and tenant payment history. Known events and risks, such as refinancing risks, were also considered in the fair value determination. In certain cases, fair value was based on the net present value of the expected cash flow stream or the underlying value of the real estate collateral.
 
Certain of the mortgage loans have call options that occur within the next 12 years. However, if interest rates were to significantly increase, we may be unable to exercise the call options on our existing mortgage loans commensurate with the significantly increased market rates. As of March 31, 2016 (Successor Company), assuming the loans are called at their next call dates, approximately $86.3 million of principal would become due for the remainder of 2016, $906.6 million in 2017 through 2021, $240.3 million in 2022 through 2026, and $11.2 million thereafter.
 
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 March 31, 2016 (Successor Company) and December 31, 2015 (Successor Company), approximately $474.5 million and $449.2 million, respectively, of the Company’s total 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 months ended March 31, 2016 (Successor Company), the period of February 1, 2015 to March 31, 2015 (Successor Company), and January 1, 2015 to January 31, 2015 (Predecessor Company), the Company recognized $6.8 million, $1.8 million, and $0.1 million, respectively, of participating mortgage loan income.
 
As of March 31, 2016 (Successor Company), approximately $3.5 million, or 0.01%, of invested assets consisted of nonperforming mortgage loans, restructured mortgage loans, or 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. During the three months ended March 31, 2016 (Successor Company), the Company did not enter into certain mortgage loan transactions that were accounted for as troubled debt restructurings under Topic 310 of the FASB ASC. If the Company had troubled debt restructurings, these transactions would include either the acceptance of assets in satisfaction of principal during the respective periods or at a future date, and were the result of agreements between the creditor and the debtor. During the three months ended March 31, 2016 (Successor Company), the Company did not accept or agree to accept assets in satisfaction of principal. As of March 31, 2016 (Successor Company), the Company did not have any mortgage loan transactions accounted for as troubled debt restructurings.
 

21


The Company’s mortgage loan portfolio consists of two categories of loans: 1) those not subject to a pooling and servicing agreement and 2) those subject to a contractual pooling and servicing agreement. As of March 31, 2016 (Successor Company), $3.5 million of mortgage loans not subject to a pooling and servicing agreement were nonperforming mortgage loans, restructured, or mortgage loans that were foreclosed and were converted to real estate properties. The Company did not foreclose on any nonperforming loans not subject to a pooling and servicing agreement during the three months ended March 31, 2016 (Successor Company).
 
As of March 31, 2016 (Successor Company), none of the loans subject to a pooling and servicing agreement were nonperforming or restructured. The Company did not foreclose on any nonperforming loans subject to pooling and servicing agreement during the three months ended March 31, 2016 (Successor Company).
 
As of March 31, 2016 (Successor Company), the Company had an allowance for mortgage loan credit losses of $1.9 million and no allowance as of December 31, 2015 (Successor Company). Due to the Company’s loss experience and nature of the loan portfolio, the Company believes that a collectively evaluated allowance would be inappropriate. The Company believes an allowance calculated through an analysis of specific loans that are believed to have a higher risk of credit impairment provides a more accurate presentation of expected losses in the portfolio and is consistent with the applicable guidance for loan impairments in ASC Subtopic 310. Since the Company uses the specific identification method for calculating the allowance, it is necessary to review the economic situation of each borrower to determine those that have higher risk of credit impairment. The Company has a team of professionals that monitors borrower conditions such as payment practices, borrower credit, operating performance, and property conditions, as well as ensuring the timely payment of property taxes and insurance. Through this monitoring process, the Company assesses the risk of each loan. When issues are identified, the severity of the issues are assessed and reviewed for possible credit impairment. If a loss is probable, an expected loss calculation is performed and an allowance is established for that loan based on the expected loss. The expected loss is calculated as the excess carrying value of a loan over either the present value of expected future cash flows discounted at the loan’s original effective interest rate, or the current estimated fair value of the loan’s underlying collateral. A loan may be subsequently charged off at such point that the Company no longer expects to receive cash payments, the present value of future expected payments of the renegotiated loan is less than the current principal balance, or 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 charge off is recorded by eliminating the allowance against the 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:
 
 
Successor Company
 
Predecessor Company
 
As of
March 31, 2016
 
February 1, 2015
to
December 31, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Beginning balance
$

 
$

 
$
5,720

Charge offs

 
(2,561
)
 
(861
)
Recoveries

 
(638
)
 
(2,359
)
Provision
1,900

 
3,199

 

Ending balance
$
1,900

 
$

 
$
2,500


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. If a loan becomes over 90 days delinquent, it is the Company’s general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place. For loans subject to a pooling and servicing agreement, there are certain additional restrictions and/or requirements related to workout proceedings, and as such, these loans may have different attributes and/or circumstances affecting the status of delinquency or categorization of those in nonperforming status. An analysis of the delinquent loans is shown in the following chart.
 
 
 
 
 
 
Greater
 
 
Successor Company
 
30-59 Days
 
60-89 Days
 
than 90 Days
 
Total
As of March 31, 2016
 
Delinquent
 
Delinquent
 
Delinquent
 
Delinquent
 
 
(Dollars In Thousands)
Commercial mortgage loans
 
$

 
$
2,438

 
$
1,034

 
$
3,472

Number of delinquent commercial mortgage loans
 

 
1

 
1

 
2

 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
 
 
 
 
 
Commercial mortgage loans
 
$
6,002

 
$
1,033

 
$

 
$
7,035

Number of delinquent commercial mortgage loans
 
6

 
1

 

 
7

 

22


     The Company’s commercial mortgage loan portfolio consists of mortgage loans that are collateralized by real estate. Due to the collateralized nature of the loans, any assessment of impairment and ultimate loss given a default on the loans is based upon a consideration of the estimated fair value of the real estate. The Company limits accrued interest income on impaired loans to 90 days of interest. Once accrued interest on the impaired loan is received, interest income is recognized on a cash basis. For information regarding impaired loans, please refer to the following chart:
 
 
 
 
Unpaid
 
 
 
Average
 
Interest
 
Cash Basis
Successor Company
 
Recorded
 
Principal
 
Related
 
Recorded
 
Income
 
Interest
As of March 31, 2016
 
Investment
 
Balance
 
Allowance
 
Investment
 
Recognized
 
Income
 
 
(Dollars In Thousands)
Commercial mortgage loans:
 
 

 
 

 
 

 
 

 
 

 
 

With no related allowance recorded
 
$
3,472

 
$
3,896

 
$

 
$
1,736

 
$
37

 
$
25

With an allowance recorded
 
6,434

 
6,434

 
1,900

 
6,434

 
56

 
55

 
 
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
Commercial mortgage loans:
 
 

 
 

 
 

 
 

 
 

 
 

With no related allowance recorded
 
$
1,694

 
$
1,728

 
$

 
$
847

 
$
104

 
$
117

With an allowance recorded
 

 

 

 

 

 

 
     As of March 31, 2016 (Successor Company) and December 31, 2015 (Successor Company), the Company did not carry any mortgage loans that have been modified in a troubled debt restructuring.
 
8.                                      GOODWILL
 
As permitted by ASC Topic 805, Business Combinations, the Company measured its assets and liabilities at fair value on the date of the Merger, February 1, 2015. The purchase price in excess of the fair value of assets and liabilities of the Company resulted in the establishment of goodwill as of the date of the Merger. As of February 1, 2015 (Successor Company), the Company established an aggregate goodwill balance of $735.7 million. During the measurement period subsequent to February 1, 2015, the Company has made adjustments to provisional amounts related to certain tax balances that resulted in a decrease to goodwill of $3.3 million from the amount recorded at the Merger date. This reduction in Goodwill was applied to the Life Marketing segment's goodwill. The balance of goodwill associated with the Merger as of March 31, 2016 (Successor Company) and December 31, 2015 (Successor Company) was $732.4 million. There has been no change in the goodwill during the three months ended March 31, 2016 (Successor Company).
 
Accounting for goodwill requires an estimate of the future profitability of the associated lines of business to assess the recoverability of the capitalized acquisition goodwill. The Company evaluates the carrying value of goodwill at the segment (or reporting unit) level at least annually and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: 1) a significant adverse change in legal factors or in business climate, 2) unanticipated competition, or 3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company first determines through qualitative analysis whether relevant events and circumstances indicate that it is more likely than not that segment goodwill balances are impaired as of the testing date. If it is determined that it is more likely than not that impairment exists, the Company compares its estimate of the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The Company utilizes a fair value measurement (which includes a discounted cash flows analysis) to assess the carrying value of the reporting units in consideration of the recoverability of the goodwill balance assigned to each reporting unit as of the measurement date. The Company’s material goodwill balances are attributable to certain of its operating segments (which are each considered to be reporting units). The cash flows used to determine the fair value of the Company’s reporting units are dependent on a number of significant assumptions. The Company’s estimates, which consider a market participant view of fair value, are subject to change given the inherent uncertainty in predicting future results and cash flows, which are impacted by such things as policyholder behavior, competitor pricing, capital limitations, new product introductions, and specific industry and market conditions.

The balance recognized as goodwill is not amortized, but is reviewed for impairment on an annual basis, or more frequently as events or circumstances may warrant, including those circumstances which would more likely than not reduce the fair value of the Company’s reporting units below its carrying amount. During the fourth quarter of 2015, the Company performed its annual evaluation of goodwill based on information as of September 30, 2015 (Successor Company) and determined that no adjustment to impair goodwill was necessary. During the three months ended March 31, 2016 (Successor Company), the Company did not identify any events or circumstances which would indicate that the fair value of its operating segments would have declined below their book value, either individually or in the aggregate. Accordingly, no impairment to the Company’s goodwill balance has been recorded.


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9.                               DEBT AND OTHER OBLIGATIONS
 
Debt and Subordinated Debt Securities
 
In conjunction with the Merger and in accordance with ASC Topic 805, the Company adjusted the carrying value of debt to fair value as of the date of the Merger, February 1, 2015. This resulted in the Company establishing premiums and discounts on its outstanding debt, subordinated debentures and non-recourse funding obligations. The carrying value of the Company’s revolving line of credit approximates fair value due to the nature of the borrowings and the fact the Company pays a variable rate of interest that reflects current market conditions. The fair value of the Company’s senior notes, subordinated debt, and non-recourse funding obligations associated with Golden Gate II Captive Insurance Company and MONY Life Insurance Company, were determined using market prices as of February 1, 2015. The fair value of the Golden Gate V non-recourse funding obligation was determined using a discounted cash flow model with inputs derived from comparable financial instruments. The premiums and discounts established as of February 1, 2015 are amortized over the expected life of the instruments using the effective interest method. The amortization of premiums and discounts are recorded as a component of interest expense and are recorded in “Other operating expenses” on the Company’s Consolidated Condensed Statements of Income.
 
Debt and subordinated debt securities are summarized as follows:
 
Successor Company
 
As of
March 31, 2016
 
As of
December 31, 2015
 
(Dollars In Thousands)
Debt (year of issue):
 

 
 

Revolving Line of Credit
$
480,000

 
$
485,000

6.40% Senior Notes (2007), due 2018
161,182

 
162,671

7.375% Senior Notes (2009), due 2019
468,558

 
473,127

8.45% Senior Notes (2009), due 2039
415,767

 
468,008

 
$
1,525,507

 
$
1,588,806

Subordinated debt securities (year of issue):
 

 
 

6.25% Subordinated Debentures (2012), due 2042, callable 2017
$
294,398

 
$
295,833

6.00% Subordinated Debentures (2012), due 2042, callable 2017
152,505

 
152,930

 
$
446,903

 
$
448,763

 
During the three months ended March 31, 2016 (Successor Company), the Company repurchased and subsequently extinguished $51.4 million (par value - $32.9 million) of the Company's 8.45% Senior Notes due 2039. These repurchases resulted in a $7.3 million pre-tax gain for the Company. The gain is recorded in other income in the consolidated condensed statements of income.

During the period of February 1, 2015 to December 31, 2015 (Successor Company), the Company called and redeemed the entire $103.1 million of outstanding principal amount of the Company’s 6.125% Subordinated Debentures due 2034.
 
On February 2, 2015, the Company amended and restated the Credit Facility (the "Credit Facility”). Under 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 $1.25 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 the Company’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 the Company's Senior Debt. The Credit Facility also provided for a facility fee at a rate that varies with the ratings of the Company’s Senior Debt and that is calculated on the aggregate amount of commitments under the Credit Facility, whether used or unused. The initial facility fee rate was 0.15% on February 2, 2015, and was adjusted to 0.125% upon the Company's subsequent ratings upgrade on February 2, 2015. The Credit Facility provides that the Company is liable for the full amount of any obligations for borrowings or letters of credit, including those of PLICO, under the Credit Facility. The maturity date of the Credit Facility is February 2, 2020. The Company is not aware of any non-compliance with the financial debt covenants of the Credit Facility as of March 31, 2016 (Successor Company). There was an outstanding balance of $480.0 million bearing interest at a rate of LIBOR plus 1.00% as of March 31, 2016 (Successor Company).
 

24


Non-Recourse Funding Obligations
 
Golden Gate Captive Insurance Company
 
On January 15, 2016, Golden Gate Captive Insurance Company (“Golden Gate”), a wholly owned subsidiary of PLICO, and Steel City, LLC (“Steel City”), a newly formed wholly owned subsidiary of the Company, entered into an 18-year transaction to finance $2.188 billion of “XXX” reserves related to the acquired GLAIC Block and the other term life insurance business reinsured to Golden Gate by PLICO and WCL, a direct wholly owned subsidiary of PLICO. Steel City issued notes with an aggregate initial principal amount of $2.188 billion to Golden Gate in exchange for a surplus note issued by Golden Gate with an initial principal amount of $2.188 billion. Through the structure, Hannover Life Reassurance Company of America (Bermuda) Ltd., The Canada Life Assurance Company (Barbados Branch) and Nomura Americas Re Ltd. (collectively, the “Risk-Takers”) provide credit enhancement to the Steel City Notes for the 18-year term in exchange for credit enhancement fees. The transaction is “non-recourse” to PLICO, WCL and the Company, meaning that none of these companies are liable to reimburse the Risk-Takers for any credit enhancement payments required to be made. As of March 31, 2016 (Successor Company), the aggregate principal balance of the Steel City notes was $2.171 billion. In connection with this transaction, the Company has entered into certain support agreements under which it guarantees or otherwise supports certain obligations of Golden Gate or Steel City, including a guarantee of the fees to the Risk-Takers. The support agreements provide that amounts would become payable by the Company if Golden Gate’s annual general corporate expenses were higher than modeled amounts, certain reinsurance rates applicable to the subject business increase beyond modeled amounts or in the event write-downs due to other-than-temporary impairments on assets held in certain accounts exceed defined threshold levels. Additionally, the Company has entered into a separate agreement to guarantee payment of certain fee amounts in connection with the credit enhancement of the Steel City Notes. As of March 31, 2016 (Successor Company), no payments have been made under these agreements.

Prior to this transaction Golden Gate had three series of non-recourse funding obligations with a total outstanding balance of $800 million. The Company held the entire outstanding balance of non-recourse funding obligations. Series A1 non-recourse funding obligations had a balance of $400 million and accrued interest at 7.375%, the Series A2 non-recourse funding obligations had a balance of $100 million and accrued interest at 8.00%, and the Series A3 non-recourse funding obligations had a balance of $300 million and accrued interest at 8.45%. As a result of the transaction described above, the $800 million of Golden Gate Series A Surplus Notes held by the Company were contributed to PLICO and then subsequently contributed to Golden Gate, which resulted in the extinguishment of these notes.
 
Golden Gate II Captive Insurance Company