INVESTMENT OPERATIONS

Net realized gains (losses) for all other investments are summarized as follows:



	For The Three Months Ended March 31,
	2017			2016
	(Dollars In Thousands)
Fixed maturities	$	9,490		$	5,721
Equity securities	(9		)	(166		)
Impairments	(7,831		)	(2,617		)
Modco trading portfolio	18,552			78,154
Other investments	(5,192		)	(1,981		)
Total realized gains (losses) - investments	$	15,010		$	79,111

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



	For The Three Months Ended March 31,
	2017			2016
	(Dollars In Thousands)
Gross realized gains	$	10,738		$	9,048
Gross realized losses:
Impairment losses	$	(7,831	)	$	(2,617	)
Realized losses from sales	$	(1,257	)	$	(3,493	)

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



	For The Three Months Ended March 31,
	2017			2016
	(Dollars In Thousands)
Securities in an unrealized gain position:
Fair value (proceeds)	$	169,134		$	309,249
Gains realized	$	10,738		$	9,048

Securities in an unrealized loss position⁽¹⁾:
Fair value (proceeds)	$	12,452		$	53,687
Losses realized	$	(1,257	)	$	(3,493	)

(1) The Company made the decision to exit these holdings in conjunction with its overall asset liability management process.

The amortized cost and fair value of the Company’s investments classified as available-for-sale are as follows:



As of March 31, 2017	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Total OTTI Recognized in OCI⁽¹⁾
	(Dollars In Thousands)
Fixed maturities:
Residential mortgage-backed securities	$	1,988,289	$	11,023	$	(29,120	)	$	1,970,192	$	(3	)
Commercial mortgage-backed securities	1,850,816		3,225		(39,378		)	1,814,663		—
Other asset-backed securities	1,177,426		22,172		(17,148		)	1,182,450		—
U.S. government-related securities	1,310,138		401		(35,744		)	1,274,795		—
Other government-related securities	253,129		4,130		(12,058		)	245,201		—
States, municipals, and political subdivisions	1,776,716		1,811		(105,803		)	1,672,724		—
Corporate securities	28,785,229		213,518		(1,316,535		)	27,682,212		(5,338		)
Preferred stock	94,362		316		(5,404		)	89,274		—
	37,236,105		256,596		(1,561,190		)	35,931,511		(5,341		)
Equity securities	778,213		16,706		(8,226		)	786,693		—
Short-term investments	247,918		—		—			247,918		—
	$	38,262,236	$	273,302	$	(1,569,416	)	$	36,966,122	$	(5,341	)

As of December 31, 2016
Fixed maturities:
Residential mortgage-backed securities	$	1,913,413	$	10,737	$	(25,667	)	$	1,898,483	$	(9	)
Commercial mortgage-backed securities	1,850,620		2,528		(41,678		)	1,811,470		—
Other asset-backed securities	1,210,490		21,741		(20,698		)	1,211,533		—
U.S. government-related securities	1,308,192		422		(40,455		)	1,268,159		—
Other government-related securities	253,182		1,536		(14,797		)	239,921		—
States, municipals, and political subdivisions	1,760,837		1,224		(105,558		)	1,656,503		—
Corporate securities	28,801,768		153,715		(1,583,918		)	27,371,565		(11,030		)
Preferred stock	94,362		—		(8,519		)	85,843		—
	37,192,864		191,903		(1,841,290		)	35,543,477		(11,039		)
Equity securities	761,340		7,751		(21,685		)	747,406		—
Short-term investments	279,782		—		—			279,782		—
	$	38,233,986	$	199,654	$	(1,862,975	)	$	36,570,665	$	(11,039	)

(1) These amounts are included in the gross unrealized gains and gross unrealized losses columns above.

As of March 31, 2017, and December 31, 2016, the Company had an additional $2.6 billion and $2.6 billion of fixed maturities, $5.5 million and $7.1 million of equity securities, and $51.2 million and $52.6 million of short-term investments classified as trading securities, respectively.

The amortized cost and fair value of available-for-sale and held-to-maturity fixed maturities as of March 31, 2017, by expected maturity, are shown below. Expected maturities of securities without a single maturity date are allocated based on estimated rates of prepayment that may differ from actual rates of prepayment.



	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars In Thousands)
Due in one year or less	$	583,614	$	584,526	$	—	$	—
Due after one year through five years	6,534,001		6,533,496		—		—
Due after five years through ten years	7,847,205		7,767,967		—		—
Due after ten years	22,271,285		21,045,522		2,758,137		2,746,375
	$	37,236,105	$	35,931,511	$	2,758,137	$	2,746,375

The chart below summarizes the Company's other-than-temporary impairments of investments. All of the impairments were related to fixed or equity maturities.



	For The Three Months Ended March 31,
	2017
	Fixed Maturities			Equity Securities			Total Securities
	(Dollars In Thousands)
Other-than-temporary impairments	$	(95	)	$	(2,630	)	$	(2,725	)
Non-credit impairment losses recorded in other comprehensive income	(5,106		)	—			(5,106		)
Net impairment losses recognized in earnings	$	(5,201	)	$	(2,630	)	$	(7,831	)



	For The Three Months Ended March 31,
	2016
	Fixed Maturities			Equity Securities		Total Securities
	(Dollars In Thousands)
Other-than-temporary impairments	$	(2,769	)	$	—	$	(2,769	)
Non-credit impairment losses recorded in other comprehensive income	152			—		152
Net impairment losses recognized in earnings	$	(2,617	)	$	—	$	(2,617	)

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, 2017 and 2016.

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):



	For The Three Months Ended March 31,
	2017			2016
	(Dollars In Thousands)
Beginning balance	$	12,685		$	22,761
Additions for newly impaired securities	—			2,092
Additions for previously impaired securities	—			525
Reductions for previously impaired securities due to a change in expected cash flows	(12,685		)	(22,759		)
Reductions for previously impaired securities that were sold in the current period	—			—
Ending balance	$	—		$	2,619

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, 2017:



	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	$	1,137,748	$	(25,086	)	$	159,309	$	(4,034	)	$	1,297,057	$	(29,120	)
Commercial mortgage-backed securities	1,444,322		(35,054		)	97,152		(4,324		)	1,541,474		(39,378		)
Other asset-backed securities	260,723		(5,836		)	173,891		(11,312		)	434,614		(17,148		)
U.S. government-related securities	1,214,007		(35,744		)	2		—			1,214,009		(35,744		)
Other government-related securities	71,542		(1,267		)	80,422		(10,791		)	151,964		(12,058		)
States, municipalities, and political subdivisions	1,030,078		(63,063		)	546,377		(42,740		)	1,576,455		(105,803		)
Corporate securities	11,292,276		(393,211		)	9,399,889		(923,324		)	20,692,165		(1,316,535		)
Preferred stock	59,654		(3,446		)	18,980		(1,958		)	78,634		(5,404		)
Equities	148,787		(2,702		)	70,384		(5,524		)	219,171		(8,226		)
	$	16,659,137	$	(565,409	)	$	10,546,406	$	(1,004,007	)	$	27,205,543	$	(1,569,416	)

RMBS and CMBS had gross unrealized losses greater than twelve months of $4.0 million and $4.3 million, respectively, as of March 31, 2017. 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 $11.3 million as of March 31, 2017. 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”). At this time, the Company has no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary.

The other government-related securities had gross unrealized losses greater than twelve months of $10.8 million as of March 31, 2017. These declines were related to changes in interest rates.

The states, municipalities, and political subdivisions category had gross unrealized losses greater than twelve months of $42.7 million as of March 31, 2017. These declines were related to changes in interest rates.

The corporate securities category had gross unrealized losses greater than twelve months of $923.3 million as of March 31, 2017. 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, 2017, the Company had a total of 2,171 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.



	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	$	1,060,569	$	(21,550	)	$	170,826	$	(4,117	)	$	1,231,395	$	(25,667	)
Commercial mortgage-backed securities	1,452,146		(37,665		)	100,475		(4,013		)	1,552,621		(41,678		)
Other asset-backed securities	323,706		(9,291		)	176,792		(11,407		)	500,498		(20,698		)
U.S. government-related securities	1,237,942		(40,454		)	3		(1		)	1,237,945		(40,455		)
Other government-related securities	98,412		(2,907		)	79,393		(11,890		)	177,805		(14,797		)
States, municipalities, and political subdivisions	1,062,368		(63,809		)	548,254		(41,749		)	1,610,622		(105,558		)
Corporate securities	12,553,514		(469,189		)	9,793,579		(1,114,729		)	22,347,093		(1,583,918		)
Preferred stock	66,781		(6,642		)	19,062		(1,877		)	85,843		(8,519		)
Equities	411,845		(15,273		)	69,497		(6,412		)	481,342		(21,685		)
	$	18,267,283	$	(666,780	)	$	10,957,881	$	(1,196,195	)	$	29,225,164	$	(1,862,975	)

RMBS and CMBS had gross unrealized losses greater than twelve months of $4.1 million and $4.0 million, respectively, as of December 31, 2016. 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 $11.4 million as of December 31, 2016. This category predominately includes student-loan backed auction rate securities, the underlying collateral, of which is at least 97% guaranteed by the FFELP. At this time, the Company has no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary.

The states, municipalities, and political subdivisions category had gross unrealized losses greater than twelve months of $41.7 million as of December 31, 2016. These declines were related to changes in interest rates.

The corporate securities category had gross unrealized losses greater than twelve months of $1.1 billion as of December 31, 2016. 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, 2017, the Company had securities in its available-for-sale portfolio which were rated below investment grade of $2.0 billion and had an amortized cost of $2.0 billion. In addition, included in the Company’s trading portfolio, the Company held $259.8 million of securities which were rated below investment grade. Approximately $361.0 million of the available-for-sale and trading securities that were below investment grade 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:



	For The Three Months Ended March 31,
	2017		2016
	(Dollars In Thousands)
Fixed maturities	$	224,115	$	632,685
Equity securities	14,569		(70		)

The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of March 31, 2017, and December 31, 2016, are as follows:



As of March 31, 2017	Amortized Cost		Gross Unrecognized Holding Gains		Gross Unrecognized Holding Losses			Fair Value		Total OTTI Recognized in OCI
	(Dollars In Thousands)
Fixed maturities:
Securities issued by affiliates:
Red Mountain LLC	$	668,137	$	—	$	(55,005	)	$	613,132	$	—
Steel City LLC	2,090,000		43,243		—			2,133,243		—
	$	2,758,137	$	43,243	$	(55,005	)	$	2,746,375	$	—

As of December 31, 2016
Fixed maturities:
Securities issued by affiliates:
Red Mountain LLC	$	654,177	$	—	$	(67,222	)	$	586,955	$	—
Steel City LLC	2,116,000		30,385		—			2,146,385		—
	$	2,770,177	$	30,385	$	(67,222	)	$	2,733,340	$	—

During the three months ended March 31, 2017 and 2016, the Company recorded no other-than-temporary impairments on held-to-maturity securities.

The Company’s held-to-maturity securities had $43.2 million of gross unrecognized holding gains and $55.0 million of gross unrecognized holding losses by maturity as of March 31, 2017. 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 $30.4 million of gross unrecognized holding gains and $67.2 million of gross unrecognized holding losses by maturity as of December 31, 2016. 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, 2017, Red Mountain LLC ("Red Mountain") and Steel City LLC ("Steel City"), that were determined to be VIEs. As of December 31, 2016, the Company had an interest in two subsidiaries, Red Mountain LLC ("Red Mountain") and Steel City LLC ("Steel City"), that were determined to be VIEs.

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”) in which Golden Gate V issued non-recourse funding obligations to Red Mountain and Red Mountain issued a note (the "Red Mountain Note") to Golden Gate V. For details of this transaction, see Note 10, 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, through an affiliate, of $10,000. Additionally, the Company has guaranteed Red Mountain’s payment obligation for the credit enhancement fee to the unrelated third party provider. As of March 31, 2017, 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 10, 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, 2017, no payments have been made or required related to this guarantee.