10-Q 1 plc9301710-q.htm 10-Q Document

 

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 September 30, 2017
 
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
 
 
 
 
 
Emerging Growth Company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 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 October 21, 2017:  1,000
 





PROTECTIVE LIFE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2017
 
TABLE OF CONTENTS
 
PART I
 
 
 
 
Page
Item 1.
Financial Statements (unaudited):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
 
 
 
Item 1A.
 
Item 2.
 
Item 6.
 
 
 





PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
 
For The
Three Months Ended
September 30,
 
For The
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars In Thousands)
Revenues
 

 
 
 
 
 
 

Premiums and policy fees
$
855,088

 
$
834,544

 
$
2,583,813

 
$
2,545,287

Reinsurance ceded
(325,120
)
 
(322,229
)
 
(984,094
)
 
(969,161
)
Net of reinsurance ceded
529,968

 
512,315


1,599,719

 
1,576,126

Net investment income
507,914

 
482,729

 
1,522,098

 
1,446,306

Realized investment gains (losses):
 

 
 

 
 

 
 

Derivative financial instruments
(82,341
)
 
116

 
(260,407
)
 
(156,749
)
All other investments
18,150

 
24,152

 
94,708

 
194,663

Other-than-temporary impairment losses
(366
)
 
(1,898
)
 
(3,124
)
 
(10,194
)
Portion recognized in other comprehensive income (before taxes)
93

 
(1,410
)
 
(7,765
)
 
3,302

Net impairment losses recognized in earnings
(273
)
 
(3,308
)
 
(10,889
)
 
(6,892
)
Other income
110,970

 
107,642

 
331,523

 
313,506

Total revenues
1,084,388

 
1,123,646

 
3,276,752

 
3,366,960

Benefits and expenses
 

 
 

 
 

 
 

Benefits and settlement expenses, net of reinsurance ceded: (three months: 2017 - $256,703; 2016 - $279,109; nine months: 2017 - $806,314; 2016 - $855,276)
743,934

 
733,051

 
2,205,937

 
2,161,293

Amortization of deferred policy acquisition costs and value of business acquired
3,991

 
43,392

 
47,612

 
94,899

Other operating expenses, net of reinsurance ceded: (three months: 2017 - $57,293; 2016 - $49,073; nine months: 2017 - $161,615; 2016 - $148,334)
225,613

 
214,124

 
674,236

 
637,186

Total benefits and expenses
973,538

 
990,567

 
2,927,785

 
2,893,378

Income before income tax
110,850

 
133,079

 
348,967

 
473,582

Income tax expense
28,308

 
39,785

 
106,743

 
152,820

Net income
$
82,542

 
$
93,294

 
$
242,224

 
$
320,762


See Notes to the Consolidated Condensed Financial Statements
2


PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
For The
Three Months Ended
September 30,
 
For The
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars In Thousands)
Net income
$
82,542

 
$
93,294

 
$
242,224

 
$
320,762

Other comprehensive income (loss):
 

 
 
 
 
 
 

Change in net unrealized gains (losses) on investments, net of income tax: (three months: 2017 - $54,464; 2016 - $106,841; nine months: 2017 - $295,743; 2016 - $657,352)
101,148

 
198,419

 
549,234

 
1,220,796

Reclassification adjustment for investment amounts included in net income, net of income tax: (three months: 2017 - $(146); 2016 - $575; nine months: 2017 - $631; 2016 - $(6,041))
(271
)
 
1,068

 
1,174

 
(11,219
)
Change in net unrealized gains (losses) relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (three months: 2017 - $452; 2016 - $1,278; nine months: 2017 - $3,837; 2016 - $(106))
839

 
2,374

 
7,125

 
(198
)
Change in accumulated (loss) gain - derivatives, net of income tax: (three months: 2017 - $445; 2016 - $0; nine months: 2017 - $19; 2016 - $0)
828

 

 
36

 

Reclassification adjustment for derivative amounts included in net income, net of income tax: (three months: 2017 - $14; 2016 - $0; nine months: 2017 - $139; 2016 - $0)
24

 

 
257

 

Change in postretirement benefits liability adjustment, net of income tax: (three months: 2017 - $0; 2016 - $(874); nine months: 2017 - $0; 2016 - $(874))

 
(1,624
)
 

 
(1,624
)
Total other comprehensive income
102,568

 
200,237

 
557,826

 
1,207,755

Total comprehensive income
$
185,110

 
$
293,531

 
$
800,050

 
$
1,528,517


See Notes to the Consolidated Condensed Financial Statements
3


PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
 
 
As of
 
September 30, 2017
 
December 31, 2016
 
(Dollars In Thousands)
Assets
 

 
 

Fixed maturities, at fair value (amortized cost: 2017 - $41,090,638 ; 2016 - $39,832,724)
$
40,777,816

 
$
38,183,337

Fixed maturities, at amortized cost (fair value: 2017 - $2,796,603; 2016 - $2,733,340)
2,730,995

 
2,770,177

Equity securities, at fair value (cost: 2017 - $763,914; 2016 - $768,423)
781,537

 
754,489

Mortgage loans (related to securitizations: 2017 - $245,202; 2016 - $277,964)
6,528,890

 
6,132,125

Investment real estate, net of accumulated depreciation (2017 - $113; 2016 - $252)
4,572

 
8,060

Policy loans
1,625,960

 
1,650,240

Other long-term investments
1,113,937

 
865,304

Short-term investments
527,179

 
332,431

Total investments
54,090,886


50,696,163

Cash
257,562

 
348,182

Accrued investment income
496,876

 
482,388

Accounts and premiums receivable
127,007

 
118,303

Reinsurance receivables
5,191,229

 
5,323,846

Deferred policy acquisition costs and value of business acquired
2,158,816

 
2,019,829

Goodwill
793,470

 
793,470

Other intangibles, net of accumulated amortization (2017 - $126,709; 2016 - $79,226)
673,588

 
688,083

Property and equipment, net of accumulated depreciation (2017 - $20,185; 2016 - $17,450)
109,671

 
106,111

Other assets
218,876

 
170,004

Income tax receivable
99,370

 
116,823

Assets related to separate accounts
 
 
 

Variable annuity
13,763,971

 
13,244,252

Variable universal life
996,375

 
895,925

Total assets
$
78,977,697


$
75,003,379


See Notes to the Consolidated Condensed Financial Statements
4


PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(continued)
 
 
As of
 
September 30, 2017
 
December 31, 2016
 
(Dollars In Thousands)
Liabilities
 

 
 

Future policy benefits and claims
$
30,801,511

 
$
30,511,085

Unearned premiums
871,591

 
848,495

Total policy liabilities and accruals
31,673,102

 
31,359,580

Stable value product account balances
4,793,890

 
3,501,636

Annuity account balances
10,813,795

 
10,642,115

Other policyholders’ funds
1,265,500

 
1,165,749

Other liabilities
2,579,308

 
1,924,155

Deferred income taxes
1,987,582

 
1,599,764

Non-recourse funding obligations
2,759,640

 
2,796,474

Secured financing liabilities
599,556

 
797,721

Debt
1,122,000

 
1,163,285

Subordinated debt securities
495,255

 
441,202

Liabilities related to separate accounts
 

 
 

Variable annuity
13,763,971

 
13,244,252

Variable universal life
996,375

 
895,925

Total liabilities
72,849,974


69,531,858

Commitments and contingencies - Note 11


 


Shareowner’s equity
 

 
 

Common Stock: 2017 and 2016 - $0.01 par value; shares authorized: 5,000; shares issued: 1,000

 

Additional paid-in-capital
5,554,059

 
5,554,059

Retained earnings
670,361

 
571,985

Accumulated other comprehensive income (loss):
 

 
 

Net unrealized (losses) gains on investments, net of income tax: (2017 - $(53,167); 2016 - $(349,541))
(98,739
)
 
(649,147
)
Net unrealized losses relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (2017 - $(27); 2016 - $(3,864))
(50
)
 
(7,175
)
Accumulated gain (loss) - derivatives, net of income tax: (2017 - $549; 2016 - $391)
1,020

 
727

Postretirement benefits liability adjustment, net of income tax: (2017 - $578; 2016 - $578)
1,072

 
1,072

Total shareowner’s equity
6,127,723


5,471,521

Total liabilities and shareowner’s equity
$
78,977,697


$
75,003,379


See Notes to the Consolidated Condensed Financial Statements
5


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

 
Common
Stock
 
Additional
Paid-In-
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareowner’s
Equity
 
(Dollars In Thousands)
Balance, December 31, 2016
$

 
$
5,554,059

 
$
571,985

 
$
(654,523
)
 
$
5,471,521

Net income for the nine months ended September 30, 2017
 

 
 

 
242,224

 
 

 
242,224

Other comprehensive income
 

 
 

 
 

 
557,826

 
557,826

Comprehensive income for the nine months ended September 30, 2017
 

 
 

 
 

 
 

 
800,050

Dividends to parent
 
 
 
 
(143,848
)
 
 
 
(143,848
)
Balance, September 30, 2017
$

 
$
5,554,059

 
$
670,361

 
$
(96,697
)
 
$
6,127,723


See Notes to the Consolidated Condensed Financial Statements
6


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

 
For The
Nine Months Ended
September 30,
 
2017
 
2016
 
(Dollars In Thousands)
Cash flows from operating activities
 
 
 

Net income
$
242,224

 
$
320,762

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

 
 

Realized investment (gains) losses
176,588

 
(31,022
)
Amortization of DAC and VOBA
47,612

 
94,899

Capitalization of DAC
(249,640
)
 
(244,252
)
Depreciation and amortization expense
49,227

 
42,520

Deferred income tax
86,463

 
201,466

Accrued income tax
17,453

 
(152,402
)
Interest credited to universal life and investment products
507,229

 
532,998

Policy fees assessed on universal life and investment products
(1,004,829
)
 
(935,702
)
Change in reinsurance receivables
132,617

 
101,284

Change in accrued investment income and other receivables
(17,550
)
 
(44,655
)
Change in policy liabilities and other policyholders’ funds of traditional life and health products
(273,640
)
 
(159,533
)
Trading securities:
 

 
 

Maturities and principal reductions of investments
131,563

 
93,397

Sale of investments
195,733

 
390,412

Cost of investments acquired
(277,423
)
 
(438,886
)
Other net change in trading securities
17,741

 
47,879

Amortization of premiums and accretion of discounts on investments and mortgage loans
232,939

 
308,249

Change in other liabilities
36,239

 
338,199

Other, net
(58,308
)
 
(110,243
)
Net cash (used in) provided by operating activities
$
(7,762
)
 
$
355,370



 

See Notes to the Consolidated Condensed Financial Statements
7


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


 
For The
Nine Months Ended
September 30,
 
2017
 
2016
 
(Dollars In Thousands)
Cash flows from investing activities
 

 
 

Maturities and principal reductions of investments, available-for-sale
$
541,155

 
$
984,707

Sale of investments, available-for-sale
1,302,576

 
1,544,558

Cost of investments acquired, available-for-sale
(3,248,911
)
 
(3,962,879
)
Change in investments, held-to-maturity
36,000

 
(2,185,000
)
Mortgage loans:
 

 
 

New lendings
(1,081,226
)
 
(944,025
)
Repayments
644,189

 
648,109

Change in investment real estate, net
3,679

 
2,905

Change in policy loans, net
24,280

 
43,425

Change in other long-term investments, net
(282,506
)
 
(104,543
)
Change in short-term investments, net
(203,169
)
 
51,960

Net unsettled security transactions
349,544

 
52,292

Purchase of property, equipment, and intangibles
(34,229
)
 
(15,607
)
Amounts received from reinsurance transaction

 
325,800

Net cash used in investing activities
$
(1,948,618
)
 
$
(3,558,298
)
Cash flows from financing activities
 

 
 

Borrowings under line of credit arrangements and debt
$
975,000

 
$
220,000

Principal payments on line of credit arrangement and debt
(934,123
)
 
(373,074
)
Issuance (repayment) of non-recourse funding obligations
(36,000
)
 
2,098,700

Secured financing liabilities
(198,165
)
 
(218,728
)
Dividends to shareowner
(143,848
)
 
(89,343
)
Investment product deposits and change in universal life deposits
3,901,051

 
3,509,315

Investment product withdrawals
(1,698,062
)
 
(1,718,670
)
Other financing activities, net
(93
)
 

Net cash provided by financing activities
$
1,865,760

 
$
3,428,200

Change in cash
(90,620
)
 
225,272

Cash at beginning of period
348,182

 
396,072

Cash at end of period
$
257,562

 
$
621,344


See Notes to the 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 (now known as Dai-ichi Life Holdings, Inc., “Dai-ichi Life”), when DL Investment (Delaware), Inc. a wholly owned subsidiary of Dai-ichi Life, merged with and into the Company. Prior to February 1, 2015, 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.
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 and nine months ended September 30, 2017, are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2017. 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, 2016.
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 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, 2016. There were no significant changes to the Company's accounting policies during the nine months ended September 30, 2017.
Accounting Pronouncements Recently Adopted
ASU No. 2017-04-Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This Update simplifies the goodwill impairment test by re-defining the concept of goodwill impairment as the condition that exists when the carrying amount of a reporting unit exceeds its fair value. The Update eliminates “Step 2” of the current goodwill impairment test, which requires entities to determine goodwill impairment by calculating the implied fair value of goodwill by remeasuring to fair value the assets and liabilities of a reporting unit as if that reporting unit had been acquired in a business combination. The Company elected to adopt the amendments in the Update in the first quarter of 2017, and will apply the revised guidance to impairment tests conducted after January 1, 2017. Application of the revised guidance did not impact the Company’s financial position or results of operations and will simplify its annual goodwill impairment test, which is generally conducted in the fourth quarter. For more details regarding the Company’s goodwill assessment process, please refer to Note 9, Goodwill.

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 additional disclosures introduced in this Update have not been provided, as the short-duration lines of business to which they apply are not material to the Company’s financial statements.

9


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. The Company will adopt this Update using the modified retrospective approach via a cumulative effect adjustment to retained earnings as of January 1, 2018. The amendments in the Update, along with clarifying updates issued subsequent to ASU 2014-09, will impact some of the Company's smaller lines of business, specifically revenues at the Company's affiliated broker dealers and insurance agency, and certain revenues associated with the Company's Asset Protection products. However, the cumulative effect adjustment related to the Company's adoption of the revised guidance is limited to the Company's Asset Protection segment. Based on its current projections, the Company estimates that the cumulative effect adjustment as of January 1, 2018 will result in a decrease in retained earnings between $72 million and $82 million. Several application questions remain outstanding, most notably interpretive positions regarding the Update's application to certain of the Company's warranty products. The Company will also implement minor changes to its accounting and disclosures with respect to the non-insurance lines of business referenced above to ensure compliance with the revised guidance.
    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 Update also introduces a single-step impairment model for equity investments without a readily determinable fair value. Additionally, the Update requires changes in instrument-specific credit risk for fair value option liabilities to be recorded in other comprehensive income. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2017 and will be applied on a modified retrospective basis. The Company will record a cumulative-effect adjustment at the date of adoption (January 1, 2018) transferring unrealized gains and losses on available-for-sale equity securities to retained earnings from accumulated other comprehensive income. The impact of this adjustment (had it been recorded on September 30, 2017), net of income tax, would have resulted in a $11.5 million increase to retained earnings. The Company expects to complete its review of applicable policies and procedures 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 lease asset and liability will be measured at the present value of the minimum lease payments less any upfront payments or fees. The Update also requires numerous disclosure changes for which the Company is assessing the impact. The amendments in the Update are effective for annual and interim periods beginning after December 15, 2018 on a modified retrospective basis. The Company has completed an inventory of all leases in the organization and is currently assessing the impact of the Update and updating internal processes to ensure compliance with the revised guidance.

ASU No. 2016-13 - Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The amendments in this Update introduce a new current expected credit loss (“CECL”) model for certain financial assets, including mortgage loans and reinsurance receivables. The new model will not apply to debt securities classified as available-for-sale. For assets within the scope of the new model, an entity will recognize as an allowance against earnings its estimate of the contractual cash flows not expected to be collected on day one of the asset’s acquisition. The allowance may be reversed through earnings if a security recovers in value. This differs from the current impairment model, which requires recognition of credit losses when they have been incurred and recognizes a security’s subsequent recovery in value in other comprehensive income. The Update also makes targeted changes to the current impairment model for available-for-sale debt securities, which comprise the majority of the Company’s invested assets. Similar to the CECL model, credit loss impairments will be recorded in an allowance against earnings that may be reversed for subsequent recoveries in value. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2019 on a modified retrospective basis. 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 operations and financial results.

ASU No. 2016-15 - Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The amendments in this Update are intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. Specific transactions addressed in the new guidance include: Debt prepayment/extinguishment costs, contingent consideration payments, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investments. The Update does not introduce any new accounting or financial reporting requirements, and is effective for annual and interim periods beginning after December 15, 2018 using the retrospective method. The Company is reviewing its policies and processes to ensure compliance with the requirements in this Update, upon adoption.

ASU No. 2016-18 - Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Task Force). The amendments in this update provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows, thereby reducing diversity in practice related to the presentation of these amounts. The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The Update is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company expects to complete its review of applicable policies and procedures to ensure compliance with the revised guidance.

10



ASU No. 2017-01 - Business Combinations (Topic 805): Clarifying the Definition of a Business. The purpose of this update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in the Update provide a specific test by which an entity may determine whether an acquisition involves a set of assets or a business. The amendments in the Update are to be applied prospectively for periods beginning after December 15, 2017. The Company has reviewed the revised requirements, and does not anticipate that the changes will impact its policies or recent conclusions related to its acquisition activities.

    ASU No. 2017-07 - Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments in this update require entities to disaggregate the current-service-cost component from other components of net benefit cost and present it with other current compensation costs in the income statement. The other components of net benefit cost must be presented outside of income from operations if that subtotal is presented. In addition, the Update requires entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines. The amendments in this update are effective for interim and annual periods beginning after December 15, 2017. As provided for in the ASU, the Company expects to apply the provisions of the statement retrospectively for components of net periodic pension costs and prospectively for capitalization of the service costs component of net periodic costs and net periodic postretirement benefits. The Update will not impact the Company’s financial position or results of operations. The Company is reviewing its policies and processes to ensure compliance with the requirements in this Update, upon adoption.    

ASU No. 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this update require that premiums on callable debt securities be amortized to the first call date. This is a change from current guidance, under which premiums are amortized to the maturity date of the security. The amendments are effective for annual and interim periods beginning after December 31, 2018, and early adoption is permitted. Transition will be through a modified retrospective approach in which the cumulative effect of application is recorded to retained earnings at the beginning of the annual period in which an entity adopts the revised guidance. The Company is currently reviewing its systems and processes to determine whether early adoption of the revised guidance is practicable.

ASU No. 2017-12 - Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this update are designed to permit hedge accounting to be applied to a broader range of hedging strategies as well as to more closely align hedge accounting and risk management objectives. Specific provisions include requiring changes in the fair value of a hedging instrument be recorded in the same income statement line as the hedged item when it affects earnings. In addition, after a hedge has initially qualified as an effective hedge the Update permits the use of a qualitative hedge effectiveness test in subsequent periods. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. The Company is currently assessing the impact this standard will have on its operations and financial results.
    
3.     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.
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 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.

11


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 September 30, 2017, and December 31, 2016, is as follows:
 
As of
 
September 30, 2017
 
December 31, 2016
 
(Dollars In Thousands)
Closed block liabilities
 

 
 

Future policy benefits, policyholders’ account balances and other policyholder liabilities
$
5,814,527

 
$
5,896,355

Policyholder dividend obligation
136,004

 
31,932

Other liabilities
76,176

 
40,007

Total closed block liabilities
6,026,707

 
5,968,294

Closed block assets
 

 
 

Fixed maturities, available-for-sale, at fair value
$
4,549,322

 
$
4,440,105

Mortgage loans on real estate
130,521

 
201,088

Policy loans
707,293

 
712,959

Cash
148,612

 
108,270

Other assets
141,740

 
135,794

Total closed block assets
5,677,488

 
5,598,216

Excess of reported closed block liabilities over closed block assets
349,219

 
370,078

Portion of above representing accumulated other comprehensive income:
 

 
 

Net unrealized investment gains (losses) net of policyholder dividend obligation: $(55,231) and $(197,450); and net of income tax: $19,331 and $69,107

 

Future earnings to be recognized from closed block assets and closed block liabilities
$
349,219

 
$
370,078

Reconciliation of the policyholder dividend obligation is as follows:
 
For The
Nine Months Ended
September 30,
 
2017
 
2016
 
(Dollars In Thousands)
Policyholder dividend obligation, beginning of period
$
31,932

 
$

Applicable to net revenue (losses)
(38,147
)
 
(36,707
)
Change in net unrealized investment gains (losses) allocated to the policyholder dividend obligation
142,219

 
300,814

Policyholder dividend obligation, end of period
$
136,004

 
$
264,107


12


Closed Block revenues and expenses were as follows:
 
For The
Three Months Ended
September 30,
 
For The
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars In Thousands)
Revenues
 

 
 
 
 
 
 

Premiums and other income
$
40,962

 
$
44,043

 
$
128,697

 
$
135,282

Net investment income
50,780

 
53,582

 
153,481

 
156,458

Net investment gains
341

 
326

 
448

 
963

Total revenues
92,083

 
97,951

 
282,626

 
292,703

Benefits and other deductions
 

 
 
 
 

 
 

Benefits and settlement expenses
81,721

 
88,143

 
249,319

 
260,227

Other operating expenses
621

 
537

 
1,216

 
2,214

Total benefits and other deductions
82,342

 
88,680

 
250,535

 
262,441

Net revenues before income taxes
9,741

 
9,271

 
32,091

 
30,262

Income tax expense
3,409

 
3,245

 
11,232

 
10,591

Net revenues
$
6,332

 
$
6,026

 
$
20,859

 
$
19,671

4.     INVESTMENT OPERATIONS
Net realized gains (losses) for all other investments are summarized as follows:
 
For The
Three Months Ended
September 30,
 
For The
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars In Thousands)
Fixed maturities
$
1,042

 
$
1,665

 
$
10,482

 
$
24,116

Equity securities
(352
)
 

 
(1,398
)
 
36

Impairments
(273
)
 
(3,308
)
 
(10,889
)
 
(6,892
)
Modco trading portfolio
19,399

 
23,995

 
93,181

 
178,353

Other investments
(1,939
)
 
(1,508
)
 
(7,557
)
 
(7,842
)
Total realized gains (losses) - investments
$
17,877

 
$
20,844

 
$
83,819

 
$
187,771


13


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
September 30,
 
For The
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars In Thousands)
 
 
 
 
Gross realized gains
$
1,933

 
$
3,223

 
$
14,968

 
$
31,023

Gross realized losses:
 
 
 
 
 
 


Impairment losses
$
(273
)
 
$
(3,308
)
 
$
(10,889
)
 
$
(6,892
)
Other realized losses
$
(1,243
)
 
$
(1,558
)
 
$
(5,884
)
 
$
(6,871
)
The chart below summarizes the fair value (proceeds) and the gains (losses) realized on securities the Company sold that were in an unrealized gain position and an unrealized loss position.
 
For The
Three Months Ended
September 30,
 
For The
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars In Thousands)
Securities in an unrealized gain position:
 
 
 
 
 
 
 
Fair value (proceeds)
$
121,459

 
$
167,272

 
$
566,064

 
$
990,066

Gains realized
$
1,933

 
$
3,223

 
$
14,967

 
$
31,023

 
 
 
 
 
 
 
 
Securities in an unrealized loss position(1):
 
 
 
 
 
 
 
Fair value (proceeds)
$
37,186

 
$
7,105

 
$
121,450

 
$
67,688

Losses realized
$
(1,243
)
 
$
(1,558
)
 
$
(5,884
)
 
$
(6,871
)
 
 
 
 
 
 
 
 
(1) The Company made the decision to exit these holdings in conjunction with its overall asset liability management process.

14


The amortized cost and fair value of the Company’s investments classified as available-for-sale are as follows:
As of September 30, 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
 
$
2,187,460

 
$
22,141

 
$
(17,347
)
 
$
2,192,254

 
$
16

Commercial mortgage-backed securities
 
1,939,832

 
6,167

 
(24,570
)
 
1,921,429

 

Other asset-backed securities
 
1,186,463

 
17,692

 
(13,488
)
 
1,190,667

 

U.S. government-related securities
 
1,317,910

 
1,256

 
(26,333
)
 
1,292,833

 

Other government-related securities
 
253,026

 
8,145

 
(6,835
)
 
254,336

 

States, municipals, and political subdivisions
 
1,756,865

 
6,416

 
(59,272
)
 
1,704,009

 
(93
)
Corporate securities
 
29,673,641

 
480,875

 
(705,147
)
 
29,449,369

 

Preferred stock
 
94,362

 
376

 
(2,898
)
 
91,840

 

 
 
38,409,559

 
543,068

 
(855,890
)
 
38,096,737

 
(77
)
Equity securities
 
758,804

 
24,914

 
(7,291
)
 
776,427

 

Short-term investments
 
482,923

 

 

 
482,923

 

 
 
$
39,651,286

 
$
567,982

 
$
(863,181
)
 
$
39,356,087

 
$
(77
)
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
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
 
$
1,913,413

 
$
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 September 30, 2017 and December 31, 2016, the Company had an additional $2.7 billion and $2.6 billion of fixed maturities, $5.1 million and $7.1 million of equity securities, and $44.3 million and $52.6 million of short-term investments classified as trading securities, respectively.

15


The amortized cost and fair value of available-for-sale and held-to-maturity fixed maturities as of September 30, 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
$
777,460

 
$
778,156

 
$

 
$

Due after one year through five years
6,292,741

 
6,325,294

 

 

Due after five years through ten years
7,685,870

 
7,718,256

 

 

Due after ten years
23,653,488

 
23,275,031

 
2,730,995

 
2,796,603

 
$
38,409,559

 
$
38,096,737

 
$
2,730,995

 
$
2,796,603

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
September 30,
 
For The
Nine Months Ended
September 30,
 
2017
 
2017
 
Fixed
Maturities
 
Equity
Securities
 
Total
Securities
 
Fixed Maturities
 
Equity Securities
 
Total Securities
 
(Dollars In Thousands)
Other-than-temporary impairments
$
(366
)
 
$

 
$
(366
)
 
$
(494
)
 
$
(2,630
)
 
$
(3,124
)
Non-credit impairment losses recorded in other comprehensive income
93

 

 
93

 
(7,765
)
 

 
$
(7,765
)
Net impairment losses recognized in earnings
$
(273
)
 
$

 
$
(273
)
 
$
(8,259
)
 
$
(2,630
)
 
$
(10,889
)
 
For The
Three Months Ended
September 30,
 
For The
Nine Months Ended
September 30,
 
2016
 
2016
 
Fixed
Maturities
 
Equity
Securities
 
Total
Securities
 
Fixed Maturities
 
Equity Securities
 
Total Securities
 
(Dollars In Thousands)
Other-than-temporary impairments
$
(1,898
)
 
$

 
$
(1,898
)
 
$
(10,194
)
 
$

 
$
(10,194
)
Non-credit impairment losses recorded in other comprehensive income
(1,410
)
 

 
(1,410
)
 
3,302

 

 
3,302

Net impairment losses recognized in earnings
$
(3,308
)
 
$

 
$
(3,308
)
 
$
(6,892
)
 
$

 
$
(6,892
)
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 and nine months ended September 30, 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):

16


 
For The
Three Months Ended
September 30,
 
For The
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars In Thousands)
Beginning balance
$
2,783

 
$
964

 
$
12,685

 
$
22,761

Additions for newly impaired securities
266

 
1,721

 
266

 
4,777

Additions for previously impaired securities
6

 
1,521

 
2,791

 
2,046

Reductions for previously impaired securities due to a change in expected cash flows
(37
)
 
(4
)
 
(12,724
)
 
(22,763
)
Reductions for previously impaired securities that were sold in the current period
(600
)
 

 
(600
)
 
(2,619
)
Ending balance
$
2,418

 
$
4,202

 
$
2,418

 
$
4,202

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 September 30, 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
$
1,044,494

 
$
(15,210
)
 
$
88,573

 
$
(2,137
)
 
$
1,133,067

 
$
(17,347
)
Commercial mortgage-backed securities
1,282,643

 
(19,936
)
 
159,684

 
(4,634
)
 
1,442,327

 
(24,570
)
Other asset-backed securities
202,097

 
(5,064
)
 
170,747

 
(8,424
)
 
372,844

 
(13,488
)
U.S. government-related securities
1,090,531

 
(21,099
)
 
85,948

 
(5,234
)
 
1,176,479

 
(26,333
)
Other government-related securities
44,015

 
(287
)
 
84,524

 
(6,548
)
 
128,539

 
(6,835
)
States, municipalities, and political subdivisions
819,311

 
(22,392
)
 
615,181

 
(36,880
)
 
1,434,492

 
(59,272
)
Corporate securities
7,825,478

 
(151,509
)
 
8,487,852

 
(553,638
)
 
16,313,330

 
(705,147
)
Preferred stock
52,294

 
(806
)
 
28,846

 
(2,092
)
 
81,140

 
(2,898
)
Equities
108,502

 
(2,245
)
 
55,006

 
(5,046
)
 
163,508

 
(7,291
)
 
$
12,469,365

 
$
(238,548
)
 
$
9,776,361

 
$
(624,633
)
 
$
22,245,726

 
$
(863,181
)
RMBS and CMBS had gross unrealized losses greater than twelve months of $2.1 million and $4.6 million, respectively, as of September 30, 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 $8.4 million as of September 30, 2017. This category predominately includes student loan backed auction rate securities whose underlying collateral is at least 97% guaranteed by the Federal Family Education Loan Program (“FFELP”). At this time, the Company has no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary.
The other government-related securities had gross unrealized losses greater than twelve months of $6.5 million as of September 30, 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 $36.9 million as of September 30, 2017. These declines were related to changes in interest rates.
The corporate securities category had gross unrealized losses greater than twelve months of $553.6 million as of September 30, 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 September 30, 2017, the Company had a total of 1,742 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.

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 December 31, 2016:
 
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 whose underlying collateral 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 other government-related securities had gross unrealized losses greater than twelve months of $11.9 million as of December 31, 2016. 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 $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 September 30, 2017, the Company had securities in its available-for-sale portfolio which were rated below investment grade of $1.9 billion and had an amortized cost of $1.9 billion. In addition, included in the Company’s trading portfolio, the Company held $240.7 million of securities which were rated below investment grade. Approximately $338.4 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
September 30,
 
For The
Nine Months Ended
September 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars In Thousands)
Fixed maturities
$
168,062

 
$
295,651

 
$
868,767

 
$
1,777,330

Equity securities
(891
)
 
(1,691
)
 
20,512

 
7,749


18


The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of September 30, 2017 and December 31, 2016, are as follows:
As of September 30, 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
 
$
690,995

 
$

 
$
(17,305
)
 
$
673,690

 
$

Steel City LLC
 
2,040,000

 
82,913

 

 
2,122,913

 

 
 
$
2,730,995

 
$
82,913

 
$
(17,305
)
 
$
2,796,603

 
$

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2016
 
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
 
$
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 and nine months ended September 30, 2017 and 2016, the Company recorded no other-than-temporary impairments on held-to-maturity securities.
The Company’s held-to-maturity securities had $82.9 million of gross unrecognized holding gains and $17.3 million of gross unrecognized holding losses by maturity as of September 30, 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 September 30, 2017 and December 31, 2016, 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

19


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 September 30, 2017, no payments have been made or required related to this guarantee.
Steel City, a 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 September 30, 2017, no payments have been made or required related to this guarantee.
5.     FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company determined the fair value of its financial instruments based on the fair value hierarchy established in FASB guidance referenced in the Fair Value Measurements and Disclosures Topic which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company has adopted the provisions from the FASB guidance that is referenced in the Fair Value Measurements and Disclosures Topic for non-financial assets and liabilities (such as property and equipment, goodwill, and other intangible assets) that are required to be measured at fair value on a periodic basis. The effect on the Company’s periodic fair value measurements for non-financial assets and liabilities was not material.
The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three level hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.
Financial assets and liabilities recorded at fair value on the consolidated balance sheets are categorized as follows:
Level 1: Unadjusted quoted prices for identical assets or liabilities in an active market.

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

a.Quoted prices for similar assets or liabilities in active markets
b.Quoted prices for identical or similar assets or liabilities in non-active markets
c.Inputs other than quoted market prices that are observable
d.
Inputs that are derived principally from or corroborated by observable market data through correlation or other means.

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

20


The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of September 30, 2017:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars In Thousands)
Assets:
 

 
 

 
 

 
 

Fixed maturity securities - available-for-sale
 

 
 

 
 

 
 

Residential mortgage-backed securities
$

 
$
2,192,254

 
$

 
$
2,192,254

Commercial mortgage-backed securities

 
1,921,429

 

 
1,921,429

Other asset-backed securities

 
637,518

 
553,149

 
1,190,667

U.S. government-related securities
1,009,225

 
283,608

 

 
1,292,833

State, municipalities, and political subdivisions

 
1,704,009

 

 
1,704,009

Other government-related securities

 
254,336

 

 
254,336

Corporate securities

 
28,824,816

 
624,553

 
29,449,369

Preferred stock
72,942

 
18,898

 

 
91,840

Total fixed maturity securities - available-for-sale
1,082,167

 
35,836,868

 
1,177,702

 
38,096,737

Fixed maturity securities - trading
 

 
 

 
 

 
 

Residential mortgage-backed securities

 
262,062

 

 
262,062

Commercial mortgage-backed securities

 
145,653

 

 
145,653

Other asset-backed securities

 
107,123

 
35,490

 
142,613

U.S. government-related securities
21,589

 
6,125

 

 
27,714

State, municipalities, and political subdivisions

 
321,001

 

 
321,001

Other government-related securities

 
64,067

 

 
64,067

Corporate securities

 
1,709,216

 
5,524

 
1,714,740

Preferred stock
3,229

 

 

 
3,229

Total fixed maturity securities - trading
24,818

 
2,615,247

 
41,014

 
2,681,079

Total fixed maturity securities
1,106,985

 
38,452,115

 
1,218,716

 
40,777,816

Equity securities
715,339

 
36

 
66,162

 
781,537

Other long-term investments(1)
61,072

 
380,512

 
130,352

 
571,936

Short-term investments
421,408

 
105,771

 

 
527,179

Total investments
2,304,804

 
38,938,434

 
1,415,230

 
42,658,468

Cash
257,562

 

 

 
257,562

Other assets
29,927

 

 

 
29,927

Assets related to separate accounts
 

 
 

 
 

 
 

Variable annuity
13,763,971

 

 

 
13,763,971

Variable universal life
996,375

 

 

 
996,375

Total assets measured at fair value on a recurring basis
$
17,352,639

 
$
38,938,434

 
$
1,415,230

 
$
57,706,303

Liabilities:
 

 
 

 
 

 
 

Annuity account balances (2)
$

 
$

 
$
85,028

 
$
85,028

Other liabilities(1)
23,775

 
206,307

 
736,413

 
966,495

Total liabilities measured at fair value on a recurring basis
$
23,775

 
$
206,307

 
$
821,441

 
$
1,051,523

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

21


The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of December 31, 2016:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars In Thousands)
Assets:
 

 
 

 
 

 
 

Fixed maturity securities - available-for-sale
 

 
 

 
 

 
 

Residential mortgage-backed securities
$

 
$
1,898,480

 
$
3

 
$
1,898,483

Commercial mortgage-backed securities

 
1,811,470

 

 
1,811,470

Other asset-backed securities

 
648,929

 
562,604

 
1,211,533

U.S. government-related securities
1,002,020

 
266,139

 

 
1,268,159

State, municipalities, and political subdivisions

 
1,656,503

 

 
1,656,503

Other government-related securities

 
239,921

 

 
239,921

Corporate securities

 
26,707,519

 
664,046

 
27,371,565

Preferred stock
66,781

 
19,062

 

 
85,843

Total fixed maturity securities - available-for-sale
1,068,801

 
33,248,023

 
1,226,653

 
35,543,477

Fixed maturity securities - trading
 

 
 

 
 

 
 

Residential mortgage-backed securities

 
255,027

 

 
255,027

Commercial mortgage-backed securities

 
149,683

 

 
149,683