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INVESTMENT OPERATIONS
 3 Months Ended
Mar. 31, 2018
Investments, Debt and Equity Securities [Abstract]  
INVESTMENT OPERATIONS
INVESTMENT OPERATIONS
Net realized gains (losses) for all other investments are summarized as follows:
 
For The
Three Months Ended
March 31,
 
2018
 
2017
 
(Dollars In Thousands)
Fixed maturities
$
2,783

 
$
9,490

Equity gains and losses(1)
(8,786
)
 
(9
)
Impairments
(3,645
)
 
(7,831
)
Modco trading portfolio
(84,709
)
 
18,552

Other investments
3,113

 
(5,192
)
Total realized gains (losses) - investments
$
(91,244
)
 
$
15,010

 
 
 
 
(1) Beginning in the three month period ending March 31, 2018, all changes in the fair market value of equity securities are recorded as a realized gains (loss) as a result of the adoption of ASU No. 2016-01
Gross realized gains and gross realized losses on investments available-for-sale (fixed maturities and short-term investments) are as follows:
 
For The
Three Months Ended
March 31,
 
2018
 
2017
 
(Dollars In Thousands)
Gross realized gains
$
8,049

 
$
10,738

Gross realized losses:
 
 
 
Impairment losses
$
(3,645
)
 
$
(7,831
)
Other realized losses
$
(5,267
)
 
$
(1,257
)

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,
 
2018
 
2017
 
(Dollars In Thousands)
Securities in an unrealized gain position:
 
 
 
Fair value (proceeds)
$
142,133

 
$
169,134

Gains realized
$
8,049

 
$
10,738

 
 
 
 
Securities in an unrealized loss position(1):
 
 
 
Fair value (proceeds)
$
56,984

 
$
12,452

Losses realized
$
(5,267
)
 
$
(1,257
)
 
 
 
 
(1) The Company made the decision to exit these holdings in conjunction with its overall asset liability management process.

The chart below summarizes the realized gains (losses) on equity securities sold during the period and equity securities still held at the reporting date.
 
For The
Three Months Ended
March 31,
 
2018
 
(Dollars In Thousands)
Net gains (losses) recognized during the period on equity securities
$
(8,786
)
Less: net gains (losses) recognized on equity securities sold during the period
$
(1,702
)
Gains (losses) recognized during the period on equity securities still held
$
(7,084
)

    

The amortized cost and fair value of the Company’s investments classified as available-for-sale are as follows:
As of March 31, 2018
 
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
 
$
2,430,278

 
$
11,723

 
$
(47,631
)
 
$
2,394,370

 
$
14

Commercial mortgage-backed securities
 
1,899,618

 
583

 
(58,695
)
 
1,841,506

 
—

Other asset-backed securities
 
1,238,929

 
15,376

 
(9,653
)
 
1,244,652

 
—

U.S. government-related securities
 
1,377,633

 
168

 
(50,001
)
 
1,327,800

 
—

Other government-related securities
 
282,664

 
6,421

 
(11,626
)
 
277,459

 
—

States, municipals, and political subdivisions
 
1,767,604

 
6,162

 
(73,487
)
 
1,700,279

 
—

Corporate securities
 
29,487,086

 
261,484

 
(1,188,797
)
 
28,559,773

 
—

Redeemable preferred stock
 
94,362

 
336

 
(4,129
)
 
90,569

 
—

 
 
38,578,174

 
302,253

 
(1,444,019
)
 
37,436,408

 
14

Short-term investments
 
371,290

 
—

 
—

 
371,290

 
—

 
 
$
38,949,464

 
$
302,253

 
$
(1,444,019
)
 
$
37,807,698

 
$
14

 
 
 
 
 
 
 
 
 
 
 
As of December 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
 
$
2,330,832

 
$
19,413

 
$
(23,033
)
 
$
2,327,212

 
$
10

Commercial mortgage-backed securities
 
1,914,998

 
5,010

 
(30,186
)
 
1,889,822

 
—

Other asset-backed securities
 
1,234,376

 
20,936

 
(5,763
)
 
1,249,549

 
—

U.S. government-related securities
 
1,255,244

 
185

 
(32,177
)
 
1,223,252

 
—

Other government-related securities
 
282,767

 
9,463

 
(4,948
)
 
287,282

 
—

States, municipals, and political subdivisions
 
1,770,299

 
16,959

 
(45,613
)
 
1,741,645

 
(37
)
Corporate securities
 
29,606,484

 
623,713

 
(528,187
)
 
29,702,010

 
(1
)
Redeemable preferred stock
 
94,362

 
232

 
(3,503
)
 
91,091

 
—

 
 
38,489,362

 
695,911

 
(673,410
)
 
38,511,863

 
(28
)
Equity securities
 
735,569

 
22,318

 
(8,771
)
 
749,116

 
—

Short-term investments
 
558,949

 
—

 
—

 
558,949

 
—

 
 
$
39,783,880

 
$
718,229

 
$
(682,181
)
 
$
39,819,928

 
$
(28
)
 
 
 
 
 
 
 
 
 
 
 
(1) These amounts are included in the gross unrealized gains and gross unrealized losses columns above.

     The fair value of the Company's investments classified as trading are as follows:    
 
 
As of
March 31, 2018
 
As of
December 31, 2017
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

Residential mortgage-backed securities
 
$
265,547

 
$
259,694

Commercial mortgage-backed securities
 
146,633

 
146,804

Other asset-backed securities
 
129,714

 
138,097

U.S. government-related securities
 
37,575

 
27,234

Other government-related securities
 
40,368

 
63,925

States, municipals, and political subdivisions
 
318,142

 
326,925

Corporate securities
 
1,645,899

 
1,698,183

Redeemable preferred stock
 
3,264

 
3,327

 
 
2,587,142

 
2,664,189

Equity securities
 
5,366

 
5,244

Short-term investments
 
70,491

 
56,261

 
 
$
2,662,999

 
$
2,725,694


The amortized cost and fair value of available-for-sale and held-to-maturity fixed maturities as of March 31, 2018, 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
$
912,935

 
$
909,757

 
$
—

 
$
—

Due after one year through five years
7,026,832

 
6,915,584

 
—

 
—

Due after five years through ten years
6,881,555

 
6,721,386

 
—

 
—

Due after ten years
23,756,852

 
22,889,681

 
2,699,826

 
2,674,129

 
$
38,578,174

 
$
37,436,408

 
$
2,699,826

 
$
2,674,129


The charts below summarizes the Company's other-than-temporary impairments of investments. All of the impairments were related to fixed maturities or equity securities.
 
For The
Three Months Ended
March 31,
 
2018
 
Fixed
Maturities
 
(Dollars In Thousands)
Other-than-temporary impairments
$
(691
)
Non-credit impairment losses recorded in other comprehensive income
(2,954
)
Net impairment losses recognized in earnings
$
(3,645
)

 
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
)

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, 2018 and 2017.
     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,
 
2018
 
2017
 
(Dollars In Thousands)
Beginning balance
$
3,268

 
$
12,685

Additions for newly impaired securities
—

 
—

Additions for previously impaired securities
—

 
—

Reductions for previously impaired securities due to a change in expected cash flows
(1,033
)
 
(12,685
)
Reductions for previously impaired securities that were sold in the current period
—

 
—

Ending balance
$
2,235

 
$
—


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, 2018:
 
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
$
1,426,703

 
$
(29,466
)
 
$
394,955

 
$
(18,165
)
 
$
1,821,658

 
$
(47,631
)
Commercial mortgage-backed securities
984,307

 
(24,232
)
 
756,845

 
(34,463
)
 
1,741,152

 
(58,695
)
Other asset-backed securities
143,917

 
(1,784
)
 
129,840

 
(7,869
)
 
273,757

 
(9,653
)
U.S. government-related securities
145,876

 
(3,108
)
 
1,054,322

 
(46,893
)
 
1,200,198

 
(50,001
)
Other government-related securities
90,010

 
(4,221
)
 
112,461

 
(7,405
)
 
202,471

 
(11,626
)
States, municipalities, and political subdivisions
505,864

 
(10,768
)
 
1,007,246

 
(62,719
)
 
1,513,110

 
(73,487
)
Corporate securities
12,307,646

 
(337,936
)
 
10,410,752

 
(850,861
)
 
22,718,398

 
(1,188,797
)
Redeemable preferred stock
57,050

 
(1,408
)
 
22,859

 
(2,721
)
 
79,909

 
(4,129
)
 
$
15,661,373

 
$
(412,923
)
 
$
13,889,280

 
$
(1,031,096
)
 
$
29,550,653

 
$
(1,444,019
)

RMBS and CMBS had gross unrealized losses greater than twelve months of $18.2 million and $34.5 million, respectively, as of March 31, 2018. 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 $7.9 million as of March 31, 2018. 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 U.S. government-related securities and the other government-related securities had gross unrealized losses greater than twelve months of $46.9 million and $7.4 million as of March 31, 2018, respectively. 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 $62.7 million as of March 31, 2018. These declines were related to changes in interest rates.
The corporate securities category had gross unrealized losses greater than twelve months of $850.9 million as of March 31, 2018. 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, 2018, the Company had a total of 2,428 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.
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, 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
$
766,599

 
$
(9,671
)
 
$
416,221

 
$
(13,362
)
 
$
1,182,820

 
$
(23,033
)
Commercial mortgage-backed securities
757,471

 
(8,592
)
 
796,456

 
(21,594
)
 
1,553,927

 
(30,186
)
Other asset-backed securities
86,506

 
(322
)
 
134,316

 
(5,441
)
 
220,822

 
(5,763
)
U.S. government-related securities
94,110

 
(688
)
 
1,072,232

 
(31,489
)
 
1,166,342

 
(32,177
)
Other government-related securities
24,830

 
(169
)
 
115,294

 
(4,778
)
 
140,124

 
(4,947
)
States, municipalities, and political subdivisions
170,268

 
(1,738
)
 
1,027,747

 
(43,874
)
 
1,198,015

 
(45,612
)
Corporate securities
5,054,316

 
(55,795
)
 
10,962,689

 
(472,394
)
 
16,017,005

 
(528,189
)
Redeemable preferred stock
22,048

 
(1,120
)
 
23,197

 
(2,383
)
 
45,245

 
(3,503
)
Equities
86,586

 
(1,401
)
 
91,195

 
(7,370
)
 
177,781

 
(8,771
)
 
$
7,062,734

 
$
(79,496
)
 
$
14,639,347

 
$
(602,685
)
 
$
21,702,081

 
$
(682,181
)

RMBS and CMBS had gross unrealized losses greater than twelve months of $13.4 million and $21.6 million, respectively, as of December 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 $5.4 million as of December 31, 2017. 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 U.S. government-related securities and other government-related securities had gross unrealized losses greater than twelve months of $31.5 million and $4.8 million as of December 31, 2017, respectively. 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 $43.9 million as of December 31, 2017. These declines were related to changes in interest rates.
The corporate securities category had gross unrealized losses greater than twelve months of $472.4 million as of December 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, 2018, 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 $1.9 billion. In addition, included in the Company’s trading portfolio, the Company held $217.2 million of securities which were rated below investment grade. Approximately $307.5 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 maturities, classified as available-for-sale is summarized as follows:
 
For The
Three Months Ended
March 31,
 
2018
 
2017
 
(Dollars In Thousands)
Fixed maturities
$
(884,219
)
 
$
224,115


The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of March 31, 2018 and December 31, 2017, are as follows:
As of March 31, 2018
 
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
 
$
718,826

 
$
—

 
$
(56,007
)
 
$
662,819

 
$
—

Steel City LLC
 
1,981,000

 
30,310

 
—

 
2,011,310

 
—

 
 
$
2,699,826

 
$
30,310

 
$
(56,007
)
 
$
2,674,129

 
$
—

 
 
 
 
 
 
 
 
 
 
 
As of December 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
 
$
704,904

 
$
—

 
$
(19,163
)
 
$
685,741

 
$
—

Steel City LLC
 
2,014,000

 
76,586

 
—

 
2,090,586

 
—

 
 
$
2,718,904

 
$
76,586

 
$
(19,163
)
 
$
2,776,327

 
$
—


During the three months ended March 31, 2018 and 2017, the Company recorded no other-than-temporary impairments on held-to-maturity securities.
The Company’s held-to-maturity securities had $30.3 million of gross unrecognized holding gains and $56.0 million of gross unrecognized holding losses by maturity as of March 31, 2018. 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 $76.6 million of gross unrecognized holding gains and $19.2 million of gross unrecognized holding losses by maturity as of December 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.
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, 2018 and December 31, 2017, 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, 2018, 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 March 31, 2018, no payments have been made or required related to this guarantee.