10-Q 1 plc3311810-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 March 31, 2018
 
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, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
 
Accelerated Filer o
 
 
 
Non-accelerated filer x
(Do not check if a smaller reporting company)
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 April 23, 2018:  1,000
 





PROTECTIVE LIFE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED MARCH 31, 2018
 
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
March 31,
 
2018
 
2017
 
(Dollars In Thousands)
Revenues
 

 
 
Premiums and policy fees
$
889,166

 
$
860,586

Reinsurance ceded
(345,423
)
 
(316,076
)
Net of reinsurance ceded
543,743

 
544,510

Net investment income
520,863

 
506,413

Realized investment gains (losses):
 

 
 

Derivative financial instruments
78,059

 
(69,878
)
All other investments
(87,599
)
 
22,841

Other-than-temporary impairment losses
(691
)
 
(2,725
)
Portion recognized in other comprehensive income (before taxes)
(2,954
)
 
(5,106
)
Net impairment losses recognized in earnings
(3,645
)
 
(7,831
)
Other income
114,411

 
109,242

Total revenues
1,165,832

 
1,105,297

Benefits and expenses
 

 
 

Benefits and settlement expenses, net of reinsurance ceded: (2018 - $347,637; 2017 - $263,377)
786,802

 
749,642

Amortization of deferred policy acquisition costs and value of business acquired
57,981

 
20,519

Other operating expenses, net of reinsurance ceded: (2018 - $43,117; 2017 - $51,017)
229,251

 
222,787

Total benefits and expenses
1,074,034

 
992,948

Income before income tax
91,798

 
112,349

Income tax expense
17,686

 
36,935

Net income
$
74,112

 
$
75,414


See Notes to the Consolidated Condensed Financial Statements
2


PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
 
For The
Three Months Ended
March 31,
 
2018
 
2017
 
(Dollars In Thousands)
Net income
$
74,112

 
$
75,414

Other comprehensive income (loss):
 

 
 
Change in net unrealized gains (losses) on investments, net of income tax: (2018 - $(153,379); 2017 - $85,962)
(577,712
)
 
159,641

Reclassification adjustment for investment amounts included in net income, net of income tax: (2018 - $181; 2017 - $(578))
681

 
(1,072
)
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: (2018 - $3; 2017 - $1,995)
11

 
3,703

Change in accumulated (loss) gain - derivatives, net of income tax: (2018 - $129; 2017 - $(362))
487

 
(672
)
Reclassification adjustment for derivative amounts included in net income, net of income tax: (2018 - $24; 2017 - $72)
89

 
133

Change in postretirement benefits liability adjustment, net of income tax: (2018 - $0; 2017 - $0)

 

Total other comprehensive income (loss)
(576,444
)
 
161,733

Total comprehensive income (loss)
$
(502,332
)
 
$
237,147


See Notes to the Consolidated Condensed Financial Statements
3


PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
 
 
As of
 
March 31, 2018
 
December 31, 2017
 
(Dollars In Thousands)
Assets
 

 
 

Fixed maturities, at fair value (amortized cost: 2018 - $41,165,316 ; 2017 - $41,153,551)
$
40,023,550

 
$
41,176,052

Fixed maturities, at amortized cost (fair value: 2018 - $2,674,129; 2017 - $2,776,327)
2,699,826

 
2,718,904

Equity securities, at fair value (cost: 2018 - $676,451; 2017 - $740,813)
681,520

 
754,360

Mortgage loans (related to securitizations: 2018 - $1,367; 2017 - $226,409)
6,846,633

 
6,817,723

Investment real estate, net of accumulated depreciation (2018 - $154; 2017 - $132)
7,531

 
8,355

Policy loans
1,594,642

 
1,615,615

Other long-term investments
920,939

 
915,595

Short-term investments
441,781

 
615,210

Total investments
53,216,422


54,621,814

Cash
307,724

 
252,310

Accrued investment income
497,984

 
491,802

Accounts and premiums receivable
127,762

 
124,934

Reinsurance receivables
5,090,572

 
5,075,698

Deferred policy acquisition costs and value of business acquired
2,434,154

 
2,199,577

Goodwill
793,470

 
793,470

Other intangibles, net of accumulated amortization (2018 - $154,449; 2017 - $140,368)
651,707

 
663,572

Property and equipment, net of accumulated depreciation (2018 - $25,492; 2017 - $22,926)
108,682

 
111,417

Other assets
208,366

 
227,357

Income tax receivable
6,753

 
76,543

Assets related to separate accounts
 
 
 

Variable annuity
13,549,068

 
13,956,071

Variable universal life
1,019,250

 
1,035,202

Total assets
$
78,011,914


$
79,629,767


See Notes to the Consolidated Condensed Financial Statements
4


PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(continued)
 
 
As of
 
March 31, 2018
 
December 31, 2017
 
(Dollars In Thousands)
Liabilities
 

 
 

Future policy benefits and claims
$
30,690,409

 
$
30,957,592

Unearned premiums
863,162

 
875,405

Total policy liabilities and accruals
31,553,571

 
31,832,997

Stable value product account balances
4,699,614

 
4,698,371

Annuity account balances
11,060,885

 
10,921,190

Other policyholders’ funds
1,114,823

 
1,267,198

Other liabilities
2,454,942

 
2,353,565

Deferred income taxes
1,068,091

 
1,232,407

Non-recourse funding obligations
2,728,689

 
2,747,477

Secured financing liabilities
778,947

 
1,017,749

Debt
1,096,368

 
945,052

Subordinated debt securities
495,324

 
495,289

Liabilities related to separate accounts
 

 
 

Variable annuity
13,549,068

 
13,956,071

Variable universal life
1,019,250

 
1,035,202

Total liabilities
71,619,572


72,502,568

Commitments and contingencies - Note 11


 


Shareowner’s equity
 

 
 

Common Stock: 2018 and 2017 - $0.01 par value; shares authorized: 5,000; shares issued: 1,000

 

Additional paid-in-capital
5,554,059

 
5,554,059

Retained earnings
1,412,583

 
1,560,444

Accumulated other comprehensive income (loss):
 

 
 

Net unrealized (losses) gains on investments, net of income tax: (2018 - $(149,309); 2017 - $6,883)
(561,687
)
 
25,896

Net unrealized losses relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (2018 - $(3); 2017 - $(6))
(11
)
 
(22
)
Accumulated gain (loss) - derivatives, net of income tax: (2018 - $352; 2017 - $198)
1,323

 
747

Postretirement benefits liability adjustment, net of income tax: (2018 - $(3,469); 2017 - $(3,469))
(13,925
)
 
(13,925
)
Total shareowner’s equity
6,392,342


7,127,199

Total liabilities and shareowner’s equity
$
78,011,914


$
79,629,767


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, 2017
$

 
$
5,554,059

 
$
1,560,444

 
$
12,696

 
$
7,127,199

Net income for the three months ended March 31, 2018
 

 
 

 
74,112

 
 

 
74,112

Other comprehensive loss
 

 
 

 
 

 
(576,444
)
 
(576,444
)
Comprehensive loss for the three months ended March 31, 2018
 

 
 

 
 

 
 

 
(502,332
)
Cumulative effect adjustments
 
 
 
 
(81,973
)
 
(10,552
)
 
(92,525
)
Dividends to parent
 
 
 
 
(140,000
)
 
 
 
(140,000
)
Balance, March 31, 2018
$

 
$
5,554,059

 
$
1,412,583

 
$
(574,300
)
 
$
6,392,342


See Notes to the Consolidated Condensed Financial Statements
6


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

 
For The
Three Months Ended
March 31,
 
2018
 
2017
 
(Dollars In Thousands)
Cash flows from operating activities
 
 
 

Net income
$
74,112

 
$
75,414

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

 
 

Realized investment (gains) losses
13,185

 
54,868

Amortization of DAC and VOBA
57,981

 
20,519

Capitalization of DAC
(99,246
)
 
(81,474
)
Depreciation and amortization expense
16,763

 
15,474

Deferred income tax
20,965

 
29,133

Accrued income tax
69,790

 
6,737

Interest credited to universal life and investment products
178,238

 
160,239

Policy fees assessed on universal life and investment products
(351,128
)
 
(335,883
)
Change in reinsurance receivables
(14,874
)
 
15,219

Change in accrued investment income and other receivables
(7,185
)
 
(9,368
)
Change in policy liabilities and other policyholders’ funds of traditional life and health products
(111,356
)
 
(94,234
)
Trading securities:
 

 
 

Maturities and principal reductions of investments
53,420

 
44,041

Sale of investments
67,298

 
85,382

Cost of investments acquired
(129,346
)
 
(114,390
)
Other net change in trading securities
(10,901
)
 
3,801

Amortization of premiums and accretion of discounts on investments and mortgage loans
73,529

 
142,613

Change in other liabilities
27,947

 
19,373

Other, net
(21,303
)
 
2,554

Net cash (used in) provided by operating activities
$
(92,111
)
 
$
40,018



 

See Notes to the Consolidated Condensed Financial Statements
7


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


 
For The
Three Months Ended
March 31,
 
2018
 
2017
 
(Dollars In Thousands)
Cash flows from investing activities
 

 
 

Maturities and principal reductions of investments, available-for-sale
$
151,227

 
$
166,419

Sale of investments, available-for-sale
436,969

 
269,509

Cost of investments acquired, available-for-sale
(674,513
)
 
(623,564
)
Change in investments, held-to-maturity
18,000

 
11,000

Mortgage loans:
 

 
 

New lendings
(248,231
)
 
(373,108
)
Repayments
206,111

 
177,142

Change in investment real estate, net
583

 
832

Change in policy loans, net
20,973

 
14,729

Change in other long-term investments, net
(136,969
)
 
(33,832
)
Change in short-term investments, net
187,652

 
31,859

Net unsettled security transactions
48,994

 
7,361

Purchase of property, equipment, and intangibles
(2,244
)
 
(8,118
)
Net cash provided by (used in) investing activities
$
8,552

 
$
(359,771
)
Cash flows from financing activities
 

 
 

Borrowings under line of credit arrangements and debt
$
375,000

 
$
255,000

Principal payments on line of credit arrangement and debt
(211,412
)
 
(98,498
)
Issuance (repayment) of non-recourse funding obligations
(18,000
)
 
(11,000
)
Secured financing liabilities
(238,802
)
 
29,504

Dividends to shareowner
(140,000
)
 
(143,848
)
Investment product deposits and change in universal life deposits
884,607

 
901,387

Investment product withdrawals
(512,323
)
 
(551,597
)
Other financing activities, net
(97
)
 

Net cash provided by financing activities
$
138,973

 
$
380,948

Change in cash
55,414

 
61,195

Cash at beginning of period
252,310

 
348,182

Cash at end of period
$
307,724

 
$
409,377


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. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair statement of the results for the interim periods presented. Operating results for the three months ended March 31, 2018, are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2018. 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, 2017.
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, 2017. There were no significant changes to the Company's accounting policies during the three months ended March 31, 2018 other than those discussed below.
Property and Casualty Insurance Products
Property and casualty insurance products include service contract business, surety bonds, and guaranteed asset protection ("GAP"). Premiums and fees associated with service contracts and GAP products are recognized based on expected claim patterns. For all other products, premiums are generally recognized over the terms of the contract on a pro-rata basis. Commissions and fee income associated with other products are recognized as earned when the related services are provided to the customer. Unearned premium reserves are maintained for the portion of the premiums that is related to the unexpired period of the policy. Benefit reserves are recorded when insured events occur. Benefit reserves include case basis reserves for known but unpaid claims as of the balance sheet date as well as incurred but not reported ("IBNR") reserves for claims where the insured event has occurred but has not been reported to the Company as of the balance sheet date. The case basis reserves and IBNR are calculated based on historical experience and on assumptions relating to claim severity and frequency, the level of used vehicle prices, and other factors. These assumptions are modified as necessary to reflect anticipated trends.

9


Effective January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. In consideration of the amendments in this Update, the Company revised its recognition pattern for administrative fees associated with certain vehicle service and GAP products. Previously, these fees were recognized based on the work effort involved in satisfying the Company’s contract obligations. The Company will recognize these fees on a claims occurrence basis in future periods. To reflect this change in accounting principle, the Company recorded a cumulative effect adjustment as of January 1, 2018 that resulted in a decrease in retained earnings of $92.5 million. The pre-tax impact to each affected line item on the Company’s financial statements is reflected in the table below:

 
 
As Reported
 
Previous Accounting Method
 
 
For The Three Months Ended March 31, 2018
 
 
(Dollars In Millions)
Financial Statement Line Item:
 
 
 
 
Balance Sheet
 
 
 
 
Deferred policy acquisition costs and value of business acquired
 
$
2,434.2

 
$
2,295.2

Other liabilities
 
$
2,454.9

 
$
2,193.3

Statements of Income
 
 
 
 
Other income
 
$
114.4

 
$
113.2

Amortization of deferred policy acquisition costs and value of business acquired
 
$
58.0

 
$
44.2

Other operating expenses, net of reinsurance ceded
 
$
229.3

 
$
243.5

Accounting Pronouncements Recently 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 adopted 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, impacted 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. The lines of business to which the revised guidance applies are not material to the Company’s financial statements. In consideration of the amendments in this Update, the Company revised its recognition pattern for administrative fees associated with certain vehicle service and GAP products. Previously, these fees were recognized based on the work effort involved in satisfying the Company’s contract obligations. The Company will recognize these fees on a claims occurrence basis in future periods. To reflect this change in accounting principle, the Company recorded a cumulative effect adjustment as of January 1, 2018 that resulted in a decrease in retained earnings of $92.5 million. The Company also implemented minor changes to its accounting and disclosures with respect to the lines of business referenced above to ensure compliance with the revised guidance. See above for additional discussion.
    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 were applied on a modified retrospective basis. The Company recorded 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, net of income tax, resulted in a $10.6 million increase to retained earnings and a corresponding decrease to accumulated other comprehensive income, resulting in no net impact to consolidated shareowner's equity. The Company has updated its disclosures in Note 4, Investment Operations and Note 5, Fair Value of Financial Instruments in accordance with the ASU.

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, 2017 using the retrospective method. There was no financial impact.


10


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. There was no impact to the Company on adoption.

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 did not impact the Company’s financial position, results of operations, or current disclosures.
Accounting Pronouncements Not Yet Adopted
    
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. 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 the financial and operational impact of implementing the Update, as well as 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.
    

11


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 AOCI) at the acquisition date of October 1, 2013, represented the estimated maximum future post-tax earnings from the Closed Block that would be recognized in income from continuing operations over the period the policies and contracts in the Closed Block remain in force. In connection with the acquisition of MONY, the Company developed an actuarial calculation of the expected timing of MONY’s Closed Block’s earnings as of October 1, 2013. Pursuant to the acquisition of the Company by Dai-ichi Life, this actuarial calculation of the expected timing of MONY's Closed Block earnings was recalculated and reset as February 1, 2015, along with the establishment of a policyholder dividend obligation as of such date.
If the actual cumulative earnings from the Closed Block are greater than the expected cumulative earnings, only the expected earnings will be recognized in the Company’s net income. Actual cumulative earnings in excess of expected cumulative earnings at any point in time are recorded as a policyholder dividend obligation because they will ultimately be paid to Closed Block policyholders as an additional policyholder dividend unless offset by future performance that is less favorable than originally expected. If a policyholder dividend obligation has been previously established and the actual Closed Block earnings in a subsequent period are less than the expected earnings for that period, the policyholder dividend obligation would be reduced (but not below zero). If, over the period the policies and contracts in the Closed Block remain in force, the actual cumulative earnings of the Closed Block are less than the expected cumulative earnings, only actual earnings would be recognized in income from continuing operations. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside the Closed Block.

Many expenses related to Closed Block operations, including amortization of VOBA, are charged to operations outside of the Closed Block; accordingly, net revenues of the Closed Block do not represent the actual profitability of the Closed Block operations. Operating costs and expenses outside of the Closed Block are, therefore, disproportionate to the business outside of the Closed Block.
Summarized financial information for the Closed Block as of March 31, 2018, and December 31, 2017, is as follows:
 
As of
 
March 31, 2018
 
December 31, 2017
 
(Dollars In Thousands)
Closed block liabilities
 

 
 

Future policy benefits, policyholders’ account balances and other policyholder liabilities
$
5,760,621

 
$
5,791,867

Policyholder dividend obligation

 
160,712

Other liabilities
34,796

 
30,764

Total closed block liabilities
5,795,417

 
5,983,343

Closed block assets
 

 
 

Fixed maturities, available-for-sale, at fair value
$
4,497,521

 
$
4,669,856

Mortgage loans on real estate
107,826

 
108,934

Policy loans
692,632

 
700,769

Cash
39,464

 
31,182

Other assets
113,120

 
122,637

Total closed block assets
5,450,563

 
5,633,378

Excess of reported closed block liabilities over closed block assets
344,854

 
349,965

Portion of above representing accumulated other comprehensive income:
 

 
 

Net unrealized investment gains (losses) net of policyholder dividend obligation: $(162,429) and $(13,429); and net of income tax: $34,911 and $2,820
(3,014
)
 

Future earnings to be recognized from closed block assets and closed block liabilities
$
341,840

 
$
349,965


12


Reconciliation of the policyholder dividend obligation is as follows:
 
For The
Three Months Ended
March 31,
 
2018
 
2017
 
(Dollars In Thousands)
Policyholder dividend obligation, beginning of period
$
160,712

 
$
31,932

Applicable to net revenue (losses)
(11,712
)
 
(16,753
)
Change in net unrealized investment gains (losses) allocated to the policyholder dividend obligation
(149,000
)
 
26,001

Policyholder dividend obligation, end of period
$

 
$
41,180

Closed Block revenues and expenses were as follows:
 
For The
Three Months Ended
March 31,
 
2018
 
2017
 
(Dollars In Thousands)
Revenues
 

 
 
Premiums and other income
$
39,612

 
$
42,836

Net investment income
50,543

 
51,359

Net investment gains
(237
)
 
63

Total revenues
89,918

 
94,258

Benefits and other deductions
 

 
 
Benefits and settlement expenses
79,952

 
80,108

Other operating expenses
(319
)
 
166

Total benefits and other deductions
79,633

 
80,274

Net revenues before income taxes
10,285

 
13,984

Income tax expense
2,160

 
4,895

Net revenues
$
8,125

 
$
9,089

4.     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

13


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
)
    


14


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.

15


     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
)

16


 
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%

17


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

18


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.

19


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.
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 March 31, 2018:
 
Measurement
Category
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
(Dollars In Thousands)
Assets:
 
 
 

 
 

 
 

 
 

Fixed maturity securities - available-for-sale
 
 
 

 
 

 
 

 
 

Residential mortgage-backed securities
4
 
$

 
$
2,394,370

 
$

 
$
2,394,370

Commercial mortgage-backed securities
4
 

 
1,841,506

 

 
1,841,506

Other asset-backed securities
4
 

 
740,863

 
503,789

 
1,244,652

U.S. government-related securities
4
 
1,041,123

 
286,677

 

 
1,327,800

State, municipalities, and political subdivisions
4
 

 
1,700,279

 

 
1,700,279

Other government-related securities
4
 

 
277,459

 

 
277,459

Corporate securities
4
 

 
27,933,364

 
626,409

 
28,559,773

Redeemable preferred stock
4
 
72,244

 
18,325

 

 
90,569

Total fixed maturity securities - available-for-sale
 
 
1,113,367

 
35,192,843

 
1,130,198

 
37,436,408

Fixed maturity securities - trading
 
 
 

 
 

 
 

 
 

Residential mortgage-backed securities
3
 

 
265,547

 

 
265,547

Commercial mortgage-backed securities
3
 

 
146,633

 

 
146,633

Other asset-backed securities
3
 

 
94,756

 
34,958

 
129,714

U.S. government-related securities
3
 
31,684

 
5,891

 

 
37,575

State, municipalities, and political subdivisions
3
 

 
318,142

 

 
318,142

Other government-related securities
3
 

 
40,368

 

 
40,368

Corporate securities
3
 

 
1,640,575

 
5,324

 
1,645,899

Redeemable preferred stock
3
 
3,264

 

 

 
3,264

Total fixed maturity securities - trading
 
 
34,948

 
2,511,912

 
40,282

 
2,587,142

Total fixed maturity securities
 
 
1,148,315

 
37,704,755

 
1,170,480

 
40,023,550

Equity securities
3
 
615,423

 
36

 
66,061

 
681,520

Other long-term investments(1)
3 & 4
 
87,558

 
354,855

 
144,352

 
586,765

Short-term investments
3
 
327,834

 
113,947

 

 
441,781

Total investments
 
 
2,179,130

 
38,173,593

 
1,380,893

 
41,733,616

Cash
3
 
307,724

 

 

 
307,724

Other assets
3
 
34,463

 

 

 
34,463

Assets related to separate accounts
 
 
 

 
 

 
 

 
 

Variable annuity
3
 
13,549,068

 

 

 
13,549,068

Variable universal life
3
 
1,019,250

 

 

 
1,019,250

Total assets measured at fair value on a recurring basis
 
 
$
17,089,635

 
$
38,173,593

 
$
1,380,893

 
$
56,644,121

Liabilities:
 
 
 

 
 

 
 

 
 

Annuity account balances (2)
3
 
$

 
$

 
$
81,399

 
$
81,399

Other liabilities(1)
3 & 4
 
7,397

 
189,206

 
621,102

 
817,705

Total liabilities measured at fair value on a recurring basis
 
 
$
7,397

 
$
189,206

 
$
702,501

 
$
899,104

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

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, 2017:
 
Level 1
 
Level 2
 
Level 3
 
Total
 
(Dollars In Thousands)
Assets:
 

 
 

 
 

 
 

Fixed maturity securities - available-for-sale
 

 
 

 
 

 
 

Residential mortgage-backed securities
$

 
$
2,327,212

 
$

 
$
2,327,212

Commercial mortgage-backed securities

 
1,889,822

 

 
1,889,822

Other asset-backed securities

 
745,184

 
504,365

 
1,249,549

U.S. government-related securities
958,775

 
264,477

 

 
1,223,252

State, municipalities, and political subdivisions

 
1,741,645

 

 
1,741,645

Other government-related securities

 
287,282

 

 
287,282

Corporate securities

 
29,075,109

 
626,901

 
29,702,010

Redeemable preferred stock
72,471

 
18,620

 

 
91,091

Total fixed maturity securities - available-for-sale
1,031,246

 
36,349,351

 
1,131,266

 
38,511,863

Fixed maturity securities - trading
 

 
 

 
 

 
 

Residential mortgage-backed securities

 
259,694

 

 
259,694

Commercial mortgage-backed securities

 
146,804

 

 
146,804

Other asset-backed securities

 
102,875

 
35,222

 
138,097

U.S. government-related securities
21,183

 
6,051

 

 
27,234

State, municipalities, and political subdivisions

 
326,925

 

 
326,925

Other government-related securities

 
63,925

 

 
63,925

Corporate securities

 
1,692,741

 
5,442

 
1,698,183

Redeemable preferred stock
3,327

 

 

 
3,327

Total fixed maturity securities - trading
24,510

 
2,599,015

 
40,664

 
2,664,189

Total fixed maturity securities
1,055,756

 
38,948,366

 
1,171,930

 
41,176,052

Equity securities
688,214

 
36

 
66,110

 
754,360

Other long-term investments(1)
51,102

 
417,969

 
136,004

 
605,075

Short-term investments
482,461

 
132,749

 

 
615,210

Total investments
2,277,533

 
39,499,120

 
1,374,044

 
43,150,697

Cash
252,310

 

 

 
252,310

Other assets
28,771

 

 

 
28,771

Assets related to separate accounts
 

 
 

 
 

 
 

Variable annuity
13,956,071

 

 

 
13,956,071

Variable universal life
1,035,202

 

 

 
1,035,202

Total assets measured at fair value on a recurring basis
$
17,549,887

 
$
39,499,120

 
$
1,374,044

 
$
58,423,051

Liabilities:
 

 
 

 
 

 
 

Annuity account balances(2)
$

 
$

 
$
83,472

 
$
83,472

Other liabilities(1)
5,755

 
240,927

 
760,890

 
1,007,572

Total liabilities measured at fair value on a recurring basis
$
5,755

 
$
240,927

 
$
844,362

 
$
1,091,044

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

22


Determination of fair values
The valuation methodologies used to determine the fair values of assets and liabilities reflect market participant assumptions and are based on the application of the fair value hierarchy that prioritizes observable market inputs over unobservable inputs. The Company determines the fair values of certain financial assets and financial liabilities based on quoted market prices, where available. The Company also determines certain fair values based on future cash flows discounted at the appropriate current market rate. Fair values reflect adjustments for counterparty credit quality, the Company’s credit standing, liquidity, and where appropriate, risk margins on unobservable parameters. The following is a discussion of the methodologies used to determine fair values for the financial instruments as listed in the above table.
The fair value of fixed maturity, short-term, and equity securities is determined by management after considering one of three primary sources of information: third party pricing services, non-binding independent broker quotations, or pricing matrices. Security pricing is applied using a "waterfall" approach whereby publicly available prices are first sought from third party pricing services, the remaining unpriced securities are submitted to independent brokers for non-binding prices, or lastly, securities are priced using a pricing matrix. Typical inputs used by these three pricing methods include, but are not limited to: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. Third party pricing services price approximately 92.4% of the Company's available-for-sale and trading fixed maturity securities. Based on the typical trading volumes and the lack of quoted market prices for available-for-sale and trading fixed maturities, third party pricing services derive the majority of security prices from observable market inputs such as recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information outlined above. If there are no recent reported trades, the third party pricing services and brokers may use matrix or model processes to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Certain securities are priced via independent non-binding broker quotations, which are considered to have no significant unobservable inputs. When using non-binding independent broker quotations, the Company obtains one quote per security, typically from the broker from which we purchased the security. A pricing matrix is used to price securities for which the Company is unable to obtain or effectively rely on either a price from a third party pricing service or an independent broker quotation.
The pricing matrix used by the Company begins with current spread levels to determine the market price for the security. The credit spreads, assigned by brokers, incorporate the issuer’s credit rating, liquidity discounts, weighted- average of contracted cash flows, risk premium, if warranted, due to the issuer’s industry, and the security’s time to maturity. The Company uses credit ratings provided by nationally recognized rating agencies.
For securities that are priced via non-binding independent broker quotations, the Company assesses whether prices received from independent brokers represent a reasonable estimate of fair value through an analysis using internal and external cash flow models developed based on spreads and, when available, market indices. The Company uses a market-based cash flow analysis to validate the reasonableness of prices received from independent brokers. These analytics, which are updated daily, incorporate various metrics (yield curves, credit spreads, prepayment rates, etc.) to determine the valuation of such holdings. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon the analytics, the price received from the independent broker is adjusted accordingly. The Company did not adjust any quotes or prices received from brokers during the three months ended March 31, 2018.
The Company has analyzed the third party pricing services’ valuation methodologies and related inputs and has also evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs that is in accordance with the Fair Value Measurements and Disclosures Topic of the ASC. Based on this evaluation and investment class analysis, each price was classified into Level 1, 2, or 3. Most prices provided by third party pricing services are classified into Level 2 because the significant inputs used in pricing the securities are market observable and the observable inputs are corroborated by the Company. Since the matrix pricing of certain debt securities includes significant non-observable inputs, they are classified as Level 3.
Asset-Backed Securities
This category mainly consists of residential mortgage-backed securities, commercial mortgage-backed securities, and other asset-backed securities (collectively referred to as asset-backed securities or “ABS”). As of March 31, 2018, the Company held $5.5 billion of ABS classified as Level 2. These securities are priced from information provided by a third party pricing service and independent broker quotes. The third party pricing services and brokers mainly value securities using both a market and income approach to valuation. As part of this valuation process they consider the following characteristics of the item being measured to be relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, and 7) credit ratings of the securities.
After reviewing these characteristics of the ABS, the third party pricing service and brokers use certain inputs to determine the value of the security. For ABS classified as Level 2, the valuation would consist of predominantly market observable inputs such as, but not limited to: 1) monthly principal and interest payments on the underlying assets, 2) average life of the security, 3) prepayment speeds, 4) credit spreads, 5) treasury and swap yield curves, and 6) discount margin. The Company reviews the methodologies and valuation techniques (including the ability to observe inputs) in assessing the information received from external pricing services and in consideration of the fair value presentation.
As of March 31, 2018, the Company held $538.7 million of Level 3 ABS, which included $503.7 million of other asset-backed securities classified as available-for-sale and $35.0 million of other asset-backed securities classified as trading. These securities are predominantly ARS whose underlying collateral is at least 97% guaranteed by the FFELP. The Company prices its ARS using an income approach valuation model. As part of the valuation process the Company reviews the following characteristics

23


of the ARS in determining the relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, 7) credit ratings of the securities, 8) liquidity premium, and 9) paydown rate. In periods where market activity increases and there are transactions at a price that is not the result of a distressed or forced sale we consider those prices as part of our valuation. If the market activity during a period is solely the result of the issuer redeeming positions we consider those transactions in our valuation, but still consider them to be level three measurements due to the nature of the transaction.
Corporate Securities, U.S. Government-Related Securities, States, Municipals, and Political Subdivisions, and Other Government Related Securities
As of March 31, 2018, the Company classified approximately $32.2 billion of corporate securities, U.S. government-related securities, states, municipals, and political subdivisions, and other government-related securities as Level 2. The fair value of the Level 2 securities is predominantly priced by broker quotes and a third party pricing service. The Company has reviewed the valuation techniq