10-Q 1 a15-11878_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q

 

x  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2015

 

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 x 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 x No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer” and “small reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated Filer o

 

 

 

Non-accelerated filer o

 

Smaller Reporting Company o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x

 

Number of shares of Common Stock, $0.01 Par Value, outstanding as of  July 23, 2015:  1,000

 

 

 



Table of Contents

 

PROTECTIVE LIFE CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED JUNE 30, 2015

 

TABLE OF CONTENTS

 

PART I

 

 

 

Page

Item 1.

Financial Statements (unaudited):

 

 

Consolidated Condensed Statements of Income For The Three Months Ended June 30, 2015 (Successor Company), the Period of February 1, 2015 to June 30, 2015 (Successor Company), the Period of January 1, 2015 to January 31, 2015 (Predecessor Company), and For The Three and Six Months Ended June 30, 2014 (Predecessor Company)

3

 

Consolidated Condensed Statements of Comprehensive Income (Loss) For The Three Months Ended June 30, 2015 (Successor Company), the Period of February 1, 2015 to June 30, 2015 (Successor Company), the Period of January 1, 2015 to January 31, 2015 (Predecessor Company), and For The Three and Six Months Ended June 30, 2014 (Predecessor Company)

4

 

Consolidated Condensed Balance Sheets as of June 30, 2015 (Successor Company) and December 31, 2014 (Predecessor Company)

5

 

Consolidated Condensed Statement of Shareowner’s Equity for the Period of February 1, 2015 to June 30, 2015 (Successor Company) and for the Period of January 1, 2015 to January 31, 2015 (Predecessor Company)

7

 

Consolidated Condensed Statements of Cash Flows for the Period of February 1, 2015 to June 30, 2015 (Successor Company), the Period of January 1, 2015 to January 31, 2015 (Predecessor Company), and For The Six Months Ended June 30, 2014

8

 

Notes to Consolidated Condensed Financial Statements

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

77

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

150

Item 4.

Controls and Procedures

150

 

 

 

PART II

 

 

 

Item 1.

Legal Proceedings

151

Item 1A.

Risk Factors

152

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

160

Item 6.

Exhibits

161

 

Signature

162

 

2



Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

 

 

Successor Company

 

 

Predecessor Company

 

 

 

For The Three

 

February 1, 2015

 

 

January 1, 2015

 

For The Three

 

For The Six

 

 

 

Months Ended

 

to

 

 

to

 

Months Ended

 

Months Ended

 

 

 

June 30, 2015

 

June 30, 2015

 

 

January 31, 2015

 

June 30, 2014

 

June 30, 2014

 

 

 

(Dollars In Thousands)

 

 

(Dollars In Thousands, Except Per Share Amounts)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Premiums and policy fees

 

$

832,088

 

$

1,341,096

 

 

$

261,866

 

$

851,802

 

$

1,667,698

 

Reinsurance ceded

 

(345,244

)

(486,645

)

 

(89,956

)

(342,968

)

(670,681

)

Net of reinsurance ceded

 

486,844

 

854,451

 

 

171,910

 

508,834

 

997,017

 

Net investment income

 

436,291

 

725,163

 

 

175,180

 

550,816

 

1,088,979

 

Realized investment gains (losses):

 

 

 

 

 

 

 

 

 

 

 

 

Derivative financial instruments

 

94,603

 

128,244

 

 

(123,274

)

(89,926

)

(195,276

)

All other investments

 

(102,337

)

(137,393

)

 

81,153

 

80,148

 

152,262

 

Other-than-temporary impairment losses

 

(13,395

)

(13,395

)

 

(636

)

(461

)

(884

)

Portion recognized in other comprehensive income (before taxes)

 

7,661

 

7,661

 

 

155

 

(999

)

(2,167

)

Net impairment losses recognized in earnings

 

(5,734

)

(5,734

)

 

(481

)

(1,460

)

(3,051

)

Other income

 

109,094

 

176,357

 

 

36,421

 

106,931

 

205,970

 

Total revenues

 

1,018,761

 

1,741,088

 

 

340,909

 

1,155,343

 

2,245,901

 

Benefits and expenses

 

 

 

 

 

 

 

 

 

 

 

 

Benefits and settlement expenses, net of reinsurance ceded: (2015 Successor - $303,743 and $420,951); (2015 Predecessor - $87,674; 2014 Predecessor - three months: $328,555; six months: $633,387)

 

694,606

 

1,180,905

 

 

267,287

 

747,816

 

1,476,335

 

Amortization of deferred policy acquisition costs and value of business acquired

 

40,094

 

67,991

 

 

4,072

 

51,531

 

107,113

 

Other operating expenses, net of reinsurance ceded: (2015 Successor - $49,741 and $84,777) (2015 Predecessor - $35,036; 2014 Predecessor - three months: $46,545; six months: $90,311)

 

187,151

 

302,455

 

 

68,368

 

193,786

 

375,038

 

Total benefits and expenses

 

921,851

 

1,551,351

 

 

339,727

 

993,133

 

1,958,486

 

Income before income tax

 

96,910

 

189,737

 

 

1,182

 

162,210

 

287,415

 

Income tax expense (benefit)

 

33,070

 

63,036

 

 

(327

)

54,233

 

95,799

 

Net income

 

$

63,840

 

$

126,701

 

 

$

1,509

 

$

107,977

 

$

191,616

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income - basic

 

 

 

 

 

 

$

0.02

 

$

1.35

 

$

2.40

 

Net income - diluted

 

 

 

 

 

 

$

0.02

 

$

1.33

 

$

2.36

 

Cash dividends paid per share

 

 

 

 

 

 

$

 

$

0.24

 

$

0.44

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average shares outstanding - basic

 

 

 

 

 

 

80,452,848

 

79,979,153

 

79,794,831

 

Average shares outstanding - diluted

 

 

 

 

 

 

81,759,287

 

81,446,277

 

81,160,800

 

 

See Notes to Consolidated Condensed Financial Statements

 

3



Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

 

 

Successor Company

 

 

Predecessor Company

 

 

 

For The Three

 

February 1, 2015

 

 

January 1, 2015

 

For The Three

 

For The Six

 

 

 

Months Ended

 

to

 

 

to

 

Months Ended

 

Months Ended

 

 

 

June 30, 2015

 

June 30, 2015

 

 

January 31, 2015

 

June 30, 2014

 

June 30, 2014

 

 

 

(Dollars In Thousands)

 

 

(Dollars In Thousands)

 

Net income

 

$

63,840

 

$

126,701

 

 

$

1,509

 

$

107,977

 

$

191,616

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

Change in net unrealized gains (losses) on investments, net of income tax: (2015 Successor - $(324,302) and $(481,657)); (2015 Predecessor - $259,738; 2014 Predecessor - three months: $216,476; six months: $476,065)

 

(602,274

)

(894,507

)

 

482,370

 

402,027

 

884,120

 

Reclassification adjustment for investment amounts included in net income, net of income tax: (2015 Successor - $831 and $700); (2015 Predecessor - $(2,244); 2014 Predecessor - three months: $(6,558); six months: $(8,581))

 

1,543

 

1,301

 

 

(4,166

)

(12,180

)

(15,936

)

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: (2015 Successor - $(2,458) and $(2,458)); (2015 Predecessor - $(131); 2014 Predecessor - three months: $(571); six months: $1,858)

 

(4,566

)

(4,566

)

 

(243

)

(1,061

)

3,450

 

Change in accumulated (loss) gain - derivatives, net of income tax: (2015 Successor - $12 and $0); (2015 Predecessor - $5; 2014 Predecessor - three months: $(325); six months: $(9))

 

23

 

 

 

9

 

(604

)

(17

)

Reclassification adjustment for derivative amounts included in net income, net of income tax: (2015 Successor - $(31) and $0); (2015 Predecessor - $13; 2014 Predecessor - three months: $214; six months: $449)

 

(59

)

 

 

23

 

399

 

835

 

Change in postretirement benefits liability adjustment, net of income tax: (2015 Successor - $0 and $0); (2015 Predecessor - $(6,475); 2014 Predecessor - three months: $1,896; six months: $1,264)

 

 

 

 

(12,025

)

3,520

 

2,347

 

Total other comprehensive income (loss)

 

(605,333

)

(897,772

)

 

465,968

 

392,101

 

874,799

 

Total comprehensive income (loss)

 

$

(541,493

)

$

(771,071

)

 

$

467,477

 

$

500,078

 

$

1,066,415

 

 

See Notes to Consolidated Condensed Financial Statements

 

4



Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

 

 

Successor

 

 

Predecessor

 

 

 

Company

 

 

Company

 

 

 

As of

 

 

As of

 

 

 

June 30, 2015

 

 

December 31, 2014

 

 

 

(Dollars In Thousands)

 

 

(Dollars In Thousands)

 

Assets

 

 

 

 

 

 

Fixed maturities, at fair value (amortized cost: 2015 Successor - $37,890,827; 2014 Predecessor - $33,738,242)

 

$

35,762,609

 

 

$

36,775,989

 

Fixed maturities, at amortized cost (fair value: 2015 Successor - $489,950; 2014 Predecessor - $485,422)

 

565,334

 

 

435,000

 

Equity securities, at fair value (cost: 2015 Successor - $734,053; 2014 Predecessor - $778,744)

 

722,457

 

 

803,230

 

Mortgage loans (related to securitizations: 2015 Successor - $423,702; 2014 Predecessor - $455,250)

 

5,677,667

 

 

5,133,780

 

Investment real estate, net of accumulated depreciation (2015 Successor - $52; 2014 Predecessor - $246)

 

7,404

 

 

5,918

 

Policy loans

 

1,719,864

 

 

1,758,237

 

Other long-term investments

 

700,983

 

 

514,639

 

Short-term investments

 

204,667

 

 

250,645

 

Total investments

 

45,360,985

 

 

45,677,438

 

Cash

 

568,776

 

 

379,411

 

Accrued investment income

 

472,584

 

 

474,522

 

Accounts and premiums receivable

 

70,894

 

 

84,458

 

Reinsurance receivables

 

5,613,895

 

 

6,106,113

 

Deferred policy acquisition costs and value of business acquired

 

1,393,926

 

 

3,294,570

 

Goodwill

 

735,712

 

 

102,365

 

Other intangibles, net of accumulated amortization (2015 Successor - $17,212)

 

665,787

 

 

 

Property and equipment, net of accumulated depreciation (2015 Successor - $3,658; 2014 Predecessor - $118,487)

 

103,098

 

 

52,853

 

Other assets

 

146,300

 

 

316,207

 

Assets related to separate accounts

 

 

 

 

 

 

Variable annuity

 

13,313,000

 

 

13,157,429

 

Variable universal life

 

859,114

 

 

834,940

 

Total assets

 

$

69,304,071

 

 

$

70,480,306

 

 

See Notes to Consolidated Condensed Financial Statements

 

5



Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(continued)

(Unaudited)

 

 

 

Successor

 

 

Predecessor

 

 

 

Company

 

 

Company

 

 

 

As of

 

 

As of

 

 

 

June 30, 2015

 

 

December 31, 2014

 

 

 

(Dollars In Thousands)

 

 

(Dollars In Thousands)

 

Liabilities

 

 

 

 

 

 

Future policy benefits and claims

 

$

29,721,028

 

 

$

29,944,890

 

Unearned premiums

 

714,115

 

 

1,574,077

 

Total policy liabilities and accruals

 

30,435,143

 

 

31,518,967

 

Stable value product account balances

 

1,861,280

 

 

1,959,488

 

Annuity account balances

 

10,792,560

 

 

10,950,729

 

Other policyholders’ funds

 

1,121,465

 

 

1,430,325

 

Other liabilities

 

1,595,091

 

 

1,621,168

 

Income tax payable

 

101,583

 

 

23,901

 

Deferred income taxes

 

1,068,172

 

 

1,545,478

 

Non-recourse funding obligations

 

656,299

 

 

582,404

 

Repurchase program borrowings

 

602,213

 

 

50,000

 

Debt

 

1,662,739

 

 

1,300,000

 

Subordinated debt securities

 

452,424

 

 

540,593

 

Liabilities related to separate accounts

 

 

 

 

 

 

Variable annuity

 

13,313,000

 

 

13,157,429

 

Variable universal life

 

859,114

 

 

834,940

 

Total liabilities

 

64,521,083

 

 

65,515,422

 

Commitments and contingencies - Note 10

 

 

 

 

 

 

Shareowner’s equity

 

 

 

 

 

 

Preferred Stock; (Predecessor) $1 par value, shares authorized: 4,000,000; Issued: None

 

 

 

 

 

 

Common Stock, 2015 (Successor) and 2014 (Predecessor) - $.01 par value and $.50 par value; shares authorized: 5,000 and 160,000,000; shares issued: 1,000 and 88,776,960, respectively

 

 

 

44,388

 

Additional paid-in-capital

 

5,554,059

 

 

606,125

 

Treasury stock, at cost (2014 Predecessor - 9,435,255 shares)

 

 

 

(185,705

)

Retained earnings

 

126,701

 

 

3,082,000

 

Accumulated other comprehensive income (loss):

 

 

 

 

 

 

Net unrealized gains (losses) on investments, net of income tax: (2015 Successor - $(480,957); 2014 Predecessor - $796,960)

 

(893,206

)

 

1,480,068

 

Net unrealized (losses) gains relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (2015 Successor - $(2,458); 2014 Predecessor - $2,208)

 

(4,566

)

 

4,101

 

Accumulated loss - derivatives, net of income tax: (2015 Successor - $0; 2014 Predecessor - $(45))

 

 

 

(82

)

Postretirement benefits liability adjustment, net of income tax: (2015 Successor - $0; 2014 Predecessor - $(35,545))

 

 

 

(66,011

)

Total shareowner’s equity

 

4,782,988

 

 

4,964,884

 

Total liabilities and shareowner’s equity

 

$

69,304,071

 

 

$

70,480,306

 

 

See Notes to Consolidated Condensed Financial Statements

 

6



Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF SHAREOWNER’S EQUITY

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

Total

 

 

 

Common

 

Paid-In-

 

Treasury

 

Retained

 

Comprehensive

 

Shareowner’s

 

 

 

Stock

 

Capital

 

Stock

 

Earnings

 

Income

 

equity

 

 

 

(Dollars In Thousands)

 

Predecessor Company

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2014

 

$

44,388

 

$

606,125

 

$

(185,705

)

$

3,082,000

 

$

1,418,076

 

$

4,964,884

 

Net income for the period of January 1, 2015 to January 31, 2015 

 

 

 

 

 

 

 

1,509

 

 

 

1,509

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

465,968

 

465,968

 

Comprehensive income for the period of January 1, 2015 to January 31, 2015

 

 

 

 

 

 

 

 

 

 

 

467,477

 

Stock-based compensation

 

 

 

1,550

 

 

 

 

 

 

 

1,550

 

Balance, January 31, 2015

 

$

44,388

 

$

607,675

 

$

(185,705

)

$

3,083,509

 

$

1,884,044

 

$

5,433,911

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

Total

 

 

 

Common

 

Paid-In-

 

Treasury

 

Retained

 

Comprehensive

 

Shareowner’s

 

 

 

Stock

 

Capital

 

Stock

 

Earnings

 

Income (Loss)

 

equity

 

 

 

(Dollars In Thousands)

 

Successor Company

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, February 1, 2015

 

$

 

$

5,554,059

 

$

 

$

 

$

 

$

5,554,059

 

Net income for the period of February 1, 2015 to June 30, 2015 

 

 

 

 

 

 

 

126,701

 

 

 

126,701

 

Other comprehensive loss

 

 

 

 

 

 

 

 

 

(897,772

)

(897,772

)

Comprehensive loss for the period of February 1, 2015 to June 30, 2015

 

 

 

 

 

 

 

 

 

 

 

(771,071

)

Balance, June 30, 2015

 

$

 

$

5,554,059

 

$

 

$

126,701

 

$

(897,772

)

$

4,782,988

 

 

See Notes to Consolidated Condensed Financial Statements

 

7



Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

 

 

Successor

 

 

Predecessor

 

 

 

Company

 

 

Company

 

 

 

February 1, 2015

 

 

January 1, 2015

 

For The Six

 

 

 

to

 

 

to

 

Months Ended

 

 

 

June 30, 2015

 

 

January 31, 2015

 

June 30, 2014

 

 

 

(Dollars In Thousands)

 

 

(Dollars In Thousands)

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

126,701 

 

 

$

1,509 

 

$

191,616 

 

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

 

 

 

 

 

 

 

 

Realized investment losses (gains)

 

14,883

 

 

42,602

 

46,065

 

Amortization of DAC and VOBA

 

67,991

 

 

4,072

 

107,113

 

Capitalization of deferred policy acquisition costs

 

(130,347

)

 

(22,489

)

(136,561

)

Depreciation and amortization expense

 

20,922

 

 

820

 

3,757

 

Deferred income tax

 

16,056

 

 

30,791

 

(30,728

)

Accrued income tax

 

117,041

 

 

(32,803

)

91,410

 

Interest credited to universal life and investment products

 

422,093

 

 

79,088

 

422,306

 

Policy fees assessed on universal life and investment products

 

(491,769

)

 

(90,288

)

(481,402

)

Change in reinsurance receivables

 

110,125

 

 

(85,081

)

42,403

 

Change in accrued investment income and other receivables

 

15,831

 

 

(5,789

)

(16,821

)

Change in policy liabilities and other policyholders’ funds of traditional life and health products

 

(153,073

)

 

176,980

 

83,825

 

Trading securities:

 

 

 

 

 

 

 

 

Maturities and principal reductions of investments

 

40,104

 

 

17,946

 

47,888

 

Sale of investments

 

78,302

 

 

26,422

 

112,473

 

Cost of investments acquired

 

(135,770

)

 

(27,289

)

(75,742

)

Other net change in trading securities

 

83,770

 

 

(26,901

)

(52,325

)

Amortization of premiums and accretion of discounts on investments and mortgage loans

 

177,658

 

 

12,930

 

55,985

 

Change in other liabilities

 

(228,189

)

 

238,592

 

104,961

 

Other income - gains on repurchase of non-recourse funding obligations

 

 

 

 

(4,587

)

Other, net

 

(27,763

)

 

(149,889

)

(88,146

)

Net cash provided by operating activities

 

124,566

 

 

191,223

 

423,490

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Maturities and principal reductions of investments, available-for-sale

 

202,371

 

 

59,028

 

656,492

 

Sale of investments, available-for-sale

 

2,051,567

 

 

191,062

 

768,785

 

Cost of investments acquired, available-for-sale

 

(2,593,859

)

 

(149,887

)

(2,071,692

)

Change in investments, held-to-maturity

 

(35,000

)

 

 

(35,000

)

Mortgage loans:

 

 

 

 

 

 

 

 

New lendings

 

(637,908

)

 

(100,530

)

(351,505

)

Repayments

 

510,580

 

 

45,741

 

547,698

 

Change in investment real estate, net

 

52

 

 

7

 

1,256

 

Change in policy loans, net

 

32,008

 

 

6,365

 

37,365

 

Change in other long-term investments, net

 

(154,537

)

 

(25,339

)

(73,387

)

Change in short-term investments, net

 

34,946

 

 

(40,314

)

(35,799

)

Net unsettled security transactions

 

(46,266

)

 

37,510

 

47,933

 

Purchase of property and equipment

 

(2,444

)

 

(649

)

(4,776

)

Payments for business acquisitions

 

 

 

 

(906

)

Net cash (used in) provided by investing activities

 

(638,490

)

 

22,994

 

(513,536

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Borrowings under line of credit arrangements and debt

 

155,000

 

 

 

90,000

 

Principal payments on line of credit arrangement and debt

 

(119,399

)

 

(60,000

)

(230,000

)

Issuance (repayment) of non-recourse funding obligations

 

35,000

 

 

 

16,630

 

Repurchase program borrowings

 

552,213

 

 

 

70,490

 

Dividends to shareowners

 

 

 

 

(34,649

)

Investment product deposits and change in universal life deposits

 

1,222,581

 

 

169,233

 

1,304,549

 

Investment product withdrawals

 

(1,225,576

)

 

(240,147

)

(1,232,428

)

Other financing activities, net

 

171

 

 

(4

)

 

Net cash provided by (used in) financing activities

 

619,990

 

 

(130,918

)

(15,408

)

Change in cash

 

106,066

 

 

83,299

 

(105,454

)

Cash at beginning of period

 

462,710

 

 

379,411

 

466,542

 

Cash at end of period

 

$

568,776 

 

 

$

462,710 

 

$

361,088 

 

 

See Notes to Consolidated Condensed Financial Statements

 

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PROTECTIVE LIFE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

1.                                      BASIS OF PRESENTATION

 

Basis of Presentation

 

On February 1, 2015, Protective Life Corporation (the “Company”) became a wholly owned subsidiary of The Dai-ichi Life Insurance Company, Limited, a kabushiki kaisha organized under the laws of Japan (“Dai-ichi Life”), when DL Investment (Delaware), Inc. a wholly owned subsidiary of Dai-ichi Life, merged with and into the Company (the “Merger”). Prior to February 1, 2015, and for the periods reported as “predecessor”, the Company’s stock was publicly traded on the New York Stock Exchange and 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.

 

The Merger was accounted for by the Company under the acquisition method of accounting under ASC Topic 805 Business Combinations. In accordance with ASC Topic 805-20-30, all identifiable assets acquired and liabilities assumed were measured at fair value as of the acquisition date. The Company elected to apply “pushdown” accounting by applying the guidance allowed by ASC Topic 805, Business Combinations, including the initial recognition of most of the Company’s assets and liabilities at fair value as of the acquisition date, and similarly recognizing goodwill calculated based on the terms of the transaction and the fair value of the new basis of net assets of the Company. The new basis of accounting will be the basis of the accounting records in the preparation of future financial statements and related disclosures after the Merger date. Goodwill of $735.7 million was recorded as of the acquisition date which represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in the Merger, and reflects the Company’s assembled workforce, future growth potential and other sources of value not associated with identifiable assets.

 

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Such accounting principles differ from statutory reporting practices used by insurance companies in reporting to state regulatory authorities. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair statement of the results for the interim periods presented. Operating results for the three months ended June 30, 2015 (Successor Company), the period of February 1, 2015 to June 30, 2015 (Successor Company) and the period of January 1, 2015 to January 31, 2015 (Predecessor Company) are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2015 (Successor Company). The year-end consolidated condensed financial data included herein was derived from audited financial statements but does not include all disclosures required by GAAP within this report. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (Predecessor Company).

 

The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to changing competition, economic conditions, interest rates, investment performance, insurance ratings, claims, persistency, and other factors.

 

Reclassifications

 

Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on previously reported net income or shareowner’s equity.

 

During the second quarter of 2015, the Company recorded an adjustment related to certain shadow adjustments to the Company’s unrealized investment losses and future policy benefits and claims liability for the previous interim period (period February 1, 2015 to March 31, 2015). Had this adjustment been recorded by the Company prior to March 31, 2015, the recording of this amount within that interim period would have resulted in an increase to other comprehensive income of $66.7 million, net of income taxes, with offsetting adjustments to the future policy benefits and claims liability and deferred income tax liability on the interim balance sheet. The Company concluded that this adjustment was not determined to be quantitatively or qualitatively material to the interim periods and that the previously issued interim financial statements as of and for the period ended March 31, 2015 were not materially affected. This adjustment was recorded by the Company within the presented interim consolidated condensed financial statements for the quarter ended June 30, 2015.

 

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Entities Included

 

The consolidated condensed financial statements for the predecessor and successor periods presented in this report include the accounts of Protective Life Corporation and subsidiaries and its affiliate companies in which the Company holds a majority voting or economic interest. Intercompany balances and transactions have been eliminated.

 

2.                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Significant Accounting Policies

 

For a full description of significant accounting policies, see Note 2 to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014 (Predecessor Company). Other than the accounting matters resulting from the application of pushdown accounting in connection with ASC Topic 805, the Company did not make significant changes to accounting policies during the period of February 1, 2015 to June 30, 2015 (Successor Company) except as noted below.

 

Intangible Assets

 

Intangible assets with definite lives are amortized over the estimated useful life of the asset. Amortizable intangible assets primarily consist of distribution relationships, trade names, and technology. Intangible assets with indefinite lives, primarily insurance licenses, are not amortized.

 

Value of Business Acquired

 

In conjunction with the Merger, a portion of the purchase price was allocated to the right to receive future gross profits from cash flows and earnings of the Company’s insurance policies and investment contracts as of the date of the Merger. This intangible asset, called value of business acquired (“VOBA”), is based on the actuarially estimated present value of future cash flows from the Company’s insurance policies and investment contracts in-force on the date of the Merger. The estimated present value of future cash flows used in the calculation of the VOBA is based on certain assumptions, including mortality, persistency, expenses, and interest rates that the Company expects to experience in future years. The Company amortizes VOBA in proportion to gross premiums for traditional life products, or estimated gross margins (“EGMs”) for participating traditional life products within the MONY block. For interest sensitive products, the Company uses various amortization bases including expected gross profits (“EGPs”), revenues, or insurance in-force.

 

Goodwill

 

Goodwill of $735.7 million was recognized in conjunction with the Merger as the excess of the purchase considerations over the fair value of identifiable assets acquired and liabilities assumed. The balance recognized as goodwill is not amortized, but is reviewed for impairment on an annual basis, or more frequently as events or circumstances may warrant, including those circumstances which would more likely than not reduce the fair value of the Company’s reporting units below its carrying amount.

 

Property and Equipment

 

In conjunction with the Merger, property and equipment was recorded at fair value and will be depreciated from this basis in future periods based on the respective estimated useful lives. Real estate assets were recorded at appraised values as of the acquisition date. The Company has estimated the remaining useful life of the home office building to be 25 years. Land is not depreciated.

 

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The carrying amounts of the Company’s fixed assets are as follows

 

 

 

Successor

 

 

Predecessor

 

 

 

Company

 

 

Company

 

 

 

As of

 

 

As of

 

 

 

June 30, 2015

 

 

December 31, 2014

 

 

 

(Dollars In Thousands)

 

 

(Dollars In Thousands)

 

Home office building

 

$

65,127

 

 

$

75,109

 

Land

 

24,920

 

 

 

Data processing equipment

 

11,815

 

 

40,919

 

Other, principally furniture and equipment

 

4,894

 

 

55,312

 

 

 

106,756

 

 

171,340

 

Accumulated depreciation

 

3,658

 

 

118,487

 

Total property and equipment

 

$

103,098

 

 

$

52,853

 

 

Guaranteed Minimum Withdrawal Benefits

 

The Company also establishes reserves for guaranteed minimum withdrawal benefits (“GMWB”) on its variable annuity (“VA”) products. The GMWB is valued in accordance with FASB guidance under the ASC Derivatives and Hedging Topic which utilizes the valuation technique prescribed by the ASC Fair Value Measurements and Disclosures Topic, which requires the embedded derivative to be recorded at fair value using current implied volatilities for the equity indices. The fair value of the GMWB is impacted by equity market conditions and can result in the GMWB embedded derivative being in an overall net asset or net liability position.  In times of favorable equity market conditions the likelihood and severity of claims is reduced and expected fee income increases.  Since claims are generally expected later than fees these favorable equity market conditions can result in the present value of fees being greater than the present value of claims which results in a net GMWB embedded derivative asset.  In times of unfavorable equity market conditions the likelihood and severity of claims is increased and expected fee income decreases and can result in the present value of claims exceeding the present value of fees resulting in a net GMWB embedded derivative liability. The methods used to estimate the embedded derivatives employ assumptions about mortality, lapses, policyholder behavior, equity market returns, interest rates, and market volatility. The Company assumes age-based mortality from the National Association of Insurance Commissioners 1994 Variable Annuity MGDB Mortality Table for company experience. Differences between the actual experience and the assumptions used result in variances in profit and could result in losses. In conjunction with the merger the Company updated the fair value of the GMWB reserves to reflect current assumptions as of February 1, 2015 (Successor Company). As a result of the application of ASC Topic 805, the Company reset the hedge premium rates utilized in the valuation for all policies to be equal to the present value of future claims with the reset hedge premium rates being capped at the actual charges to the policyholder. This update resulted in a decrease in the net liability of approximately $266.1 million on the Merger date. As of June 30, 2015 (Successor Company), the net GMWB asset held was approximately $59.9 million.

 

Policyholder Liabilities

 

Insurance Liabilities and Reserves

 

In conjunction with the Merger and in accordance with ASC 805, insurance liabilities and reserves are recorded at fair value and the underlying contracts are considered to be new contracts, for measurement and reporting purposes as of the acquisition date. Estimating liabilities for future policy benefits on life and health insurance products requires the use of assumptions relative to future investment yields, mortality, morbidity, persistency, and other assumptions based on the Company’s historical experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviation. Determining liabilities for the Company’s property and casualty insurance products also requires the use of assumptions, including the projected levels of used vehicle prices, the frequency and severity of claims, and the effectiveness of internal processes designed to reduce the level of claims. The Company’s results depend significantly upon the extent to which its actual claims experience is consistent with the assumptions the Company used in determining its reserves and pricing its products. The Company’s reserve assumptions and estimates require significant judgment and, therefore, are inherently uncertain. The Company cannot determine with precision the ultimate amounts that it will pay for actual claims or the timing of those payments. As such, at the acquisition date, the Company updated the assumptions described above to reflect current best estimates

 

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and reserves were calculated in accordance with the methodology described below. VOBA was recorded to reflect the difference between the fair value of the contractual insurance liability and the reserve established.

 

Traditional Life, Health, and Credit Insurance Products

 

Traditional life insurance products consist principally of those products with fixed and guaranteed premiums and benefits, and they include whole life insurance policies, term and term-like life insurance policies, limited payment life insurance policies, and certain annuities with life contingencies. In accordance with ASC 805, the liabilities for future policy benefits on traditional life insurance products, when combined with the associated VOBA, have been recorded at fair value. These values were computed using assumptions that includes interest rates, mortality, lapse rates, expenses estimates, and other assumptions based on the Company’s experience, modified as necessary to reflect anticipated trends and to include provisions for possible adverse deviation. The liability for future policy benefits and claims on traditional life, health, and credit insurance products includes estimated unpaid claims that have been reported to us and claims incurred but not yet reported.

 

Universal Life and Investment Products

 

Universal life and investment products include universal life insurance, guaranteed investment contracts, guaranteed funding agreements, deferred annuities, and annuities without life contingencies. Benefit reserves for universal life and investment products represent policy account balances before applicable surrender charges plus certain deferred policy initiation fees that are recognized in income over the term of the policies. Policy benefits and claims that are charged to expense include benefit claims incurred in the period in excess of related policy account balances and interest credited to policy account balances.

 

The Company establishes liabilities for fixed indexed annuity (“FIA”) products. These products are deferred fixed annuities with a guaranteed minimum interest rate plus a contingent return based on equity market performance. The FIA product is considered a hybrid financial instrument under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC” or “Codification”) Topic 815—Derivatives and Hedging which allows the Company to make the election to value the liabilities of these FIA products at fair value. This election was made for the FIA products issued prior to 2010 as the policies were issued. These products are no longer being marketed. The future changes in the fair value of the liability for these FIA products will be recorded in Benefit and settlement expenses with the liability being recorded in Annuity account balances. For more information regarding the determination of fair value of annuity account balances please refer to Note 15, Fair Value of Financial Instruments. Premiums and policy fees for these FIA products consist of fees that have been assessed against the policy account balances for surrenders. Such fees are recognized when assessed and earned.

 

The Company currently markets a deferred fixed annuity with a guaranteed minimum interest rate plus a contingent return based on equity market performance and the products are considered hybrid financial instruments under the FASB’s ASC Topic 815—Derivatives and Hedging. The Company did not elect to value these FIA products at fair value prior to the Merger date.  As a result the Company accounts for the provision that provides for a contingent return based on equity market performance as an embedded derivative. The embedded derivative is bifurcated from the host contract and recorded at fair value in Other liabilities. The host contract is accounted for as a debt instrument in accordance with ASC Topic 944—Financial Services—Insurance and is recorded in Annuity account balances with any discount to the minimum account value being accreted using the effective yield method. Benefits and settlement expenses include accreted interest and benefit claims incurred during the period.

 

The Company markets universal life products with a guaranteed minimum interest rate plus a contingent return based on equity market performance and are considered hybrid financial instruments under the FASB’s ASC Topic 815—Derivatives and Hedging. The Company did not elect to value these IUL products at fair value prior to the Merger date. As a result the Company accounts for the provision that provides for a contingent return based on equity market performance as an embedded derivative. The embedded derivative is bifurcated from the host contract and recorded at fair value in Other liabilities. Changes in the fair value of the embedded derivative are recorded in Realized investment gains (losses)—Derivative financial instruments. For more information regarding the determination of fair value of the IUL embedded derivative refer to Note 15, Fair Value of Financial Instruments. The host contract is accounted for as a debt instrument in accordance with ASC Topic 944—Financial Services—Insurance and is recorded

 

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in Future policy benefits and claims with any discount to the minimum account value being accreted using the effective yield method. Benefits and settlement expenses include accreted interest and benefit claims incurred during the period.

 

The Company’s accounting policies with respect to variable universal life (“VUL”) and VA are identical except that policy account balances (excluding account balances that earn a fixed rate) are valued at fair value and reported as components of assets and liabilities related to separate accounts.

 

The Company establishes liabilities for guaranteed minimum death benefits (“GMDB”) on its VA products. The methods used to estimate the liabilities employ assumptions about mortality and the performance of equity markets. The Company assumes age-based mortality from the National Association of Insurance Commissioners 1994 Variable Annuity MGDB Mortality Table for company experience. Future declines in the equity market would increase the Company’s GMDB liability. Differences between the actual experience and the assumptions used result in variances in profit and could result in losses. Our GMDB as of June 30, 2015 (Successor Company), are subject to a dollar-for-dollar reduction upon withdrawal of related annuity deposits on contracts issued prior to January 1, 2003. As of June 30, 2015 (Successor Company), the GMDB reserve was $32.8 million.

 

Property and Casualty Insurance Products

 

Property and casualty insurance products include service contract business, surety bonds, and guaranteed asset protection (“GAP”). 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.

 

Reinsurance

 

The Company uses reinsurance extensively in certain of its segments and accounts for reinsurance and the recognition of the impact of reinsurance costs in accordance with the ASC Financial Services — Insurance Topic. The following summarizes some of the key aspects of the Company’s accounting policies for reinsurance.

 

Reinsurance Assets and Liabilities—Claim liabilities and policy benefits are calculated consistently for all policies, regardless of whether or not the policy is reinsured. Once the claim liabilities and policy benefits for the underlying policies are estimated, the amounts recoverable from the reinsurers are estimated based on a number of factors including the terms of the reinsurance contracts, historical payment patterns of reinsurance partners, and the financial strength and credit worthiness of reinsurance partners and recorded as Reinsurance receivables on the balance sheet. The reinsurance receivables were recorded in the balance sheet using current accounting policies and the most current assumptions as of the merger date. As of the merger date, the Company also calculated the ceded VOBA associated with the reinsured policies. The reinsurance receivables combined with the associated ceded VOBA represent the fair value of the reinsurance assets. Liabilities for unpaid reinsurance claims are produced from claims and reinsurance system records, which contain the relevant terms of the individual reinsurance contracts. The Company monitors claims due from reinsurers to ensure that balances are settled on a timely basis. Incurred but not reported claims are reviewed by the Company’s actuarial staff to ensure that appropriate amounts are ceded.

 

The Company analyzes and monitors the credit worthiness of each of its reinsurance partners to minimize collection issues. For newly executed reinsurance contracts with reinsurance companies that do not meet predetermined standards, the Company requires collateral such as assets held in trusts or letters of credit.

 

Accounting Pronouncements Recently Adopted

 

Accounting Standards Update (“ASU”) No. 2014-08—Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity. This Update changes the requirements for reporting discontinued operations and related disclosures. The Update limits the definition of a discontinued operation to disposals that represent “strategic shifts” that will have a major effect on an entity’s operation and financial results.

 

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Additionally, the Update requires enhanced disclosures about the components of discontinued operations and the financial effects of the disposal. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2014. The Company has reviewed the additional disclosures required by the Update, and will apply the revised guidance to any disposals occurring after the effective date.

 

ASU No. 2014-11—Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures.  This Update changes the requirements for classification of certain repurchase agreements, and will expand the use of secured borrowing accounting for repurchase-to-maturity transactions. In addition, the Update requires additional disclosures for repurchase agreements accounted for both as sales and as secured borrowings. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2014. The Update did not impact the Company’s financial position or results of operations. The Company has updated its policies and processes to ensure compliance with the additional disclosure requirements in this Update.

 

ASU No. 2014-17—Business Combinations (Topic 805).  This Update relates to “pushdown accounting”, which refers to pushing down the acquirer’s accounting and reporting basis (which is recognized in conjunction with its accounting for a business combination) to the acquiree’s standalone financial statements. The new guidance makes pushdown accounting optional for an acquiree that is a business or nonprofit activity when there is a change-in- control event (e.g., the acquirer in a business combination obtains control over the acquiree). In addition, the staff of the SEC released Staff Accounting Bulletin (“SAB”) No. 115, which rescinds SAB Topic 5J, “New Basis of Accounting Required in Certain Circumstances” (the SEC staff’s pre-existing guidance on pushdown accounting) and conforms SEC guidance on pushdown accounting to the FASB’s new guidance. Revised SEC guidance was codified in ASU No. 2015-08, issued in May 2015. The new pushdown accounting guidance became effective upon its issuance on November 18, 2014. Although now optional, the Company has applied pushdown accounting to its standalone financial statements effective with the Company becoming a wholly owned subsidiary of Dai-ichi Life on February 1, 2015. The presentation within this report for predecessor and successor periods is consistent with this Update.

 

Accounting Pronouncements Not Yet Adopted

 

ASU No. 2014-09—Revenue from Contracts with Customers (Topic 606). This Update provides for significant revisions to the recognition of revenue from contracts with customers across various industries. Under the new guidance, entities are required to apply a prescribed 5-step process to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The accounting for revenues associated with insurance products is not within the scope of this Update. The Update was originally effective for annual and interim periods beginning after December 15, 2017.  However, in July 2015, the FASB voted to defer the effective date of ASU No. 2014-09 by one year to December 15, 2018. Early adoption will be allowed, but not before the original effective date. The Company is reviewing its policies and processes to ensure compliance with the requirements in this Update, upon adoption. The Company is currently assessing the impact this standard will have on its non-insurance operations.

 

ASU No. 2014-15—Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This Update will require management to assess an entity’s ability to continue as a going concern, and will require footnote disclosures in certain circumstances. Under the updated guidance, management should consider relevant conditions and evaluate whether it is probable that the entity will be unable to meet its obligations within one year after the issuance date of the financial statements. The Update is effective for annual periods ending December 31, 2016 and interim periods thereafter, with early adoption is permitted. The amendments in this Update will not impact the Company’s financial position or results of operations. However, the new guidance will require a formal assessment of going concern by management based on criteria prescribed in the new guidance. The Company is reviewing its policies and processes to ensure compliance with the new guidance.

 

ASU No. 2015-02—Consolidation—Amendments to the Consolidation Analysis.  This Update makes several targeted changes to generally accepted accounting principles, including a) eliminating the presumption that a general partner should consolidate a limited partnership and b) eliminating the consolidation model specific to limited partnerships. The amendments also clarify when fees and related party relationships should be considered in the consolidation of variable interest entities. The amendments in this Update are effective for annual and interim periods

 

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beginning after December 15, 2015. The Company is reviewing its policies and processes to ensure compliance with the requirements in this Update, upon adoption.

 

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

 

ASU No. 2015-05 — Intangibles — Goodwill and Other — Internal-Use Software. The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. The Update is effect for annual and interim periods beginning after December 15, 2015. The Company is reviewing its policies and processes to ensure compliance with the revised guidance.

 

ASU No. 2015-09 — Financial Services—Insurance (Topic 944): Disclosures about Short-Duration Contracts. The amendments in this Update require additional disclosures for short-duration contracts issued by insurance entities. The additional disclosures focus on the liability for unpaid claims and claim adjustment expenses and include incurred and paid claims development information by accident year in tabular form, along with a reconciliation of this information to the statement of financial position. For accident years included in the development tables, the amendments also require disclosure of the total incurred-but-not-reported liabilities and expected development on reported claims, along with claims frequency information unless impracticable. Finally, the amendments require disclosure of the historical average annual percentage payout of incurred claims. With the exception of the current reporting period, claims development information may be presented as supplementary information. The Update is effective for annual periods beginning after December 15, 2015 and interim periods beginning after December 15, 2016. The Company is reviewing its products to determine the applicability and potential impact of the new disclosures.

 

3.                                      DAI-ICHI MERGER

 

On February 1, 2015 the Company, subsequent to required approvals from the Company’s shareholders and relevant regulatory authorities, became a wholly owned subsidiary of Dai-ichi Life as contemplated by the Agreement and Plan of Merger (the “Merger Agreement”) with Dai-ichi Life and DL Investment (Delaware), Inc., a Delaware corporation and wholly owned subsidiary of Dai-ichi Life, which provided for the Merger of DL Investment (Delaware), Inc. with and into the Company, with the Company surviving the Merger as a wholly owned subsidiary of Dai-ichi Life. On February 1, 2015 each share of the Company’s common stock outstanding was converted into the right to receive $70 per share, without interest (the “Per Share Merger Consideration”). The aggregate cash consideration paid in connection with the Merger for the outstanding shares of common stock was approximately $5.6 billion and paid directly to the shareowners of record by Dai-ichi Life. According to public statements by both companies, the Merger will provide Dai-ichi Life with a platform for growth in the United States, where it did not previously have a significant presence. In connection with the completion of the Merger, the Company’s previously publicly traded equity was delisted from the NYSE, although the Company remains an SEC registrant for financial reporting purposes in the United States.

 

The Merger was accounted for under the acquisition method of accounting under ASC Topic 805. In accordance with ASC Topic 805-20-30, all identifiable assets acquired and liabilities assumed were measured at fair value as of the acquisition date. Goodwill of $735.7 million represents the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in the Merger, and reflects the Company’s assembled workforce, future growth potential and other sources of value not associated with identifiable assets. None of the goodwill is tax deductible.

 

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The following table summarizes the consideration paid for the acquisition and the preliminary determination of the fair value of assets acquired and liabilities assumed at the acquisition date:

 

 

 

Fair Value

 

 

 

As of

 

 

 

February 1, 2015

 

 

 

(Dollars In Thousands)

 

Assets

 

 

 

Fixed maturities

 

$

38,363,025

 

Equity securities

 

745,512

 

Mortgage loans

 

5,580,229

 

Investment real estate

 

7,456

 

Policy loans

 

1,751,872

 

Other long-term investments

 

686,507

 

Short-term investments

 

316,167

 

Total investments

 

47,450,768

 

Cash

 

462,710

 

Accrued investment income

 

484,021

 

Accounts and premiums receivable

 

112,182

 

Reinsurance receivables

 

5,724,020

 

Value of business acquired

 

1,276,886

 

Goodwill

 

735,712

 

Other intangibles

 

683,000

 

Property and equipment

 

104,364

 

Other assets

 

120,762

 

Income tax receivable

 

15,458

 

Assets related to separate accounts

 

 

 

Variable annuity

 

12,970,587

 

Variable universal life

 

819,188

 

Total assets

 

$

70,959,658

 

Liabilities

 

 

 

Future policy and benefit claims

 

$

30,195,841

 

Unearned premiums

 

682,183

 

Total policy liabilities and accruals

 

30,878,024

 

Stable value product account balances

 

1,932,277

 

Annuity account balances

 

10,941,661

 

Other policyholders’ funds

 

1,388,083

 

Other liabilities

 

2,188,863

 

Deferred income taxes

 

1,535,556

 

Non-recourse funding obligations

 

621,798

 

Repurchase program borrowings

 

50,000

 

Debt

 

1,519,211

 

Subordinated debt securities

 

560,351

 

Liabilities related to separate accounts

 

 

 

Variable annuity

 

12,970,587

 

Variable universal life

 

819,188

 

Total liabilities

 

65,405,599

 

Net assets acquired

 

$

5,554,059

 

 

As of the acquisition date, all contractual cash flows related to the Company’s historical and acquired receivables (as presented within this consolidated balance sheet) are expected to be collected.

 

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Intangible assets recognized by the Company included the following (excluding goodwill):

 

 

 

Estimated

 

 

 

 

 

Fair Value on

 

Estimated

 

 

 

Acquisition Date

 

Useful Life

 

 

 

(Dollars In Thousands)

 

(In Years)

 

Distribution relationships

 

$

405,000

 

14-22

 

Trade names

 

103,000

 

13-17

 

Technology

 

143,000

 

7-14

 

Total intangible assets subject to amortization

 

651,000

 

 

 

 

 

 

 

 

 

Insurance licenses

 

32,000

 

Indefinite

 

Total intangible assets

 

$

683,000

 

 

 

 

Identified intangible assets were valued using the excess earnings method, relief from royalty method or cost approach, as appropriate.

 

Amortizable intangible assets will be amortized straight line over their assigned useful lives. The following is a schedule of estimated aggregate amortization expense:

 

Year

 

Amount

 

 

 

(Dollars In Thousands)

 

2015

 

$

20,657

 

2016

 

41,313

 

2017

 

41,313

 

2018

 

41,313

 

2019

 

41,313

 

 

All tangible and intangible assets of the Company were allocated to applicable operating segments in connection with the recording of pushdown accounting.  The purchase price was also allocated to each operating segment in accordance with the determined fair value of the operating segments, such that the total reconciled with the total consideration paid in the merger.  Subtraction of the fair value of the tangible and intangible assets for each operating segment from the allocated purchase price of that operating segment resulted in the goodwill allocated to each operating segment. The amount of goodwill allocated to each operating segment is reflected in Note 18, Operating Segments.

 

Treatment of certain acquisition related costs

 

The Company recorded costs related to the Merger in either the predecessor or successor periods based on the specific facts and circumstances underlying each individual transaction. Certain of these costs were fully contingent on the consummation of the Merger on February 1, 2015 (Successor Company). These costs are not expensed in either the Predecessor or Successor Company Statement of Comprehensive Income (Loss). Liabilities for payment of these contingent costs are included in the opening balance sheet as of February 1, 2015 (Successor Company), and the nature and amount of the costs are discussed below.

 

Fees in the amount of $28.8 million which were paid to the Company’s financial advisor related to the Merger were recorded as liabilities as of the acquisition date. In accordance with the terms of the contract, payment of these fees was contingent on the successful closing of the Merger, and became payable on the date thereof.

 

Certain of the Company’s stock-based compensation arrangements provided for acceleration of benefits on the completion of a change-in-control event. Upon the completion of the Merger, benefits in the amount of $138.2 million became payable to eligible employees under these arrangements. Such accounts are recorded as liabilities as of the acquisition closing date. The portion of this payable that represented expense accelerated on the merger date was $25.4 million.

 

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Treatment of Benefit Plans

 

At or immediately prior to the Merger, each stock appreciation right with respect to shares of Common Stock granted under any Stock Plan (each, a “SAR”) that were outstanding and unexercised immediately prior to the Merger and that had a base price per share of Common Stock underlying such SAR (the “Base Price”) that was less than the Per Share Merger Consideration (each such SAR, an “In-the-Money SAR”), whether or not exercisable or vested, was cancelled and converted into the right to receive an amount in cash less any applicable withholding taxes, determined by multiplying (i) the excess of the Per Share Merger Consideration over the Base Price of such In-the-Money SAR by (ii) the number of shares of Common Stock subject to such In-the-Money SAR (such amount, the “SAR Consideration”).

 

At or immediately prior to the effective time of the Merger, each restricted stock unit with respect to a share of Common Stock granted under any Stock Plan (each, a “RSU”) that was outstanding immediately prior to the Merger, whether or not vested, was cancelled and converted into the right to receive an amount in cash, without interest, less any applicable withholding taxes, determined by multiplying (i) the Per Share Merger Consideration by (ii) the number of RSUs.

 

The number of performance shares earned for each award of performance shares granted under any Stock Plan was calculated by determining the number of performance shares that would have been paid if the subject award period had ended on the December 31 immediately preceding the Merger (based on the conditions set for payment of performance share awards for the subject award period), provided that the number of performance shares earned for each award were not less than the aggregate number of performance shares at the target performance level. Each performance share earned that was outstanding immediately prior to the Merger, whether or not vested, was cancelled and converted into the right to receive an amount in cash, without interest, less any applicable withholding taxes, determined by multiplying (i) the Per Share Merger Consideration by (ii) the number of Performance Shares.

 

4.                                      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 Insurance Department (the “Superintendent”). Closed Block assets and liabilities are carried on the same basis as similar assets and liabilities held in the general account.

 

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

 

If the actual cumulative earnings from the Closed Block are greater than the expected cumulative earnings, only the expected earnings will be recognized in the Company’s net income. Actual cumulative earnings in excess of expected cumulative earnings at any point in time are recorded as a policyholder dividend obligation because they will ultimately be paid to Closed Block policyholders as an additional policyholder dividend unless offset by future performance that is less favorable than originally expected. If a policyholder dividend obligation has been previously

 

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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 June 30, 2015 (Successor Company) and December 31, 2014 (Predecessor Company) is as follows.

 

 

 

Successor

 

Predecessor

 

 

 

Company

 

Company

 

 

 

As of

 

 

As of

 

 

 

June 30, 2015

 

 

December 31, 2014

 

 

 

(Dollars In Thousands)

 

 

(Dollars In Thousands)

 

Closed block liabilities

 

 

 

 

 

 

Future policy benefits, policyholders’ account balances and other policyholder liabilities

 

$

6,062,552 

 

 

$

6,138,505 

 

Policyholder dividend obligation

 

52,283

 

 

366,745

 

Other liabilities

 

18,885

 

 

53,838

 

Total closed block liabilities

 

6,133,720

 

 

6,559,088

 

Closed block assets

 

 

 

 

 

 

Fixed maturities, available-for-sale, at fair value

 

$

4,424,934 

 

 

$

4,524,037 

 

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

 

 

 

5,387

 

Mortgage loans on real estate

 

345,678

 

 

448,855

 

Policy loans

 

755,692

 

 

771,120

 

Cash and other invested assets

 

34,511

 

 

30,984

 

Other assets

 

154,346

 

 

221,270

 

Total closed block assets

 

5,715,161

 

 

6,001,653

 

Excess of reported closed block liabilities over closed block assets

 

418,559

 

 

557,435

 

Portion of above representing accumulated other comprehensive income:

 

 

 

 

 

 

Net unrealized investment gains (losses) net of deferred tax benefit of $0 (Successor) and $0 (Predecessor); net of policyholder dividend obligation of $166,434 (Successor) and $106,886 (Predecessor)

 

 

 

 

Future earnings to be recognized from closed block assets and closed block liabilities

 

$

418,559 

 

 

$

557,435 

 

 

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Reconciliation of the policyholder dividend obligation is as follows:

 

 

 

Successor

 

Predecessor

 

 

 

Company

 

Company

 

 

 

February 1, 2015

 

 

January 1, 2015

 

For The Six

 

 

 

to

 

 

to

 

Months Ended

 

 

 

June 30, 2015

 

 

January 31, 2015

 

June 30, 2014

 

 

 

(Dollars In Thousands)

 

 

(Dollars In Thousands)

 

Policyholder dividend obligation, beginning of period

 

$

323,432

 

 

$

366,745

 

$

190,494

 

Applicable to net revenue (losses)

 

(15,096

)

 

(1,369

)

(6,951

)

Change in net unrealized investment gains (losses) allocated to the policyholder dividend obligation

 

(256,053

)

 

135,077

 

145,329

 

Policyholder dividend obligation, end of period

 

$

52,283

 

 

$

500,453

 

$

328,872

 

 

Closed Block revenues and expenses were as follows:

 

 

 

Successor Company

 

Predecessor Company

 

 

 

For The Three

 

February 1, 2015

 

 

January 1, 2015

 

For The Three

 

For The Six

 

 

 

Months Ended

 

to

 

 

to

 

Months Ended

 

Months Ended

 

 

 

June 30, 2015

 

June 30, 2015

 

 

January 31, 2015

 

June 30, 2014

 

June 30, 2014

 

 

 

(Dollars In Thousands)

 

 

(Dollars In Thousands)

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

Premiums and other income

 

$

49,998

 

$

81,669

 

 

$

15,065

 

$

53,073

 

$

102,846

 

Net investment income (loss)

 

54,833

 

87,681

 

 

19,107

 

60,416

 

112,623

 

Net investment gains (losses)

 

2,216

 

2,850

 

 

568

 

1,086

 

6,105

 

Total revenues

 

107,047

 

172,200

 

 

34,740

 

114,575

 

221,574

 

Benefits and other deductions

 

 

 

 

 

 

 

 

 

 

 

 

Benefits and settlement expenses

 

98,975

 

154,746

 

 

31,152

 

103,209

 

199,535

 

Other operating expenses

 

263

 

474

 

 

 

383

 

90

 

Total benefits and other deductions

 

99,238

 

155,220

 

 

31,152

 

103,592

 

199,625

 

Net revenues before income taxes

 

7,809

 

16,980

 

 

3,588

 

10,983

 

21,949

 

Income tax expense

 

2,733

 

5,943

 

 

1,256

 

3,844

 

7,682

 

Net revenues

 

$

5,076

 

$

11,037

 

 

$

2,332

 

$

7,139

 

$

14,267

 

 

5.                                      INVESTMENT OPERATIONS

 

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

 

 

 

Successor

 

Predecessor

 

 

 

Company

 

Company

 

 

 

For The Three

 

February 1, 2015

 

 

January 1, 2015

 

For The Three

 

For The Six

 

 

 

Months Ended

 

to

 

 

to

 

Months Ended

 

Months Ended

 

 

 

June 30, 2015

 

June 30, 2015

 

 

January 31, 2015

 

June 30, 2014

 

June 30, 2014

 

 

 

(Dollars In Thousands)

 

 

(Dollars In Thousands)

 

Fixed maturities

 

$

3,339

 

$

3,712

 

 

$

6,891

 

$

20,198

 

$

27,568

 

Equity securities

 

21

 

21

 

 

 

 

 

Impairments on fixed maturity securities

 

(5,734

)

(5,734

)

 

(481

)

(1,460

)

(3,051

)

Impairments on equity securities

 

 

 

 

 

 

 

Modco trading portfolio

 

(108,741

)

(141,901

)

 

73,062

 

60,989

 

127,292

 

Other investments

 

3,044

 

775

 

 

1,200

 

(1,039

)

(2,598

)

Total realized gains (losses) - investments

 

$

(108,071

)

$

(143,127

)

 

$

80,672

 

$

78,688

 

$

149,211

 

 

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For the three months ended June 30, 2015 (Successor Company) and for the period of February 1, 2015 to June 30, 2015 (Successor Company), gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $5.4 million and $6.9 million and gross realized losses were $7.8 million and $8.9 million, respectively, including $5.7 million and $5.7 million of impairment losses, respectively.

 

For the period of January 1, 2015 to January 31, 2015 (Predecessor Company), gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $6.9 million and gross realized losses were $0.5 million, including $0.4 million of impairment losses.

 

For the three and six months ended June 30, 2014 (Predecessor Company), gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $20.4 million and $28.10 million and gross realized losses were $1.6 million and $3.4 million, including $1.4 million and $2.9 million of impairment losses, respectively.

 

For the three months ended June 30, 2015 (Successor Company) and for the period of February 1, 2015 to June 30, 2015 (Successor Company), the Company sold securities in an unrealized gain position with a fair value (proceeds) of $432.2 million and $715.0 million, respectively. The gains realized on the sale of these securities was $5.4 million and $6.9 million, respectively.

 

For the period of January 1, 2015 to January 31, 2015 (Predecessor Company), the Company sold securities in an unrealized gain position with a fair value (proceeds) of $172.6 million. The gain realized on the sale of these securities was $6.9 million.

 

For the three and six months ended June 30, 2014 (Predecessor Company), the Company sold securities in an unrealized gain position with a fair value (proceeds) of $306.3 million and $571.0 million, respectively. The gains realized on the sale of these securities was $20.4 million and $28.1 million, respectively.

 

For the three months ended June 30, 2015 (Successor Company) and for the period of February 1, 2015 to June 30, 2015 (Successor Company), the Company sold securities in an unrealized loss position with a fair value (proceeds) of $28.6 million and $49.3 million, respectively. The loss realized on the sale of these securities was $2.1 million and $3.2 million, respectively. The Company made the decision to exit these holdings in conjunction with our overall asset liability management process.

 

For the period of January 1, 2015 to January 31, 2015 (Predecessor Company), the Company sold securities in an unrealized loss position with a fair value (proceeds) of $0.4 million. The loss realized on the sale of these securities were immaterial to the Company. The Company made the decision to exit these holdings in conjunction with our overall asset liability management process.

 

For the three and six months ended June 30, 2014 (Predecessor Company), the Company sold securities in an unrealized loss position with a fair value (proceeds) of $1.6 million and $4.4 million, respectively. The losses realized on the sale of these securities were $0.2 million and $0.5 million, respectively. The Company made the decision to exit these holdings in conjunction with our overall asset liability management process.

 

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Table of Contents

 

The amortized cost and fair value of the Company’s investments classified as available-for-sale as of June 30, 2015 (Successor Company) and December 31, 2014 (Predecessor Company), are as follows:

 

 

 

 

 

Gross

 

Gross

 

 

 

Total OTTI

 

Successor Company

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Recognized

 

As of June 30, 2015

 

Cost

 

Gains

 

Losses

 

Value

 

in OCI(1)

 

 

 

 

 

(Dollars In Thousands)

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

1,594,167

 

$

6,244

 

$

(23,585

)

$

1,576,826

 

$

 

Commercial mortgage-backed securities

 

1,236,987

 

271

 

(34,102

)

1,203,156

 

 

Other asset-backed securities

 

820,349

 

2,062

 

(22,940

)

799,471

 

 

U.S. government-related securities

 

1,644,086

 

427

 

(42,983

)

1,601,530

 

 

Other government-related securities

 

19,578

 

 

(796

)

18,782

 

 

States, municipals, and political subdivisions

 

1,720,059

 

59

 

(135,050

)

1,585,068

 

 

Corporate securities

 

28,044,507

 

51,209

 

(1,926,339

)

26,169,377

 

(7,024

)

Preferred stock

 

64,362

 

 

(2,695

)

61,667

 

 

 

 

35,144,095

 

60,272

 

(2,188,490

)

33,015,877

 

(7,024

)

Equity securities

 

725,747

 

903

 

(12,498

)

714,152

 

 

Short-term investments

 

160,855

 

 

 

160,855

 

 

 

 

$

36,030,697

 

$

61,175

 

$

(2,200,988

)

$

33,890,884

 

$

(7,024

)

 

 

Predecessor Company

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

Residential mortgage-backed securities

 

$

1,374,206

 

$

56,330

 

$

(12,278

)

$

1,418,258

 

$

6,404

 

Commercial mortgage-backed securities

 

1,119,979

 

59,637

 

(2,364

)

1,177,252

 

 

Other asset-backed securities

 

857,441

 

17,885

 

(35,950

)

839,376

 

(95

)

U.S. government-related securities

 

1,394,028

 

44,149

 

(9,282

)

1,428,895

 

 

Other government-related securities

 

16,939

 

3,233

 

 

20,172

 

 

States, municipals, and political subdivisions

 

1,391,526

 

296,594

 

(431

)

1,687,689

 

 

Corporate securities

 

24,765,303

 

2,759,255

 

(139,031

)

27,385,527

 

 

 

 

30,919,422

 

3,237,083

 

(199,336

)

33,957,169

 

6,309

 

Equity securities

 

757,259

 

38,669

 

(14,182

)

781,746

 

 

Short-term investments

 

155,500

 

 

 

155,500

 

 

 

 

$

31,832,181

 

$

3,275,752

 

$

(213,518

)

$

34,894,415

 

$

6,309

 

 


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

 

The preferred stock shown above as of June 30, 2015 (Successor Company) is included in the equity securities total as of December 31, 2014 (Predecessor Company).

 

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The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of June 30, 2015 (Successor Company) and December 31, 2014 (Predecessor Company), are as follows:

 

 

 

 

 

Gross

 

Gross

 

 

 

Total OTTI

 

Successor Company

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

 

Recognized

 

As of June 30, 2015

 

Cost

 

Gains

 

Losses

 

Value

 

in OCI

 

 

 

(Dollars In Thousands)

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

Other

 

$

565,334

 

$

 

$

(75,384

)

$

489,950

 

$

 

 

 

$

565,334

 

$

 

$

(75,384

)

$

489,950

 

$

 

 

 

Predecessor Company

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2014

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities:

 

 

 

 

 

 

 

 

 

 

 

Other

 

$

435,000

 

$

50,422

 

$

 

$

485,422

 

$

 

 

 

$

435,000

 

$

50,422

 

$

 

$

485,422

 

$

 

 

During the period of February 1, 2015 to June 30, 2015 (Successor Company), the period of January 1, 2015 to January 31, 2015 (Predecessor Company), and for the six months ended June 30, 2014 (Predecessor Company), the Company did not record any other-than-temporary impairments on held-to-maturity securities. The Company’s held-to-maturity securities had $75.4 million of gross unrecognized holding losses as of June 30, 2015 (Successor Company).  The Company does not consider these unrecognized holding losses to be other-than-temporary based on certain positive factors associated with the securities which include credit ratings, financial health of the issuer, continued access of the issuer to capital markets and other pertinent information.

 

The Company’s held-to-maturity securities had no gross unrecognized holding losses as of December 31, 2014 (Predecessor Company).

 

As of June 30, 2015 (Successor Company) and December 31, 2014 (Predecessor Company), the Company had an additional $2.7 billion and $2.8 billion of fixed maturities, $8.3 million and $21.5 million of equity securities, and $43.8 million and $95.1 million of short-term investments classified as trading securities, respectively.

 

The amortized cost and fair value of available-for-sale and held-to-maturity fixed maturities as of June 30, 2015 (Successor Company), by expected maturity, are shown below. Expected maturities of securities without a single maturity date are allocated based on estimated rates of prepayment that may differ from actual rates of prepayment.

 

 

 

Successor Company

 

 

 

Available-for-sale

 

Held-to-maturity

 

 

 

Amortized

 

Fair

 

Amortized

 

Fair

 

 

 

Cost

 

Value

 

Cost

 

Value

 

 

 

(Dollars In Thousands)

 

(Dollars In Thousands)

 

Due in one year or less

 

$

849,305