Employee Benefit Plans

Defined Benefit Pension, Post-Retirement Medical, and Supplemental Executive Retirement Plans

The Company has a noncontributory Defined Benefit Pension Plan covering substantially all of its employees that were hired before January 1, 1999. Prior to December 31, 2012, the Company accounted for the Defined Benefit Pension Plan as the direct legal obligation of the Company and accounted for the corresponding plan obligations on its balance sheet and statements of income. Effective December 31, 2012, the Company transferred the sponsorship of the Defined Benefit Pension Plan to GWL&A Financial, the Company’s immediate parent. Despite the change in sponsorship of the Defined Benefit Pension Plan, the Company continues to account for the corresponding plan obligations on its balance sheet and statements of income.

Benefits for the Defined Benefit Pension Plan are based principally on an employee’s years of service and compensation levels near retirement. The Company’s policy for funding the Defined Benefit Pension Plans is to make annual contributions, which equal or exceed regulatory requirements.

The Company sponsors an unfunded Post-Retirement Medical Plan (the “Medical Plan”) that provides health benefits to retired employees who are not Medicare eligible. The Medical Plan is contributory and contains other cost sharing features which may be adjusted annually for the expected general inflation rate. The Company’s policy is to fund the cost of the Medical Plan benefits in amounts determined at the discretion of management.

The Company also provides Supplemental Executive Retirement Plans to certain key executives. These plans provide key executives with certain benefits upon retirement, disability, or death based upon total compensation. The Company has purchased individual life insurance policies with respect to employees covered by these plans. The Company is the owner and beneficiary of the insurance contracts.

A December 31 measurement date is used for the employee benefit plans.

The following tables provide a reconciliation of the changes in the benefit obligations, fair value of plan assets and the underfunded status for the Company’s Defined Benefit Pension, Post-Retirement Medical, and Supplemental Executive Retirement plans:



	Defined Benefit Pension Plan						Post-Retirement Medical Plan						Supplemental Executive Retirement Plan						Total
	Year Ended December 31,						Year Ended December 31,						Year Ended December 31,						Year Ended December 31,
	2016			2015			2016			2015			2016			2015			2016			2015
Change in projected benefit obligation:
Benefit obligation, January 1	$	560,817		$	583,080		$	16,637		$	12,782		$	43,858		$	55,832		$	621,312		$	651,694
Service cost	(1,403		)	12,851			1,246			1,042			294			282			137			14,175
Interest cost	25,263			23,987			713			560			1,775			2,122			27,751			26,669
Actuarial (gain) loss	24,928			(42,863		)	1,408			3,360			1,911			(9,504		)	28,247			(49,007		)
Regular benefits paid	(17,315		)	(16,238		)	(973		)	(1,446		)	(3,337		)	(4,874		)	(21,625		)	(22,558		)
Acquisition	—			—			—			339			—			—			—			339
Benefit obligation, December 31	$	592,290		$	560,817		$	19,031		$	16,637		$	44,501		$	43,858		$	655,822		$	621,312
Accumulated benefit obligation	$	575,024		$	544,011		$	19,031		$	16,637		$	43,098		$	42,182		$	637,153		$	602,830

On January 1, 2015, the Company acquired the retirement business of Putnam, an affiliate of the Company. See Note 2 for additional discussion regarding the acquisition. Per the terms of the Asset Transfer Agreement, the Company was required to give each Putnam employee full credit for the employee’s service period with Putnam prior to the closing date for the purpose of eligibility to participate, vesting and level of benefits under the Post-Retirement Medical Plan. As a result, approximately 150 individuals became eligible participants of the Post-Retirement Medical Plan at January 1, 2015. The transaction was recorded as a prior service cost, which resulted in a $339 increase before tax to other liabilities and expenses and a decrease to accumulated other comprehensive income.



	Defined Benefit Pension Plan						Post-Retirement Medical Plan						Supplemental Executive Retirement Plan						Total
	Year Ended December 31,						Year Ended December 31,						Year Ended December 31,						Year Ended December 31,
	2016			2015			2016			2015			2016			2015			2016			2015
Change in plan assets:
Value of plan assets, January 1	$	427,131		$	443,962		$	—		$	—		$	—		$	—		$	427,131		$	443,962
Actual return on plan assets	43,271			(593		)	—			—			—			—			43,271			(593		)
Employer contributions	—			—			973			1,446			3,337			4,874			4,310			6,320
Benefits paid	(17,315		)	(16,238		)	(973		)	(1,446		)	(3,337		)	(4,874		)	(21,625		)	(22,558		)
Value of plan assets, December 31	$	453,087		$	427,131		$	—		$	—		$	—		$	—		$	453,087		$	427,131



	Defined Benefit Pension Plan						Post-Retirement Medical Plan						Supplemental Executive Retirement Plan						Total
	December 31,						December 31,						December 31,						December 31,
	2016			2015			2016			2015			2016			2015			2016			2015
Under funded status at December 31	$	(139,203	)	$	(133,686	)	$	(19,031	)	$	(16,637	)	$	(44,501	)	$	(43,858	)	$	(202,735	)	$	(194,181	)

The following table presents amounts recognized in the consolidated balance sheets for the Company’s Defined Benefit Pension, Post-Retirement Medical, and Supplemental Executive Retirement plans:



	Defined Benefit Pension Plan						Post-Retirement Medical Plan						Supplemental Executive Retirement Plan						Total
	December 31,						December 31,						December 31,						December 31,
	2016			2015			2016			2015			2016			2015			2016			2015
Amounts recognized in consolidated balance sheets:
Other liabilities	$	(139,203	)	$	(133,686	)	$	(19,031	)	$	(16,637	)	$	(44,501	)	$	(43,858	)	$	(202,735	)	$	(194,181	)
Accumulated other comprehensive income (loss)	(133,055		)	(139,316		)	5,715			8,540			(2,360		)	(890		)	(129,700		)	(131,666		)

The following table provides information regarding amounts in AOCI that have not yet been recognized as components of net periodic benefit cost at December 31, 2016:



	Defined Benefit Pension Plan						Post-Retirement Medical Plan				Supplemental Executive Retirement Plan						Total
	Gross			Net of tax			Gross		Net of tax		Gross			Net of tax			Gross			Net of tax
Net gain (loss)	$	(133,055	)	$	(86,486	)	$	5,091	$	3,309	$	(660	)	$	(429	)	$	(128,624	)	$	(83,606	)
Net prior service (cost) credit	—			—			624		406		(1,700		)	(1,105		)	(1,076		)	(699		)
	$	(133,055	)	$	(86,486	)	$	5,715	$	3,715	$	(2,360	)	$	(1,534	)	$	(129,700	)	$	(84,305	)

The following table provides information regarding amounts in AOCI that are expected to be recognized as components of net periodic benefit costs during the year ended December 31, 2017:



	Defined Benefit Pension Plan						Post-Retirement Medical Plan				Supplemental Executive Retirement Plan						Total
	Gross			Net of tax			Gross		Net of tax		Gross			Net of tax			Gross			Net of tax
Net gain (loss)	$	(8,799	)	$	(5,719	)	$	210	$	137	$	54		$	35		$	(8,535	)	$	(5,547	)
Prior service (cost) credit	—			—			453		294		(501		)	(326		)	(48		)	(32		)
	$	(8,799	)	$	(5,719	)	$	663	$	431	$	(447	)	$	(291	)	$	(8,583	)	$	(5,579	)

The expected benefit payments for the Company’s Defined Benefit Pension, Post-Retirement Medical, and Supplemental Executive Retirement plans for the years indicated are as follows:



	Defined Benefit Pension Plan		Post-Retirement Medical Plan		Supplemental Executive Retirement Plan
2017	$	16,600	$	856	$	3,435
2018	20,029		843		2,775
2019	21,231		917		2,460
2020	22,694		946		2,438
2021	24,820		1,028		2,400
2022 through 2026	154,223		6,776		27,188

Net periodic (benefit) cost of the Defined Benefit Pension, Post-Retirement Medical, and Supplemental Executive Retirement plans included in general insurance expenses in the accompanying consolidated statements of income includes the following components:



	Defined Benefit Pension Plan
	Year Ended December 31,
	2016			2015			2014
Components of net periodic cost:
Service cost	$	(1,403	)	$	12,851		$	4,952
Interest cost	25,263			23,987			23,068
Expected return on plan assets	(22,339		)	(28,345		)	(29,288		)
Amortization of unrecognized prior service cost	—			13			51
Amortization of loss from earlier periods	10,260			12,398			2,898
Net periodic cost	$	11,781		$	20,904		$	1,681



	Post-Retirement Medical Plan
	Year Ended December 31,
	2016			2015			2014
Components of net periodic benefit:
Service cost	$	1,246		$	1,042		$	985
Interest cost	713			560			574
Amortization of unrecognized prior service benefit	(1,102		)	(1,640		)	(1,706		)
Amortization of gain from earlier periods	(317		)	(511		)	(450		)
Net periodic benefit	$	540		$	(549	)	$	(597	)



	Supplemental Executive Retirement Plan
	Year Ended December 31,
	2016			2015		2014
Components of net periodic cost:
Service cost	$	294		$	282	$	586
Interest cost	1,775			2,122		2,528
Amortization of unrecognized prior service cost	501			933		4,844
Amortization of loss from earlier periods	(61		)	663		282
Settlement	—			—		1,857
Net periodic cost	$	2,509		$	4,000	$	10,097

On August 1, 2014, the Company made a lump-sum benefit payment from the Supplemental Executive Retirement Plan. The lump-sum distribution resulted in the settlement of 21% of the Supplemental Executive Retirement Plan’s projected benefit obligation and exceeded the total of the projected service cost and interest cost for the plan year. In connection with this settlement during the third quarter of 2014, the Company reclassified a $1,857 loss before tax to earnings from accumulated other comprehensive income. The lump-sum benefit payment also resulted in the recognition of $3,911 of prior service costs within earnings from accumulated other comprehensive income.

The following tables present the assumptions used in determining benefit obligations of the Defined Benefit Pension, Post-Retirement Medical, and the Supplemental Executive Retirement plans:



	Defined Benefit Pension Plan
	December 31,
	2016		2015
Discount rate	4.20	%	4.55	%
Rate of compensation increase	4.47	%	4.47	%



	Post-Retirement Medical Plan
	December 31,
	2016		2015
Discount rate	4.05	%	4.31	%
Initial health care cost trend	6.75	%	7.00	%
Ultimate health care cost trend	5.00	%	5.00	%
Year ultimate trend is reached	2024		2024



	Supplemental Executive Retirement Plan
	December 31,
	2016		2015
Discount rate	3.80	%	4.22	%
Rate of compensation increase	4.00	%	4.00	%

During 2016, the Company adopted the Society of Actuaries Mortality Improvement Scale (MP-2016).

During 2015, the Company adopted the Society of Actuaries 2015 Mortality Tables Report (RP-2015) and Mortality Improvement Scale (MP-2015), which adjusted the mortality assumptions used to measure retirement plan obligations. These mortality assumptions are an update to the tables adopted in 2014, to reflect two additional years of U.S. population mortality improvement data.

The following tables present the assumptions used in determining the net periodic (benefit) cost of the Defined Benefit Pension, Post-Retirement Medical, and the Supplemental Executive Retirement plans:



	Defined Benefit Pension Plan
	Year Ended December 31,
	2016		2015
Discount rate	4.55	%	4.17	%
Expected return on plan assets	6.00	%	6.50	%
Rate of compensation increase	4.47	%	4.47	%



	Post-Retirement Medical Plan
	Year Ended December 31,
	2016		2015
Discount rate	4.31	%	3.94	%
Initial health care cost trend	7.00	%	6.50	%
Ultimate health care cost trend	5.00	%	5.00	%
Year ultimate trend is reached	2024		2018



	Supplemental Executive Retirement Plan
	Year Ended December 31,
	2016		2015
Discount rate	4.22	%	3.99	%
Rate of compensation increase	4.00	%	4.00	%

The discount rate has been set based on the rates of return on high-quality fixed-income investments currently available and expected to be available during the period the benefits will be paid. In particular, the yields on bonds rated AA or better on the measurement date have been used to set the discount rate.

The following table presents the impact on the Post-Retirement Medical Plan that a one-percentage-point change in assumed health care cost trend rates would have on the following:



	One percentage point increase		One percentage point decrease
Increase (decrease) on total service and interest cost on components	$	322	$	(269	)
Increase (decrease) on post-retirement benefit obligation	2,430		(2,083		)

The following table presents how the Company’s Defined Benefit Pension Plan assets are invested:



	December 31,
	2016		2015
Equity securities	45	%	67	%
Debt securities	39	%	31	%
Other	16	%	2	%
Total	100	%	100	%

The following tables present information about the Defined Benefit Retirement Plan’s assets measured at fair value on a recurring basis and indicates the fair value hierarchy of the valuation approach utilized to determine such fair value:



	Defined benefit plan assets measured at fair value on a recurring basis
	December 31, 2016
	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Common collective trust funds: ⁽¹⁾
Equity index funds	$	—	$	—	$	—	$	34,578
Midcap index funds	—		—		—		35,330
World equity index funds	—		—		—		44,235
U.S. equity market funds	—		—		—		45,614
International equity funds	—		—		—		11,143
Total common collective trust funds	—		—		—		170,900
Fixed maturity investments:
U.S. government direct obligations and agencies	—		5,672		—		5,672
Obligations of U.S. states and their municipalities	—		18,670		—		18,670
Corporate debt securities	—		141,102		1,316		142,418
Asset-backed securities	—		7,828		—		7,828
Commercial mortgage-backed securities	—		2,884		—		2,884
Total fixed maturity investments	—		176,156		1,316		177,472
Equity investments:
Fixed income mutual funds	21,321		—		—		21,321
Equity mutual funds	11,106		—		—		11,106
Preferred stock	640		—		—		640
Total equity investments	33,067		—		—		33,067
Limited partnership investments ⁽¹⁾	—		—		—		7,022
Money market funds	62,883		—		—		62,883
Total defined benefit plan assets	$	95,950	$	176,156	$	1,316	$	451,344

⁽¹⁾ Fair values of Common collective trust funds and Limited partnership investments are estimated using net asset value per unit as a practical expedient which are excluded from the disclosure requirement to classify amounts in the fair value hierarchy in connection with the adoption of ASU 2015-07.



	Defined benefit plan assets measured at fair value on a recurring basis
	December 31, 2015
	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Total
Common collective trust funds: ⁽¹⁾
Equity index funds	$	—	$	—	$	—	$	94,751
Midcap index funds	—		—		—		88,267
World equity index funds	—		—		—		8,511
U.S. equity market funds	—		—		—		94,471
Total common collective trust funds	—		—		—		286,000
Fixed maturity investments:
U.S. government direct obligations and agencies	—		6,753		—		6,753
Obligations of U.S. states and their municipalities	—		19,074		—		19,074
Corporate debt securities	—		93,811		—		93,811
Asset-backed securities	—		8,149		—		8,149
Commercial mortgage-backed securities	—		2,926		—		2,926
Total fixed maturity investments	—		130,713		—		130,713
Preferred stock	280		—		—		280
Limited partnership investments ⁽¹⁾	—		—		—		7,654
Money market funds	2,484		—		—		2,484
Total defined benefit plan assets	$	2,764	$	130,713	$	—	$	427,131

The following tables present additional information about assets of the Defined Benefit Retirement Plan measured at fair value on a recurring basis and for which the Company has utilized Level 3 inputs to determine fair value:



	Recurring Level 3 financial assets
	Corporate debt securities
	Year Ended December 31,
	2016			2015
Balance, January 1	$	—		$	—
Actual return on plan assets	54			—
Settlements	(213		)	—
Transfers into Level 3 ⁽¹⁾	1,475			—
Balance, December 31	$	1,316		$	—

⁽¹⁾ Transfers into Level 3 are due primarily to decreased observability of inputs in valuation methodologies.

The investment objective of the Defined Benefit Pension Plan is to provide a risk-adjusted return that will ensure the payment of benefits while protecting against the risk of substantial investment losses. Correlations among the asset classes are used to identify an asset mix that the Company believes will provide the most attractive returns. Long-term return forecasts for each asset class using historical data and other qualitative considerations to adjust for projected economic forecasts are used to set the expected rate of return for the entire portfolio.

The Defined Benefit Pension Plan utilizes various investment securities. Generally, investment securities are exposed to various risks, such as interest rate risks, credit risk, and overall market volatility. Due to the level of risk associated with certain investment securities, it is reasonably possible that changes in the values of investment securities will occur and that such changes could materially affect the amounts reported.

The following table presents the ranges the Company targets for the allocation of invested Defined Benefit Pension Plan assets at December 31, 2017:



	December 31, 2017
Equity securities	30	%
Debt securities	52	%
Other	18	%
Total	100	%

Management estimates the value of these investments will be recoverable. The Company does not expect any plan assets to be returned to it during the year ended December 31, 2017. The Company expects to make payments of approximately $856 with respect to its Post-Retirement Medical Plan and $3,435 with respect to its Supplemental Executive Retirement Plan during the year ended December 31, 2017.

Other employee benefit plans

The Company has an executive deferred compensation plan providing key executives with the opportunity to participate in an unfunded deferred compensation program. Under the program, participants may defer base compensation and bonuses and earn interest on the amounts deferred. The program is not qualified under Section 401 of the Internal Revenue Code. Participant balances, which are reflected in other liabilities in the accompanying consolidated balance sheets, are $7,236 and $8,678 at December 31, 2016, and 2015, respectively. The participant deferrals earned interest at the average rates of 6.42% and 6.48% during the years ended December 31, 2016, and 2015, respectively. The interest rate is based on the Moody’s Average Annual Corporate Bond Index rate plus 0.45% for actively employed participants and fixed rates ranging from 4.12% to 5.03% for retired participants.

The Company offers an unfunded, non-qualified deferred compensation plan to a select group of management and highly compensated individuals. Participants defer a portion of their compensation and realize potential market gains or losses on the invested contributions. The program is not qualified under Section 401 of the Internal Revenue Code. Participant balances, which are included in other liabilities in the accompanying consolidated balance sheets, are $21,758 and $18,654 at December 31, 2016, and 2015, respectively.

The Company sponsors a qualified defined contribution benefit plan covering all employees. Under this plan, employees may contribute a percentage of their annual compensation to the plan up to certain maximums, as defined by the plan and by the Internal Revenue Service (“IRS”). Currently, the Company matches a percentage of employee contributions in cash. The Company recognized $12,364, $13,016, and $8,479 in expense related to this plan for the years ended December 31, 2016, 2015, and 2014, respectively.