10-Q 1 a2018q210-q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
 
 
 
 
(Mark One)
  
 
  
 
 x
  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
  
 
  
OF THE SECURITIES EXCHANGE ACT OF 1934
  
 
 
  
For the quarterly period ended June 30, 2018
  
 
 
  
 OR
  
 
 ¨
  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
  
 
  
OF THE SECURITIES EXCHANGE ACT OF 1934
  
 
 
  
 
Commission File Number 1-11848
  
 
REINSURANCE GROUP OF AMERICA, INCORPORATED
(Exact name of Registrant as specified in its charter)
MISSOURI                        
  
43-1627032
(State or other jurisdiction                  
  
(IRS employer
of incorporation or organization)  
  
identification number)
16600 Swingley Ridge Road
Chesterfield, Missouri 63017
(Address of principal executive offices)
(636) 736-7000
(Registrant’s telephone number, including area code)
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 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, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x     Accelerated filer o     Non-accelerated filer o     
Smaller reporting company o     Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x

As of July 31, 2018, 63,656,444 shares of the registrant’s common stock were outstanding.



REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
TABLE OF CONTENTS
 
Item
  
 
  
Page
 
 
 
 
  
PART I – FINANCIAL INFORMATION
  
 
 
 
 
1
  
  
 
 
  
  
 
  
  
 
  
  
 
  
  
 
  
  
 
 
 
 
 
 
 
 
     3. Equity
 
 
 
     4. Investments
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
     9. Income Tax
 
 
 
 
 
 
     11. Reinsurance
 
 
 
 
2
  
  
3
  
  
4
  
  
 
 
 
 
  
PART II – OTHER INFORMATION
  
 
 
 
 
1
  
  
1A
  
  
2
  
  
6
  
  
 
  
  
 
  
  

2


PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
June 30,
2018
 
December 31,
2017
 
 
(Dollars in thousands, except share data)
 
Assets
 
 
 
 
Fixed maturity securities available-for-sale, at fair value (amortized cost $35,233,970 and $35,281,412)
 
$
36,784,954

 
$
38,150,820

Equity securities, at fair value (cost $121,744 and $102,841)
 
108,070

 
100,152

Mortgage loans on real estate (net of allowances of $9,706 and $9,384)
 
4,558,669

 
4,400,533

Policy loans
 
1,339,252

 
1,357,624

Funds withheld at interest
 
5,981,092

 
6,083,388

Short-term investments
 
123,028

 
93,304

Other invested assets
 
1,605,562

 
1,505,332

Total investments
 
50,500,627

 
51,691,153

Cash and cash equivalents
 
1,397,679

 
1,303,524

Accrued investment income
 
400,160

 
392,721

Premiums receivable and other reinsurance balances
 
2,617,382

 
2,338,481

Reinsurance ceded receivables
 
789,429

 
782,027

Deferred policy acquisition costs
 
3,205,667

 
3,239,824

Other assets
 
855,553

 
767,088

Total assets
 
$
59,766,497

 
$
60,514,818

Liabilities and Stockholders’ Equity
 
 
 
 
Future policy benefits
 
$
22,286,622

 
$
22,363,241

Interest-sensitive contract liabilities
 
16,513,668

 
16,227,642

Other policy claims and benefits
 
5,334,210

 
4,992,074

Other reinsurance balances
 
412,846

 
488,739

Deferred income taxes
 
2,009,514

 
2,198,309

Other liabilities
 
1,094,826

 
1,102,975

Long-term debt
 
2,788,111

 
2,788,365

Collateral finance and securitization notes
 
724,998

 
783,938

Total liabilities
 
51,164,795

 
50,945,283

Commitments and contingent liabilities (See Note 8)
 


 


Stockholders’ Equity:
 
 
 
 
Preferred stock - par value $.01 per share, 10,000,000 shares authorized, no shares issued or outstanding
 

 

Common stock - par value $.01 per share, 140,000,000 shares authorized, 79,137,758 shares issued at June 30, 2018 and December 31, 2017
 
791

 
791

Additional paid-in capital
 
1,887,336

 
1,870,906

Retained earnings
 
6,952,170

 
6,736,265

Treasury stock, at cost - 15,465,272 and 14,685,663 shares
 
(1,243,566
)
 
(1,102,058
)
Accumulated other comprehensive income
 
1,004,971

 
2,063,631

Total stockholders’ equity
 
8,601,702

 
9,569,535

Total liabilities and stockholders’ equity
 
$
59,766,497

 
$
60,514,818

See accompanying notes to condensed consolidated financial statements (unaudited).

3


REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
(Dollars in thousands, except per share data)
Net premiums
 
$
2,594,460

 
$
2,480,451

 
$
5,177,011

 
$
4,846,147

Investment income, net of related expenses
 
528,061

 
518,538

 
1,044,390

 
1,032,902

Investment related gains (losses), net:
 
 
 
 
 
 
 
 
Other-than-temporary impairments on fixed maturity securities
 
(3,350
)
 
(3,401
)
 
(3,350
)
 
(20,590
)
Other investment related gains (losses), net
 
(7,222
)
 
59,696

 
(7,692
)
 
137,408

Total investment related gains (losses), net
 
(10,572
)
 
56,295

 
(11,042
)
 
116,818

Other revenues
 
83,959

 
73,992

 
159,256

 
142,149

Total revenues
 
3,195,908

 
3,129,276

 
6,369,615

 
6,138,016

Benefits and Expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
2,279,593

 
2,164,363

 
4,641,694

 
4,270,508

Interest credited
 
109,327

 
115,285

 
189,776

 
222,969

Policy acquisition costs and other insurance expenses
 
320,276

 
319,832

 
677,178

 
699,221

Other operating expenses
 
194,959

 
154,356

 
386,233

 
312,862

Interest expense
 
37,025

 
29,352

 
74,479

 
71,754

Collateral finance and securitization expense
 
7,440

 
6,773

 
15,042

 
13,543

Total benefits and expenses
 
2,948,620

 
2,789,961

 
5,984,402

 
5,590,857

 Income before income taxes
 
247,288

 
339,315

 
385,213

 
547,159

Provision for income taxes
 
42,914

 
107,125

 
80,609

 
169,457

Net income
 
$
204,374

 
$
232,190

 
$
304,604

 
$
377,702

Earnings per share:
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
3.19

 
$
3.60

 
$
4.74

 
$
5.86

Diluted earnings per share
 
$
3.13

 
$
3.54

 
$
4.65

 
$
5.76

Dividends declared per share
 
$
0.50

 
$
0.41

 
$
1.00

 
$
0.82

See accompanying notes to condensed consolidated financial statements (unaudited).

4


REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Comprehensive income (loss)
 
(Dollars in thousands)
Net income
 
$
204,374

 
$
232,190

 
$
304,604

 
$
377,702

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
(54,677
)
 
43,565

 
(55,837
)
 
21,352

Net unrealized investment gains (losses)
 
(368,719
)
 
306,329

 
(1,002,323
)
 
509,444

Defined benefit pension and postretirement plan adjustments
 
(29
)
 
849

 
(500
)
 
1,773

Total other comprehensive income (loss), net of tax
 
(423,425
)
 
350,743

 
(1,058,660
)
 
532,569

Total comprehensive income (loss)
 
$
(219,051
)
 
$
582,933

 
$
(754,056
)
 
$
910,271

See accompanying notes to condensed consolidated financial statements (unaudited).

5


REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six months ended June 30,
 
 
2018
 
2017
 
 
 (Dollars in thousands)
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
304,604

 
$
377,702

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Change in operating assets and liabilities:
 
 
 
 
Accrued investment income
 
1,834

 
(34,676
)
Premiums receivable and other reinsurance balances
 
(345,253
)
 
(230,650
)
Deferred policy acquisition costs
 
20,528

 
35,870

Reinsurance ceded receivable balances
 
18,245

 
(127,995
)
Future policy benefits, other policy claims and benefits, and other reinsurance balances
 
598,015

 
745,799

Deferred income taxes
 
48,117

 
142,044

Other assets and other liabilities, net
 
(98,807
)
 
(63,811
)
Amortization of net investment premiums, discounts and other
 
(25,713
)
 
(47,563
)
Depreciation and amortization expense
 
21,554

 
13,869

Investment related (gains) losses, net
 
11,042

 
(116,818
)
Other, net
 
29,422

 
(37,797
)
Net cash provided by operating activities
 
583,588

 
655,974

Cash Flows from Investing Activities:
 
 
 
 
Sales of fixed maturity securities available-for-sale
 
3,836,575

 
4,288,713

Maturities of fixed maturity securities available-for-sale
 
328,097

 
313,530

Sales of equity securities
 
29,099

 
166,916

Principal payments and sales of mortgage loans on real estate
 
213,691

 
135,450

Principal payments on policy loans
 
24,793

 
26,658

Purchases of fixed maturity securities available-for-sale
 
(3,880,733
)
 
(5,311,818
)
Purchases of equity securities
 
(11,930
)
 
(32,299
)
Cash invested in mortgage loans on real estate
 
(376,470
)
 
(463,063
)
Cash invested in policy loans
 
(6,421
)
 
(5,830
)
Cash invested in funds withheld at interest
 
(42,761
)
 
(6,910
)
Purchase of businesses, net of cash acquired of $4,938
 
(29,315
)
 

Purchases of property and equipment
 
(14,573
)
 
31,686

Change in short-term investments
 
(9,843
)
 
22,671

Change in other invested assets
 
(160,824
)
 
(55,379
)
Net cash used in investing activities
 
(100,615
)
 
(889,675
)
Cash Flows from Financing Activities:
 
 
 
 
Dividends to stockholders
 
(64,370
)
 
(52,815
)
Repayment of collateral finance and securitization notes
 
(53,102
)
 
(23,761
)
Principal payments of long-term debt
 
(1,331
)
 
(301,278
)
Purchases of treasury stock
 
(165,069
)
 
(10,578
)
Exercise of stock options, net
 
1,252

 
2,527

Change in cash collateral for derivative positions and other arrangements
 
17,578

 
(7,046
)
Deposits on universal life and other investment type policies and contracts
 
225,876

 
917,675

Withdrawals on universal life and other investment type policies and contracts
 
(329,899
)
 
(402,528
)
Net cash (used in) provided by financing activities
 
(369,065
)
 
122,196

Effect of exchange rate changes on cash
 
(19,753
)
 
34,137

Change in cash and cash equivalents
 
94,155

 
(77,368
)
Cash and cash equivalents, beginning of period
 
1,303,524

 
1,200,718

Cash and cash equivalents, end of period
 
$
1,397,679

 
$
1,123,350

Supplemental disclosures of cash flow information:
 
 
 
 
Interest paid
 
$
84,670

 
$
90,425

Income taxes paid, net of refunds
 
$
59,397

 
$
26,447

Non-cash transactions:
 
 
 
 
Transfer of invested assets
 
$
604,374

 
$
2,243,360

Purchase of businesses:
 
 
 
 
Assets acquired, excluding cash acquired
 
$
65,948

 
$

Liabilities assumed
 
(36,633
)
 

Net cash paid on purchase
 
$
29,315

 
$

See accompanying notes to condensed consolidated financial statements (unaudited).

6


REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
1.
Business and Basis of Presentation
Reinsurance Group of America, Incorporated (“RGA”) is an insurance holding company that was formed on December 31, 1992. The accompanying unaudited condensed consolidated financial statements of RGA and its subsidiaries (collectively, the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments necessary for a fair presentation have been included. Results for the six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. These unaudited condensed consolidated financial statements include the accounts of RGA and its subsidiaries, and all intercompany accounts and transactions have been eliminated. These condensed consolidated statements should be read in conjunction with the Company’s 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 27, 2018 (the “2017 Annual Report”).
2.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share on net income (in thousands, except per share information):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Earnings:
 
 
 
 
 
 
 
 
Net income (numerator for basic and diluted calculations)
 
$
204,374

 
$
232,190

 
$
304,604

 
$
377,702

Shares:
 
 
 
 
 
 
 
 
Weighted average outstanding shares (denominator for basic calculation)
 
64,071

 
64,449

 
64,278

 
64,401

Equivalent shares from outstanding stock options
 
1,179

 
1,159

 
1,277

 
1,204

Denominator for diluted calculation
 
65,250

 
65,608

 
65,555

 
65,605

Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
3.19

 
$
3.60

 
$
4.74

 
$
5.86

Diluted
 
$
3.13

 
$
3.54

 
$
4.65

 
$
5.76

The calculation of common equivalent shares does not include the impact of options having a strike or conversion price that exceeds the average stock price for the earnings period, as the result would be antidilutive. The calculation of common equivalent shares also excludes the impact of outstanding performance contingent shares, as the conditions necessary for their issuance have not been satisfied as of the end of the reporting period. The following table presents approximate amounts of stock options and performance contingent shares excluded from the calculation of common equivalent shares (in millions):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Excluded from common equivalent shares:
 
 
 
 
 
 
 
 
Stock options
 
0.2

 
0.2

 
0.3

 
0.3

Performance contingent shares
 
0.2

 
0.3

 
0.2

 
0.3



7


3.
Equity
Common Stock
The changes in number of common stock shares, issued, held in treasury and outstanding are as follows for the periods indicated:
 
 
Issued
 
Held In Treasury
 
Outstanding
Balance, December 31, 2017
 
79,137,758

 
14,685,663

 
64,452,095

Common stock acquired
 

 
991,477

 
(991,477
)
Stock-based compensation (1)
 

 
(211,868
)
 
211,868

Balance, June 30, 2018
 
79,137,758

 
15,465,272

 
63,672,486

 
 
Issued
 
Held In Treasury
 
Outstanding
Balance, December 31, 2016
 
79,137,758

 
14,835,256

 
64,302,502

Stock-based compensation (1)
 

 
(189,355
)
 
189,355

Balance, June 30, 2017
 
79,137,758

 
14,645,901

 
64,491,857

(1)
Represents net shares issued from treasury pursuant to the Company’s equity-based compensation programs.
Common Stock Held in Treasury
Common stock held in treasury is accounted for at average cost. Gains resulting from the reissuance of common stock held in treasury are credited to additional paid-in capital. Losses resulting from the reissuance of common stock held in treasury are charged first to additional paid-in capital to the extent the Company has previously recorded gains on treasury share transactions, then to retained earnings.
In January 2017, RGA’s board of directors authorized a share repurchase program for up to $400.0 million of RGA’s outstanding common stock. The authorization was effective immediately and does not have an expiration date. During the first six months of 2018, RGA repurchased 1.0 million shares of common stock under this program for $150.0 million. During the first six months ended June 30, 2017, no common stock was repurchased by RGA under this program.
Accumulated Other Comprehensive Income (Loss)
The balance of and changes in each component of accumulated other comprehensive income (loss) (“AOCI”) for the six months ended June 30, 2018 and 2017 are as follows (dollars in thousands):
 
 
Accumulated
Currency
Translation
Adjustments
 
Unrealized
Appreciation
(Depreciation)
of Investments(1)
 
Pension and
Postretirement
Benefits
 
Total
Balance, December 31, 2017
 
$
(86,350
)
 
$
2,200,661

 
$
(50,680
)
 
$
2,063,631

Other comprehensive income (loss) before reclassifications
 
(44,227
)
 
(1,327,195
)
 
(2,986
)
 
(1,374,408
)
Amounts reclassified to (from) AOCI
 

 
53,646

 
2,366

 
56,012

Deferred income tax benefit (expense)
 
(11,610
)
 
271,226

 
120

 
259,736

Balance, June 30, 2018
 
$
(142,187
)
 
$
1,198,338

 
$
(51,180
)
 
$
1,004,971

 
 
Accumulated
Currency
Translation
Adjustments
 
Unrealized
Appreciation
(Depreciation)
of Investments(1)
 
Pension and
Postretirement
Benefits
 
Total
Balance, December 31, 2016
 
$
(172,541
)
 
$
1,355,033

 
$
(43,163
)
 
$
1,139,329

Other comprehensive income (loss) before reclassifications
 
(13,936
)
 
774,688

 
(196
)
 
760,556

Amounts reclassified to (from) AOCI
 

 
(39,360
)
 
2,935

 
(36,425
)
Deferred income tax benefit (expense)
 
35,288

 
(225,884
)
 
(966
)
 
(191,562
)
Balance, June 30, 2017
 
$
(151,189
)
 
$
1,864,477

 
$
(41,390
)
 
$
1,671,898

(1)
Includes cash flow hedges of $22,656 and $2,619 as of June 30, 2018 and December 31, 2017, respectively, and $1,131 and $(2,496) as of June 30, 2017 and December 31, 2016, respectively. See Note 5 - “Derivative Instruments” for additional information on cash flow hedges.

8


The following table presents the amounts of AOCI reclassifications for the three and six months ended June 30, 2018 and 2017 (dollars in thousands):
 
 
Amount Reclassified from AOCI
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
Details about AOCI Components
 
2018
 
2017
 
2018
 
2017
 
Affected Line Item in 
Statements of Income
Net unrealized investment gains (losses):
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
$
(24,642
)
 
$
40,374

 
$
(39,098
)
 
$
28,517

 
Investment related gains (losses), net
Cash flow hedges - Interest rate
 
29

 

 
(342
)
 

 
(1)
Cash flow hedges - Currency/Interest rate
 
76

 
132

 
221

 
329

 
(1)
Cash flow hedges - Forward bond purchase commitments
 

 
51

 

 
101

 
(1)
Deferred policy acquisition costs attributed to unrealized gains and losses
 
(7,835
)
 
4,565

 
(14,427
)
 
10,413

 
(2)
Total
 
(32,372
)
 
45,122

 
(53,646
)
 
39,360

 
 
Provision for income taxes
 
6,945

 
(15,218
)
 
11,623

 
(12,024
)
 
 
Net unrealized gains (losses), net of tax
 
$
(25,427
)
 
$
29,904

 
$
(42,023
)
 
$
27,336

 
 
Amortization of defined benefit plan items:
 
 
 
 
 
 
 
 
 
 
Prior service cost (credit)
 
$
247

 
$
60

 
$
493

 
$
142

 
(3)
Actuarial gains/(losses)
 
(1,267
)
 
(1,539
)
 
(2,859
)
 
(3,077
)
 
(3)
Total
 
(1,020
)
 
(1,479
)
 
(2,366
)
 
(2,935
)
 
 
Provision for income taxes
 
214

 
517

 
497

 
1,027

 
 
Amortization of defined benefit plans, net of tax
 
$
(806
)
 
$
(962
)
 
$
(1,869
)
 
$
(1,908
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(26,233
)
 
$
28,942

 
$
(43,892
)
 
$
25,428

 
 
(1)
See Note 5 - “Derivative Instruments” for additional information on cash flow hedges.
(2)
This AOCI component is included in the computation of the deferred policy acquisition cost. See Note 8 – “Deferred Policy Acquisition Costs” of the 2017 Annual Report for additional details.
(3)
This AOCI component is included in the computation of the net periodic pension cost. See Note 10 – “Employee Benefit Plans” for additional details.

Equity Based Compensation
Equity compensation expense was $16.6 million and $11.4 million in the first six months of 2018 and 2017, respectively. In the first quarter of 2018, the Company granted 0.2 million stock appreciation rights at $150.87 weighted average exercise price per share and 0.1 million performance contingent units to employees. Additionally, non-employee directors were granted a total of 7,623 shares of common stock. As of June 30, 2018, 1.5 million share options at a weighted average strike price per share of $65.70 were vested and exercisable, with a remaining weighted average exercise period of 4.4 years. As of June 30, 2018, the total compensation cost of non-vested awards not yet recognized in the condensed consolidated financial statements was $36.9 million. It is estimated that these costs will vest over a weighted average period of 1.4 years.

9


4.
Investments
Fixed Maturity and Equity Securities Available-for-Sale
The Company holds various types of fixed maturity securities available-for-sale and classifies them as corporate securities (“Corporate”), Canadian and Canadian provincial government securities (“Canadian government”), residential mortgage-backed securities (“RMBS”), asset-backed securities (“ABS”), commercial mortgage-backed securities (“CMBS”), U.S. government and agencies (“U.S. government”), state and political subdivisions, and other foreign government, supranational and foreign government-sponsored enterprises (“Other foreign government”).
The following table provides information relating to investments in fixed maturity securities by sector as of June 30, 2018 (dollars in thousands):
June 30, 2018:
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
 
% of Total
 
Other-than-
temporary impairments in AOCI
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
22,249,964

 
$
663,087

 
$
409,544

 
$
22,503,507

 
61.2
%
 
$

Canadian government
 
2,789,699

 
1,277,020

 
3,876

 
4,062,843

 
11.0

 

RMBS
 
1,837,316

 
18,500

 
34,602

 
1,821,214

 
5.0

 

ABS
 
1,711,099

 
11,596

 
13,871

 
1,708,824

 
4.6

 
275

CMBS
 
1,249,616

 
8,591

 
15,698

 
1,242,509

 
3.4

 

U.S. government
 
1,583,622

 
8,193

 
66,665

 
1,525,150

 
4.1

 

State and political subdivisions
 
703,047

 
43,318

 
9,321

 
737,044

 
2.0

 

Other foreign government
 
3,109,607

 
112,887

 
38,631

 
3,183,863

 
8.7

 

Total fixed maturity securities
 
$
35,233,970

 
$
2,143,192

 
$
592,208

 
$
36,784,954

 
100.0
%
 
$
275

 The following table provides information relating to investments in fixed maturity and equity securities by sector as of December 31, 2017 (dollars in thousands):
December 31, 2017:
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
 
% of Total
 
Other-than-
temporary impairments in AOCI
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
21,966,803

 
$
1,299,594

 
$
55,429

 
$
23,210,968

 
60.9
%
 
$

Canadian government
 
2,843,273

 
1,378,510

 
1,707

 
4,220,076

 
11.1

 

RMBS
 
1,695,126

 
36,632

 
11,878

 
1,719,880

 
4.5

 

ABS
 
1,634,758

 
18,798

 
5,194

 
1,648,362

 
4.3

 
275

CMBS
 
1,285,594

 
22,627

 
4,834

 
1,303,387

 
3.4

 

U.S. government
 
1,953,436

 
12,089

 
21,933

 
1,943,592

 
5.1

 

State and political subdivisions
 
647,727

 
59,997

 
4,296

 
703,428

 
1.8

 

Other foreign government
 
3,254,695

 
154,507

 
8,075

 
3,401,127

 
8.9

 

Total fixed maturity securities
 
$
35,281,412

 
$
2,982,754

 
$
113,346

 
$
38,150,820

 
100.0
%
 
$
275

Non-redeemable preferred stock
 
$
41,553

 
$
479

 
$
2,226

 
$
39,806

 
39.7
%
 
 
Other equity securities
 
61,288

 
479

 
1,421

 
60,346

 
60.3

 
 
Total equity securities
 
$
102,841

 
$
958

 
$
3,647

 
$
100,152

 
100.0
%
 
 
The Company enters into various collateral arrangements with counterparties that require both the pledging and acceptance of fixed maturity securities as collateral. Pledged fixed maturity securities are included in fixed maturity securities, available-for-sale in the condensed consolidated balance sheets. Fixed maturity securities received as collateral are held in separate custodial accounts and are not recorded on the Company’s condensed consolidated balance sheets. Subject to certain constraints, the Company is permitted by contract to sell or repledge collateral it receives; however, as of June 30, 2018 and December 31, 2017, none of the collateral received had been sold or repledged. The Company also holds assets in trust to satisfy collateral requirements under derivative transactions and certain third-party reinsurance treaties. The following table includes fixed maturity securities pledged and received as collateral and assets in trust held to satisfy collateral requirements under derivative transactions and certain third-party reinsurance treaties as of June 30, 2018 and December 31, 2017 (dollars in thousands):

10


 
June 30, 2018
 
December 31, 2017
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Fixed maturity securities pledged as collateral
$
63,640

 
$
66,118

 
$
72,542

 
$
75,622

Fixed maturity securities received as collateral
n/a

 
626,081

 
n/a

 
590,417

Assets in trust held to satisfy collateral requirements
16,061,218

 
16,571,173

 
15,584,296

 
16,715,281

The Company monitors its concentrations of financial instruments on an ongoing basis and mitigates credit risk by maintaining a diversified investment portfolio which limits exposure to any one issuer. The Company’s exposure to concentrations of credit risk from single issuers greater than 10% of the Company’s stockholders’ equity included securities of the U.S. government and its agencies as well as the securities disclosed below as of June 30, 2018 and December 31, 2017 (dollars in thousands).
 
June 30, 2018
 
December 31, 2017
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Fixed maturity securities guaranteed or issued by:
 
 
 
 
 
 
 
Canadian province of Quebec
$
1,101,825

 
$
1,850,642

 
$
1,119,337

 
$
1,917,996

Canadian province of Ontario
929,913

 
1,239,102

 
939,837

 
1,282,944

The amortized cost and estimated fair value of fixed maturity securities classified as available-for-sale at June 30, 2018 are shown by contractual maturity in the table below (dollars in thousands). Actual maturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset and mortgage-backed securities are shown separately in the table below, as they are not due at a single maturity date.
 
 
Amortized Cost
 
Estimated Fair Value
Available-for-sale:
 
 
 
 
Due in one year or less
 
$
978,683

 
$
986,160

Due after one year through five years
 
7,550,595

 
7,649,023

Due after five years through ten years
 
9,208,763

 
9,323,786

Due after ten years
 
12,697,898

 
14,053,438

Asset and mortgage-backed securities
 
4,798,031

 
4,772,547

Total
 
$
35,233,970

 
$
36,784,954

Corporate Fixed Maturity Securities
The tables below show the major industry types of the Company’s corporate fixed maturity holdings as of June 30, 2018 and December 31, 2017 (dollars in thousands): 
June 30, 2018:
 
 
 
Estimated
 
 
 
 
Amortized Cost    
 
Fair Value
 
% of Total           
Finance
 
$
8,097,947

 
$
8,129,125

 
36.2
%
Industrial
 
11,705,150

 
11,847,762

 
52.6

Utility
 
2,446,867

 
2,526,620

 
11.2

Total
 
$
22,249,964

 
$
22,503,507

 
100.0
%
 
 
 
 
 
 
 
December 31, 2017:
 
 
 
Estimated
 
 
 
 
Amortized Cost
 
Fair Value
 
% of Total
Finance
 
$
7,977,885

 
$
8,362,774

 
36.1
%
Industrial
 
11,535,166

 
12,199,333

 
52.5

Utility
 
2,453,752

 
2,648,861

 
11.4

Total
 
$
21,966,803

 
$
23,210,968

 
100.0
%

11


Other-Than-Temporary Impairments - Fixed Maturity Securities
As discussed in Note 2 – “Summary of Significant Accounting Policies” of the 2017 Annual Report, a portion of certain other-than-temporary impairment (“OTTI”) losses on fixed maturity securities is recognized in AOCI. For these securities, the net amount recognized in the condensed consolidated statements of income (“credit loss impairments”) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in AOCI. The following table sets forth the amount of pre-tax credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in AOCI, and the corresponding changes in such amounts (dollars in thousands):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2018
 
2017
 
2018
 
2017
Balance, beginning of period
 
$
3,677

 
$
3,677

 
$
3,677

 
$
6,013

Credit loss OTTI previously recognized on securities impaired to fair value during the period
 

 

 

 
(2,336
)
Balance, end of period
 
$
3,677

 
$
3,677

 
$
3,677

 
$
3,677


Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale
The following table presents the total gross unrealized losses for the 2,580 fixed maturity securities as of June 30, 2018, where the estimated fair value had declined and remained below amortized cost by the indicated amount (dollars in thousands):
 
 
June 30, 2018
 
 
Gross
Unrealized
Losses
 
% of Total    
Less than 20%
 
$
571,151

 
96.4
%
20% or more for less than six months
 
21,045

 
3.6

20% or more for six months or greater
 
12

 

Total
 
$
592,208

 
100.0
%
The following table presents the total gross unrealized losses for the 1,116 fixed maturity and equity securities at December 31, 2017 where the estimated fair value had declined and remained below amortized cost by the indicated amount (dollars in thousands):
 
 
December 31, 2017
 
 
Gross
Unrealized
Losses
 
% of Total    
Less than 20%
 
$
113,466

 
97.0
%
20% or more for less than six months
 
689

 
0.6

20% or more for six months or greater
 
2,838

 
2.4

Total
 
$
116,993

 
100.0
%
The Company’s determination of whether a decline in value is other-than-temporary includes analysis of the underlying credit and the extent and duration of a decline in value. The Company’s credit analysis of an investment includes determining whether the issuer is current on its contractual payments, evaluating whether it is probable that the Company will be able to collect all amounts due according to the contractual terms of the security and analyzing the overall ability of the Company to recover the amortized cost of the investment.
The following table presents the estimated fair values and gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, for 2,580 fixed maturity securities that have estimated fair values below amortized cost as of June 30, 2018 (dollars in thousands). These investments are presented by class and grade of security, as well as the length of time the related fair value has remained below amortized cost.
 

12


 
 
Less than 12 months
 
12 months or greater
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
June 30, 2018:
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
Investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
9,135,620

 
$
299,909

 
$
818,555

 
$
51,938

 
$
9,954,175

 
$
351,847

Canadian government
 
46,392

 
668

 
110,326

 
3,058

 
156,718

 
3,726

RMBS
 
1,101,941

 
25,546

 
241,914

 
9,032

 
1,343,855

 
34,578

ABS
 
807,714

 
10,637

 
139,676

 
3,187

 
947,390

 
13,824

CMBS
 
612,214

 
11,097

 
104,426

 
4,601

 
716,640

 
15,698

U.S. government
 
584,758

 
20,707

 
747,679

 
45,958

 
1,332,437

 
66,665

State and political subdivisions
 
168,817

 
5,064

 
66,122

 
4,257

 
234,939

 
9,321

Other foreign government
 
919,229

 
25,758

 
199,578

 
5,407

 
1,118,807

 
31,165

Total investment grade securities
 
13,376,685

 
399,386

 
2,428,276

 
127,438

 
15,804,961

 
526,824

 
Below investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
735,338

 
47,846

 
56,042

 
9,851

 
791,380

 
57,697

Canadian government
 
1,864

 
150

 

 

 
1,864

 
150

RMBS
 

 

 
1,194

 
24

 
1,194

 
24

ABS
 

 

 
1,148

 
47

 
1,148

 
47

Other foreign government
 
146,374

 
7,111

 
7,643

 
355

 
154,017

 
7,466

Total below investment grade securities
 
883,576

 
55,107

 
66,027

 
10,277

 
949,603

 
65,384

Total fixed maturity securities
 
$
14,260,261

 
$
454,493

 
$
2,494,303

 
$
137,715

 
$
16,754,564

 
$
592,208

The following table presents the estimated fair values and gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, for 1,116 fixed maturity and equity securities that have estimated fair values below amortized cost as of December 31, 2017 (dollars in thousands):
 
 
Less than 12 months
 
12 months or greater
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
December 31, 2017:
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
Investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
1,886,212

 
$
17,099

 
$
1,009,750

 
$
28,080

 
$
2,895,962

 
$
45,179

Canadian government
 
18,688

 
91

 
111,560

 
1,596

 
130,248

 
1,687

RMBS
 
566,699

 
5,852

 
224,439

 
6,004

 
791,138

 
11,856

ABS
 
434,274

 
2,707

 
168,524

 
2,434

 
602,798

 
5,141

CMBS
 
220,401

 
1,914

 
103,269

 
2,920

 
323,670

 
4,834

U.S. government
 
800,298

 
6,177

 
767,197

 
15,756

 
1,567,495

 
21,933

State and political subdivisions
 
43,510

 
242

 
68,666

 
4,054

 
112,176

 
4,296

Other foreign government
 
369,717

 
2,707

 
191,265

 
4,704

 
560,982

 
7,411

Total investment grade securities
 
4,339,799

 
36,789

 
2,644,670

 
65,548

 
6,984,469

 
102,337

Below investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
194,879

 
3,317

 
75,731

 
6,933

 
270,610

 
10,250

Canadian government
 
1,995

 
20

 

 

 
1,995

 
20

RMBS
 

 

 
1,369

 
22

 
1,369

 
22

ABS
 

 

 
1,489

 
53

 
1,489

 
53

Other foreign government
 
28,600

 
113

 
15,134

 
551

 
43,734

 
664

Total below investment grade securities
 
225,474

 
3,450

 
93,723

 
7,559

 
319,197

 
11,009

Total fixed maturity securities
 
$
4,565,273

 
$
40,239

 
$
2,738,393


$
73,107

 
$
7,303,666

 
$
113,346

Non-redeemable preferred stock
 
$
82

 
$
1

 
$
26,471

 
$
2,225

 
$
26,553

 
$
2,226

Other equity securities
 
5,820

 
1,023

 
47,251

 
398

 
53,071

 
1,421

Total equity securities
 
$
5,902

 
$
1,024

 
$
73,722


$
2,623

 
$
79,624

 
$
3,647


13


The Company has no intention to sell, nor does it expect to be required to sell, the securities outlined in the table above, as of the dates indicated. However, unforeseen facts and circumstances may cause the Company to sell fixed maturity securities in the ordinary course of managing its portfolio to meet certain diversification, credit quality and liquidity guidelines.
Unrealized losses on below investment grade securities as of June 30, 2018 are primarily related to publicly traded and privately placed corporate securities. Changes in unrealized losses are primarily being driven by changes in interest rates.

Investment Income, Net of Related Expenses
Major categories of investment income, net of related expenses, consist of the following (dollars in thousands):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Fixed maturity securities available-for-sale
$
373,624

 
$
355,735

 
$
742,827

 
$
680,235

Equity securities
709

 
995

 
2,391

 
2,354

Mortgage loans on real estate
50,460

 
44,442

 
100,659

 
88,789

Policy loans
14,775

 
15,194

 
29,555

 
30,466

Funds withheld at interest
86,417

 
97,367

 
161,862

 
224,945

Short-term investments and cash and cash equivalents
2,964

 
1,779

 
6,209

 
3,289

Other invested assets
20,785

 
22,071

 
44,613

 
40,539

Investment income
549,734

 
537,583

 
1,088,116

 
1,070,617

Investment expense
(21,673
)
 
(19,045
)
 
(43,726
)
 
(37,715
)
Investment income, net of related expenses
$
528,061

 
$
518,538

 
$
1,044,390

 
$
1,032,902

Investment Related Gains (Losses), Net
Investment related gains (losses), net consist of the following (dollars in thousands): 
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
Other-than-temporary impairment losses
$
(3,350
)
 
$
(3,401
)
 
$
(3,350
)
 
$
(20,590
)
Gain on investment activity
21,140

 
54,197

 
32,106

 
72,090

Loss on investment activity
(35,934
)
 
(10,288
)
 
(56,314
)
 
(18,975
)
Equity securities:
 
 
 
 
 
 
 
Gain on investment activity
469

 
23

 
497

 
23

Loss on investment activity

 
(183
)
 
(950
)
 
(4,059
)
Change in unrealized gains (losses) recognized in earnings
(6,966
)
 

 
(11,103
)
 

Other impairment losses and change in mortgage loan provision
(1,357
)
 
(6,675
)
 
(1,669
)
 
(6,774
)
Derivatives and other, net
15,426

 
22,622

 
29,741

 
95,103

Total investment related gains (losses), net
$
(10,572
)
 
$
56,295

 
$
(11,042
)
 
$
116,818

The fixed maturity impairments for the three and six months ended June 30, 2018 and 2017 were largely related to high-yield corporate securities. The other impairment losses and change in mortgage loan provision for the three and six months ended June 30, 2018 includes impairments on real estate joint ventures. The other impairment losses and change in mortgage loan provision for the three and six months ended June 30, 2017 includes impairments on limited partnerships. The fluctuations in investment related gains (losses) for derivatives and other for the three and six months ended June 30, 2018, compared to the same periods in 2017, are primarily due to changes in the fair value of embedded derivatives and interest rate swaps.
During the three months ended June 30, 2018 and 2017, the Company sold fixed maturity securities with fair values of $1,174.4 million and $696.4 million at losses of $35.9 million and $10.3 million, respectively. During the six months ended June 30, 2018 and 2017, the Company sold fixed maturity securities with fair values of $2,438.0 million and $1,125.0 million at losses of $56.3 million and $19.0 million, respectively. The Company did not sell any equity securities at losses during the three months ended June 30, 2018. During the three months ended June 30, 2017, the Company sold equity securities with fair values of $14.1 million at losses of $0.2 million. During the six months ended June 30, 2018 and 2017, the Company sold equity securities with fair values of $28.4 million and $161.7 million at losses of $1.0 million and $4.1 million, respectively. The Company generally does not buy and sell securities on a short-term basis.

14


Securities Borrowing, Lending and Other
The following table includes the amount of borrowed securities, securities lent and securities collateral received as part of the securities lending program and repurchased/reverse repurchased securities pledged and received as of June 30, 2018 and December 31, 2017 (dollars in thousands).
 
June 30, 2018
 
December 31, 2017
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Borrowed securities
$
350,350

 
$
365,730

 
$
358,875

 
$
377,820

Securities lending:
 
 
 
 
 
 
 
Securities loaned
101,995

 
102,208

 
117,246

 
121,551

Securities received
n/a

 
112,000

 
n/a

 
128,000

Repurchase program/reverse repurchase program:
 
 
 
 
 
 
 
Securities pledged
385,391

 
394,698

 
413,819

 
428,344

Securities received
n/a

 
397,712

 
n/a

 
417,550

The Company also held cash collateral for securities lending and the repurchase program/reverse repurchase programs of $29.6 million and $31.2 million at June 30, 2018 and December 31, 2017, respectively. No cash or securities have been pledged by the Company for its securities borrowing program as of June 30, 2018 and December 31, 2017.
The following tables present information on the Company’s securities lending and repurchase transactions as of June 30, 2018 and December 31, 2017 (dollars in thousands). Collateral associated with certain borrowed securities is not included within the table, as the collateral pledged to each counterparty is the right to reinsurance treaty cash flows.
 
June 30, 2018
 
Remaining Contractual Maturity of the Agreements
 
Overnight and Continuous
 
Up to 30 Days
 
30-90 Days
 
Greater than 90 Days
 
Total
Securities lending transactions:
 
 
 
 
 
 
 
 
 
Corporate
$

 
$

 
$

 
$
102,208

 
$
102,208

Total

 

 

 
102,208

 
102,208

Repurchase transactions: