Company Quick10K Filing
Quick10K
Protective Life Insurance
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-03 M&A, Other Events, Exhibits
8-K 2019-03-25 Accountant, Exhibits
8-K 2019-01-23 Enter Agreement, Other Events, Exhibits
8-K 2019-01-23 Enter Agreement, Other Events, Exhibits
8-K 2018-12-11 Enter Agreement, Leave Agreement, Exhibits
8-K 2018-05-03 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-05-01 Other Events, Exhibits
8-K 2018-01-18 Enter Agreement, Other Events, Exhibits
VIPS Vipshop Holdings 5,700
FFIN First Financial Bankshares 4,190
WRI Weingarten Realty Investors 3,710
TEDU Tarena 231
LYTS LSI Industries 91
DFFN Diffusion Pharmaceuticals 15
SLDV Security Land & Development 0
LEAI Legacy Education Alliance 0
LEXE Liberty Expedia Holdings 0
IGEN Igen Networks 0
PLICO 2019-03-31
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.1 plico3311910-qxexhibit311.htm
EX-31.2 plico3311910-qxexhibit312.htm
EX-32.1 plico3311910-qxexhibit321.htm
EX-32.2 plico3311910-qxexhibit322.htm

Protective Life Insurance Earnings 2019-03-31

PLICO 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 plico3311910q.htm 10-Q Document

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q
 
ý  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2019
 
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 001-31901
 
PROTECTIVE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
 
TENNESSEE
 
63-0169720
(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)
 
(205) 268-1000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
N/A
N/A
N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
 
Accelerated Filer o
 
 
 
Non-accelerated filer x
 
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 Exchange Act).  Yes o  No ý
 
Number of shares of Common Stock, $1.00 Par Value, outstanding as of April 26, 2019:  5,000,000
 





PROTECTIVE LIFE INSURANCE COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED MARCH 31, 2019
TABLE OF CONTENTS
 
 
Page
 
PART I
 
 
 
 
Item 1.
Financial Statements (unaudited):
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
Item 1A.
Item 6.
 

1


PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Revenues
 

 
 
Premiums and policy fees
$
923,686

 
$
883,413

Reinsurance ceded
(315,971
)
 
(345,624
)
Net of reinsurance ceded
607,715

 
537,789

Net investment income
641,422

 
489,418

Realized investment gains (losses)
56,220

 
(40,725
)
Other-than-temporary impairment losses
(1,295
)
 
(691
)
Portion recognized in other comprehensive income (before taxes)
(1,847
)
 
(2,954
)
Net impairment losses recognized in earnings
(3,142
)
 
(3,645
)
Other income
78,136

 
80,674

Total revenues
1,380,351

 
1,063,511

Benefits and expenses
 

 
 
Benefits and settlement expenses, net of reinsurance ceded: (2019 - $251,674; 2018 - $345,826)
973,154

 
786,349

Amortization of deferred policy acquisition costs and value of business acquired
30,373

 
58,073

Other operating expenses, net of reinsurance ceded: (2019 - $52,534; 2018 - $44,069)
200,097

 
197,153

Total benefits and expenses
1,203,624

 
1,041,575

Income before income tax
176,727

 
21,936

Income tax expense
34,629

 
3,661

Net income
$
142,098

 
$
18,275


See Notes to Consolidated Condensed Financial Statements
2


PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) 
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Net income
$
142,098

 
$
18,275

Other comprehensive income (loss):
 

 
 
Change in net unrealized gains (losses) on investments, net of income tax: (2019 - $300,430; 2018 - $(152,130))
1,130,190

 
(573,016
)
Reclassification adjustment for investment amounts included in net income, net of income tax: (2019 - $(419); 2018 - $181)
(1,576
)
 
681

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: (2019 - $2,337; 2018 - $3)
8,792

 
11

Change in accumulated (loss) gain - derivatives, net of income tax: (2019 - $(522); 2018 - $129)
(1,966
)
 
487

Reclassification adjustment for derivative amounts included in net income, net of income tax: (2019 - $58; 2018 - $24)
220

 
89

Total other comprehensive income (loss)
1,135,660

 
(571,748
)
Total comprehensive income (loss)
$
1,277,758

 
$
(553,473
)

See Notes to Consolidated Condensed Financial Statements
3


PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
 
As of
 
March 31, 2019
 
December 31, 2018
 
(Dollars In Thousands)
Assets
 

 
 

Fixed maturities, at fair value (amortized cost: 2019 - $54,164,460; 2018 - $54,233,151)
$
53,574,677

 
$
51,679,226

Fixed maturities, at amortized cost (fair value: 2019 - $2,594,441; 2018 - $2,547,210)
2,607,356

 
2,633,474

Equity securities, at fair value (cost: 2019 - $581,811; 2018 - $589,221)
581,376

 
557,708

Mortgage loans (related to securitizations: 2019 - $17; 2018 - $134)
7,701,465

 
7,724,733

Investment real estate, net of accumulated depreciation (2019 - $283; 2018 - $251)
6,478

 
6,816

Policy loans
1,677,442

 
1,695,886

Other long-term investments
877,269

 
798,342

Short-term investments
641,648

 
666,301

Total investments
67,667,711

 
65,762,486

Cash
217,554

 
151,400

Accrued investment income
645,133

 
633,087

Accounts and premiums receivable
204,288

 
97,033

Reinsurance receivables
4,381,736

 
4,486,029

Deferred policy acquisition costs and value of business acquired
2,989,865

 
3,026,330

Goodwill
825,511

 
825,511

Other intangibles, net of accumulated amortization (2019 - $211,664; 2018 - $197,368)
601,046

 
612,854

Property and equipment, net of accumulated depreciation (2019 - $35,030; 2018 - $30,989)
202,607

 
183,843

Other assets
384,841

 
377,845

Assets related to separate accounts
 

 
 

Variable annuity
12,737,450

 
12,288,919

Variable universal life
1,041,397

 
937,732

Total assets
$
91,899,139

 
$
89,383,069


See Notes to Consolidated Condensed Financial Statements
4


PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(continued)
 
As of
 
March 31, 2019
 
December 31, 2018
 
(Dollars In Thousands)
Liabilities
 

 
 

Future policy benefits and claims
$
42,124,648

 
$
41,900,618

Unearned premiums
771,254

 
769,620

Total policy liabilities and accruals
42,895,902

 
42,670,238

Stable value product account balances
5,527,816

 
5,234,731

Annuity account balances
13,665,415

 
13,720,081

Other policyholders’ funds
1,166,378

 
1,128,379

Other liabilities
2,189,843

 
1,939,718

Income tax payable
133,066

 
27,189

Deferred income taxes
1,111,990

 
898,339

Subordinated debt
110,000

 
1,319

Debt
2,794

 
110,000

Non-recourse funding obligations
2,863,334

 
2,888,329

Secured financing liabilities
184,012

 
495,307

Liabilities related to separate accounts
 

 
 

Variable annuity
12,737,450

 
12,288,919

Variable universal life
1,041,397

 
937,732

Total liabilities
83,629,397

 
82,340,281

Commitments and contingencies - Note 12


 


Shareowner’s equity
 

 
 

Preferred Stock; $1 par value, shares authorized: 2,000; Liquidation preference: $2
2

 
2

Common Stock, $1 par value, shares authorized and issued: 2019 and 2018 - 5,000,000
5,000

 
5,000

Additional paid-in-capital
7,410,537

 
7,410,537

Retained earnings
1,122,759

 
1,031,465

Accumulated other comprehensive income (loss):
 

 
 

Net unrealized losses on investments, net of income tax: (2019 - $(67,206); 2018 - $(367,217))
(252,822
)
 
(1,381,436
)
Net unrealized losses relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (2019 - $(3,717); 2018 - $(6,054))
(13,981
)
 
(22,773
)
Accumulated gain (loss) - derivatives, net of income tax: (2019 - $(466); 2018 - $(2)
(1,753
)
 
(7
)
Total shareowner’s equity
8,269,742

 
7,042,788

Total liabilities and shareowner’s equity
$
91,899,139

 
$
89,383,069


See Notes to Consolidated Condensed Financial Statements
5


PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF SHAREOWNER’S EQUITY
(Unaudited)
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In-Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareowner’s
Equity
 
(Dollars In Thousands)
Balance, December 31, 2018
$
2

 
$
5,000

 
$
7,410,537

 
$
1,031,465

 
$
(1,404,216
)
 
$
7,042,788

Net income for the three months ended March 31, 2019
 

 
 

 
 

 
142,098

 
 

 
142,098

Other comprehensive income
 

 
 

 
 

 
 
 
1,135,660

 
1,135,660

Comprehensive income for the three months ended March 31, 2019
 
 
 
 
 
 
 
 
 
 
1,277,758

Cumulative effect adjustments
 
 
 
 
 
 
(50,804
)
 
 
 
(50,804
)
Balance, March 31, 2019
$
2

 
$
5,000

 
$
7,410,537

 
$
1,122,759

 
$
(268,556
)
 
$
8,269,742

 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In-Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareowner’s
Equity
 
(Dollars In Thousands)
Balance, December 31, 2017
$
2

 
$
5,000

 
$
7,378,496

 
$
916,971

 
$
23,816

 
$
8,324,285

Net income for the three months ended March 31, 2018
 

 
 

 
 

 
18,275

 
 

 
18,275

Other comprehensive loss
 

 
 

 
 

 
 
 
(571,748
)
 
(571,748
)
Comprehensive loss for the three months ended March 31, 2018
 
 
 
 
 
 
 
 
 
 
(553,473
)
Cumulative effect adjustments
 
 
 
 
 
 
(78,042
)
 
(10,552
)
 
(88,594
)
Balance, March 31, 2018
$
2

 
$
5,000

 
$
7,378,496

 
$
857,204

 
$
(558,484
)
 
$
7,682,218



See Notes to Consolidated Condensed Financial Statements
6


PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Cash flows from operating activities
 
 
 

Net income
$
142,098

 
$
18,275

Adjustments to reconcile net income to net cash used in operating activities:
 

 
 

Realized investment (gains) losses
(53,078
)
 
44,370

Amortization of DAC and VOBA
30,373

 
58,073

Capitalization of DAC
(95,970
)
 
(101,064
)
Depreciation and amortization expense
18,477

 
16,556

Deferred income tax
4,938

 
5,229

Accrued income tax
105,877

 
70,879

Interest credited to universal life and investment products
285,588

 
197,458

Policy fees assessed on universal life and investment products
(407,380
)
 
(351,128
)
Change in reinsurance receivables
104,293

 
(9,544
)
Change in accrued investment income and other receivables
(77,802
)
 
5,861

Change in policy liabilities and other policyholders’ funds of traditional life and health products
(200,135
)
 
(96,291
)
Trading securities:
 

 
 

Maturities and principal reductions of investments
30,111

 
53,420

Sale of investments
142,370

 
67,298

Cost of investments acquired
(149,133
)
 
(129,346
)
Other net change in trading securities
1,662

 
(10,901
)
Amortization of premiums and accretion of discounts on investments and mortgage loans
67,037

 
73,456

Change in other liabilities
59,859

 
64,714

Other, net
(74,734
)
 
(16,271
)
Net cash used in operating activities
$
(65,549
)
 
$
(38,956
)

See Notes to Consolidated Condensed Financial Statements
7


PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Cash flows from investing activities
 

 
 

Maturities and principal reductions of investments, available-for-sale
$
374,989

 
$
150,422

Sale of investments, available-for-sale
987,615

 
436,917

Cost of investments acquired, available-for-sale
(1,331,158
)
 
(671,269
)
Change in investments, held-to-maturity
25,000

 
18,000

Mortgage loans:
 

 
 

New lendings
(155,798
)
 
(248,231
)
Repayments
170,322

 
206,111

Change in investment real estate, net
477

 
583

Change in policy loans, net
18,444

 
20,973

Change in other long-term investments, net
(8,735
)
 
(136,831
)
Change in short-term investments, net
28,357

 
191,448

Net unsettled security transactions
(36,814
)
 
48,994

Purchase of property, equipment, and intangibles
(5,543
)
 
(2,244
)
Cash received from reinsurance transaction

 

Net cash provided by investing activities
$
67,156

 
$
14,873

Cash flows from financing activities
 

 
 

Issuance (repayment) of non-recourse funding obligations
(25,000
)
 
(18,250
)
Secured financing liabilities
(311,295
)
 
(238,802
)
Investment product deposits and change in universal life deposits
1,380,615

 
892,365

Investment product withdrawals
(979,532
)
 
(529,368
)
Other financing activities, net
(241
)
 
(97
)
Net cash provided by financing activities
$
64,547

 
$
105,848

Change in cash
66,154

 
81,765

Cash at beginning of period
151,400

 
178,855

Cash at end of period
$
217,554

 
$
260,620


See Notes to Consolidated Condensed Financial Statements
8


PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1.    BASIS OF PRESENTATION
Basis of Presentation
Protective Life Insurance Company (the “Company”), a stock life insurance company, was founded in 1907. The Company is a wholly owned subsidiary of Protective Life Corporation (“PLC”), an insurance holding company. On February 1, 2015, PLC became a wholly owned subsidiary of The Dai-ichi Life Insurance Company, Limited, a kabushiki kaisha organized under the laws of Japan (now known as Dai-ichi Life Holdings, Inc., “Dai-ichi Life”), when DL Investment (Delaware), Inc. a wholly owned subsidiary of Dai-ichi Life, merged with and into PLC (the “Merger”). Prior to February 1, 2015, PLC’s stock was publicly traded on the New York Stock Exchange. Subsequent to the Merger date, PLC and the Company remain as SEC registrants within the United States. 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. PLC is a holding company with subsidiaries that provide financial services through the production, distribution, and administration of insurance and investment products.
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for the interim periods presented herein. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair statement of the results for the interim periods presented. Operating results for the three months ended March 31, 2019, are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2019. The year-end consolidated condensed financial data included herein was derived from audited financial statements but this report does not include all disclosures required by GAAP. 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, 2018.
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.
Certain reclassifications have been made in previously reported financial statements and accompanying notes to make prior period amounts comparable to those of the current period. Such reclassifications had no effect on previously reported net income or shareowner’s equity.
Entities Included
The consolidated condensed financial statements in this report include the accounts of Protective Life Insurance Company 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, 2018. There were no significant changes to the Company’s accounting policies during the three months ended March 31, 2019.
Accounting Pronouncements Recently Adopted
Accounting Standards Update (“ASU” or “Update”) No. 2016-02 - Leases. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of leases. The most significant change relates to the accounting model used by lessees. The Update requires all leases with terms greater than 12 months to be recorded on the balance sheet in the form of a lease asset and liability. The lease asset and liability are measured at the present value of the minimum lease payments less any upfront payments or fees. The amendments in the Update became effective for annual and interim periods beginning after December 15, 2018 on a modified retrospective basis. The Company recorded a cumulative effect adjustment as of the date of adoption, January 1, 2019, establishing a right of use asset and lease liability of $18.2 million on its consolidated condensed balance sheet reflected in the property and equipment and other liabilities line items, respectively.

ASU No. 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this Update require that premiums on callable debt securities be amortized to the first call date. This is a change from previous guidance, under which premiums are amortized to the maturity date of the security. The amendments became effective for annual and interim periods beginning after December 15, 2018. The Company recorded a cumulative effect adjustment as of the adoption date, January 1, 2019, resulting in a $50.8 million reduction to retained earnings, net of income tax.

ASU No. 2017-12 - Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this Update are designed to permit hedge accounting to be applied to a broader range of hedging strategies as well as to more closely align hedge accounting and risk management objectives. Specific provisions include requiring

9


changes in the fair value of a hedging instrument be recorded in the same income statement line as the hedged item when it affects earnings. In addition, after a hedge has initially qualified as an effective hedge the Update permits the use of a qualitative hedge effectiveness test in subsequent periods. The amendments in this Update became effective for annual and interim periods beginning after December 15, 2018 and early adoption is permitted. At adoption, January 1, 2019, this standard did not have an impact on the Company’s operations or financial results.
Accounting Pronouncements Not Yet Adopted
    
ASU No. 2016-13 - Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments.
The amendments in this Update introduce a new current expected credit loss (“CECL”) model for certain financial assets, including mortgage loans and reinsurance receivables. The new model will not apply to debt securities classified as available-for-sale. For assets within the scope of the new model, an entity will recognize as an allowance against earnings its estimate of the contractual cash flows not expected to be collected on day one of the asset’s acquisition. The allowance may be reversed through earnings if a security recovers in value. This differs from the current impairment model, which requires recognition of credit losses when they have been incurred and recognizes a security’s subsequent recovery in value in other comprehensive income. The Update also makes targeted changes to the current impairment model for available-for-sale debt securities, which comprise the majority of the Company’s invested assets. Similar to the CECL model, credit loss impairments will be recorded in an allowance against earnings that may be reversed for subsequent recoveries in value. The amendments in this Update, along with related amendments in ASU No. 2018-19 - Codification Improvements to Topic 326, Financial Instruments-Credit Losses, are effective for annual and interim periods beginning after December 15, 2019 on a modified retrospective basis. The Company is reviewing its policies and processes to ensure compliance with the requirements in this Update, upon adoption, and assessing the impact this standard will have on its operations and financial results.
            
ASU No. 2018-12 - Financial Services - Insurance (Topic 944): Targeted Improvements to Accounting for Long-Duration Contracts. The amendments in this Update are designed to make improvements to the existing recognition, measurement, presentation, and disclosure requirements for certain long-duration contracts issued by an insurance company. The new amendments require insurance entities to provide a more current measure of the liability for future policy benefits for traditional and limited-payment contracts by regularly refining the liability for actual past experience and updated future assumptions. This differs from current requirements where assumptions are locked-in at contract issuance for these contract types. In addition, the updated liability will be discounted using an upper-medium grade (low-credit-risk) fixed income instrument yield that reflects the characteristics of the liability which differs from currently used rates based on the invested assets supporting the liability. In addition, the amendments introduce new requirements to assess market-based insurance contract options and guarantees for Market Risk Benefits and measure them at fair value. This Update also requires insurance entities to amortize deferred acquisition costs on a constant-level basis over the expected life of the contract. Finally this Update requires new disclosures including liability rollforwards and information about significant inputs, judgements, assumptions, and methods used in the measurement. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2020 with early adoption permitted. The Company is currently reviewing its policies, processes, and applicable systems to determine the impact this standard will have on its operations and financial results.
    
3.    SIGNIFICANT TRANSACTIONS
The Lincoln National Life Insurance Company    

On May 1, 2018, The Lincoln National Life Insurance Company (“Lincoln Life”) completed its previously announced acquisition (the “Closing”) of Liberty Mutual Group Inc.’s (“Liberty Mutual”) Group Benefits Business and Individual Life and Annuity Business (the “Life Business”) through the acquisition of all of the issued and outstanding capital stock of Liberty Life Assurance Company of Boston (“Liberty”). In connection with the Closing and pursuant to the Master Transaction Agreement, dated January 18, 2018 (the “Master Transaction Agreement”), previously reported in PLC’s Current Report on Form 8-K filed on January 23, 2018, the Company and Protective Life and Annuity Insurance Company (“PLAIC”), a wholly owned subsidiary of the Company, entered into reinsurance agreements (the “Liberty Reinsurance Agreements”) and related ancillary documents (including administrative services agreements and transition services agreements) providing for the reinsurance and administration of the Life Business.

Pursuant to the Liberty Reinsurance Agreements, Liberty ceded to the Company and PLAIC the insurance policies related to the Life Business on a 100% coinsurance basis. The aggregate ceding commission for the reinsurance of the Life Business was $422.4 million, which is the purchase price.

All policies issued in states other than New York were ceded to the Company under a reinsurance agreement between Liberty and the Company, and all policies issued in New York were ceded to PLAIC under a reinsurance agreement between Liberty and PLAIC. The aggregate statutory reserves of Liberty ceded to the Company and PLAIC as of the closing of the Transaction were approximately $13.2 billion, which amount was based on initial estimates and is subject to adjustment following
the Closing. Pursuant to the terms of the Liberty Reinsurance Agreements, each of the Company and PLAIC are required to maintain assets in trust for the benefit of Liberty to secure their respective obligations to Liberty under the Liberty Reinsurance Agreements. The trust accounts were initially funded by each of the Company and PLAIC principally with the investment assets that were received from Liberty. Additionally, the Company and PLAIC have each agreed to provide, on behalf of Liberty, administration and policyholder servicing of the Life Business reinsured by it pursuant to administrative services agreements between Liberty and each of the Company and PLAIC.

The terms of the Liberty Reinsurance Agreements resulted in an acquisition of the Life Business by the Company in accordance with ASC Topic 805, Business Combinations.

10


The following table details the purchase consideration and preliminary allocation of assets acquired and liabilities assumed
from the Life Business reinsurance transaction as of the transaction date. These estimates remain preliminary and are subject to adjustment. While they are not expected to be materially different than those shown, any material adjustments to the estimates will be reflected, retroactively, as of the date of the acquisition.

 
 
Fair Value
as of
May 1, 2018
 
 
(Dollars In Thousands)
ASSETS
 
 
Fixed maturities
 
$
12,588,512

Mortgage loans
 
435,405

Policy loans
 
131,489

Total investments
 
13,155,406

Cash
 
38,456

Accrued investment income
 
152,030

Reinsurance receivables
 
272

Value of business acquired
 
338,303

Other assets
 
916

Total assets
 
13,685,383

LIABILITIES
 
 
Future policy benefits and claims
 
$
11,748,942

Unearned premiums
 

Total policy liabilities and accruals
 
11,748,942

Annuity account balances
 
1,823,444

Other policyholders’ funds
 
41,936

Other liabilities
 
71,061

Total liabilities
 
13,685,383

NET ASSETS ACQUIRED
 
$

    
The following unaudited pro forma condensed consolidated results of operations assumes that the aforementioned transactions of the Life Business were completed as of January 1, 2017. The unaudited pro forma condensed results of operations are presented solely for information purposes and are not necessarily indicative of the consolidated condensed results of operations that might have been achieved had the transaction been completed as of the date indicated:
 
Unaudited
 
For The
Three Months Ended
March 31, 2018
 
(Dollars In Thousands)
Revenue
$
1,313,999

Net income
$
57,032

Great-West Life & Annuity Insurance Company
On January 23, 2019, the Company entered into a Master Transaction Agreement (the “GWL&A Master Transaction Agreement”) with Great-West Life & Annuity Insurance Company (“GWL&A”), Great-West Life & Annuity Insurance Company of New York (“GWL&A of NY”), The Canada Life Assurance Company (“CLAC”) and The Great-West Life Assurance Company (“GWL” and, together with GWL&A, GWL&A of NY and CLAC, the “Sellers”), pursuant to which the Company will acquire via reinsurance (the “Transaction”) substantially all of the Sellers’ individual life insurance and annuity business (the “Individual Life Business”). Pursuant to the GWL&A Master Transaction Agreement, the Company and PLAIC will enter into reinsurance agreements (the “GWL&A Reinsurance Agreements”) and related ancillary documents at the closing of the Transaction. On the terms and subject to the conditions of the GWL&A Reinsurance Agreements, the Sellers will cede to the Company and PLAIC, effective as of the closing of the Transaction, substantially all of the insurance policies relating to the Individual Life Business. To support its obligations under the GWL&A Reinsurance Agreements, the Company will establish trust accounts for the benefit of GWL&A, CLAC and GWL, and PLAIC will establish a trust account for the benefit of GWL&A of NY. The Sellers will retain a block of participating policies, which will be administered by PLC.

11


The Transaction is subject to the satisfaction or waiver of customary closing conditions, including regulatory approvals and the execution of the GWL&A Reinsurance Agreements and related ancillary documents. The GWL&A Master Transaction Agreement and other transaction documents contain certain customary representations and warranties made by each of the parties, and certain customary covenants regarding the Sellers and the Individual Life Business, and provide for indemnification, among other things, for breaches of those representations, warranties and covenants.
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 Department of Financial Services (the “Superintendent”). Closed Block assets and liabilities are carried on the same basis as similar assets and liabilities held in the general account.
The excess of Closed Block liabilities over Closed Block assets (adjusted to exclude the impact of related amounts in accumulated other comprehensive income “AOCI”) at the acquisition date of October 1, 2013, represented the estimated maximum future post-tax earnings from the Closed Block that would be recognized in income from continuing operations over the period the policies and contracts in the Closed Block remain in force. In connection with the acquisition of MONY, the Company developed an actuarial calculation of the expected timing of MONY’s Closed Block’s earnings as of October 1, 2013. Pursuant to the acquisition of the Company by Dai-ichi Life, this actuarial calculation of the expected timing of MONY’s Closed Block earnings was recalculated and reset as February 1, 2015, along with the establishment of a policyholder dividend obligation as of such date.
If the actual cumulative earnings from the Closed Block are greater than the expected cumulative earnings, only the expected earnings will be recognized in the Company’s net income. Actual cumulative earnings in excess of expected cumulative earnings at any point in time are recorded as a policyholder dividend obligation because they will ultimately be paid to Closed Block policyholders as an additional policyholder dividend, unless offset by future performance that is less favorable than originally expected. If a policyholder dividend obligation has been previously established and the actual Closed Block earnings in a subsequent period are less than the expected earnings for that period, the policyholder dividend obligation would be reduced (but not below zero). If, over the period the policies and contracts in the Closed Block remain in force, the actual cumulative earnings of the Closed Block are less than the expected cumulative earnings, only actual earnings would be recognized in income from continuing operations. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside the Closed Block.
Many expenses related to Closed Block operations, including amortization of VOBA, are charged to operations outside of the Closed Block; accordingly, net revenues of the Closed Block do not represent the actual profitability of the Closed Block operations. Operating costs and expenses outside of the Closed Block are, therefore, disproportionate to the business outside of the Closed Block.

12


Summarized financial information for the Closed Block as of March 31, 2019 and December 31, 2018 is as follows:
 
As of
 
March 31, 2019
 
December 31, 2018
 
(Dollars In Thousands)
Closed block liabilities
 

 
 

Future policy benefits, policyholders’ account balances and other policyholder liabilities
$
5,643,484

 
$
5,679,732

Policyholder dividend obligation
11,803

 

Other liabilities
33,254

 
22,505

Total closed block liabilities
5,688,541

 
5,702,237

Closed block assets
 

 
 

Fixed maturities, available-for-sale, at fair value
$
4,404,945

 
$
4,257,437

Mortgage loans on real estate
75,062

 
75,838

Policy loans
666,270

 
672,213

Cash
115,204

 
116,225

Other assets
107,204

 
136,388

Total closed block assets
5,368,685

 
5,258,101

Excess of reported closed block liabilities over closed block assets
319,856

 
444,136

Portion of above representing accumulated other comprehensive income:
 

 
 

Net unrealized investment gains (losses) net of policyholder dividend obligation: $(118,670) and $(141,128); and net of income tax: $24,921 and $61,676

 
(120,528
)
Future earnings to be recognized from closed block assets and closed block liabilities
$
319,856

 
$
323,608

Reconciliation of the policyholder dividend obligation is as follows:
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Policyholder dividend obligation, beginning of period
$

 
$
160,712

Applicable to net revenue (losses)
(10,655
)
 
(11,712
)
Change in net unrealized investment gains (losses) allocated to the policyholder dividend obligation
22,458

 
(149,000
)
Policyholder dividend obligation, end of period
$
11,803

 
$


13


Closed Block revenues and expenses were as follows:
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Revenues
 

 
 
Premiums and other income
$
37,444

 
$
39,612

Net investment income
51,128

 
50,543

Net investment gains
(454
)
 
(237
)
Total revenues
88,118

 
89,918

Benefits and other deductions
 

 
 
Benefits and settlement expenses
78,666

 
79,952

Other operating expenses
359

 
(319
)
Total benefits and other deductions
79,025

 
79,633

Net revenues before income taxes
9,093

 
10,285

Income tax expense
1,910

 
2,160

Net revenues
$
7,183

 
$
8,125

5.    INVESTMENT OPERATIONS
Net realized gains (losses) are summarized as follows:
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Fixed maturities
$
5,137

 
$
2,783

Equity gains and losses
30,635

 
(8,738
)
Modco trading portfolio
94,902

 
(84,709
)
Other investments
(1,146
)
 
3,113

Realized gains (losses) - all other investments
129,528

 
(87,551
)
Realized gains (losses) - derivatives(1)
(73,308
)
 
46,826

Realized investment gains (losses)
$
56,220

 
$
(40,725
)
 
 
 
 
Net impairments losses recognized in earnings
$
(3,142
)
 
$
(3,645
)
 
 
 
 
(1) See Note 7, Derivative Financial Instruments
 
 
 
Gross realized gains and gross realized losses on investments available-for-sale (fixed maturities and short-term investments) are as follows:
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Gross realized gains
$
7,870

 
$
8,049

Gross realized losses:
 
 
 
Impairment losses
$
(3,142
)
 
$
(3,645
)
Other realized losses
$
(2,733
)
 
$
(5,267
)

14


The chart below summarizes the fair value (proceeds) and the gains (losses) realized on securities the Company sold that were in an unrealized gain position and an unrealized loss position.
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Securities in an unrealized gain position:
 
 
 
Fair value (proceeds)
$
648,891

 
$
142,133

Gains realized
$
7,870

 
$
8,049

 
 
 
 
Securities in an unrealized loss position(1):
 
 
 
Fair value (proceeds)
$
171,302

 
$
56,984

Losses realized
$
(2,733
)
 
$
(5,267
)
 
 
 
 
(1) The Company made the decision to exit these holdings in conjunction with its overall asset/liability management process.
The chart below summarizes the realized gains (losses) on equity securities sold during the period and equity securities still held at the reporting date.
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Net gains (losses) recognized during the period on equity securities
$
30,635

 
$
(8,738
)
Less: net gains (losses) recognized on equity securities sold during the period
$
60

 
$
(1,702
)
Gains (losses) recognized during the period on equity securities still held
$
30,575

 
$
(7,036
)



15


The amortized cost and fair value of the Company’s investments classified as available-for-sale are as follows:
As of March 31, 2019
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI
(1)
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
 
$
3,871,471

 
$
57,375

 
$
(29,315
)
 
$
3,899,531

 
$

Commercial mortgage-backed securities
 
2,334,211

 
17,148

 
(27,261
)
 
2,324,098

 

Other asset-backed securities
 
1,359,813

 
18,421

 
(15,623
)
 
1,362,611

 

U.S. government-related securities
 
1,439,136

 
2,382

 
(30,412
)
 
1,411,106

 

Other government-related securities
 
521,713

 
12,295

 
(11,883
)
 
522,125

 

States, municipals, and political subdivisions
 
3,632,880

 
84,040

 
(25,256
)
 
3,691,664

 
1,021

Corporate securities
 
38,424,196

 
573,892

 
(1,211,830
)
 
37,786,258

 
(18,719
)
Redeemable preferred stocks
 
87,579

 
368

 
(4,124
)
 
83,823

 

 
 
51,670,999

 
765,921

 
(1,355,704
)
 
51,081,216

 
(17,698
)
Short-term investments
 
607,017

 

 

 
607,017

 

 
 
$
52,278,016

 
$
765,921

 
$
(1,355,704
)
 
$
51,688,233

 
$
(17,698
)
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI
(1)
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
 
$
3,641,678

 
$
23,248

 
$
(61,935
)
 
$
3,602,991

 
$
(18
)
Commercial mortgage-backed securities
 
2,319,476

 
3,911

 
(57,000
)
 
2,266,387

 

Other asset-backed securities
 
1,410,059

 
17,232

 
(35,398
)
 
1,391,893

 

U.S. government-related securities
 
1,658,433

 
1,794

 
(45,722
)
 
1,614,505

 

Other government-related securities
 
543,534

 
4,292

 
(33,790
)
 
514,036

 

States, municipals, and political subdivisions
 
3,682,037

 
25,706

 
(118,902
)
 
3,588,841

 
876

Corporate securities
 
38,467,380

 
112,438

 
(2,378,240
)
 
36,201,578

 
(29,685
)
Redeemable preferred stocks
 
94,362

 

 
(11,560
)
 
82,802

 

 
 
51,816,959

 
188,621

 
(2,742,547
)
 
49,263,033

 
(28,827
)
Short-term investments
 
635,375

 

 

 
635,375

 

 
 
$
52,452,334

 
$
188,621

 
$
(2,742,547
)
 
$
49,898,408

 
$
(28,827
)
 
 
 
 
 
 
 
 
 
 
 
(1) These amounts are included in the gross unrealized gains and gross unrealized losses columns above.

16


The Company holds certain investments pursuant to certain modified coinsurance (“Modco”) arrangements. The fixed maturities held as part of these arrangements are classified as trading securities. The fair value of the investments held pursuant to these Modco arrangements are as follows:
 
 
As of
March 31, 2019
 
As of
December 31, 2018
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

Residential mortgage-backed securities
 
$
213,259

 
$
241,836

Commercial mortgage-backed securities
 
209,482

 
188,925

Other asset-backed securities
 
149,541

 
159,907

U.S. government-related securities
 
59,627

 
59,794

Other government-related securities
 
23,640

 
44,207

States, municipals, and political subdivisions
 
292,796

 
286,413

Corporate securities
 
1,533,256

 
1,423,833

Redeemable preferred stocks
 
11,860

 
11,277

 
 
2,493,461

 
2,416,192

Equity securities
 
9,207

 
9,892

Short-term investments
 
34,631

 
30,926

 
 
$
2,537,299

 
$
2,457,010

The amortized cost and fair value of available-for-sale and held-to-maturity fixed maturities as of March 31, 2019, by expected maturity, are shown below. Expected maturities of securities without a single maturity date are allocated based on estimated rates of prepayment that may differ from actual rates of prepayment.
 
Available-for-sale
 
Held-to-maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
(Dollars In Thousands)
Due in one year or less
$
1,259,571

 
$
1,257,644

 
$

 
$

Due after one year through five years
8,936,843

 
8,920,426

 

 

Due after five years through ten years
8,822,759

 
8,877,578

 

 

Due after ten years
32,651,826

 
32,025,568

 
2,607,356

 
2,594,441

 
$
51,670,999

 
$
51,081,216

 
$
2,607,356

 
$
2,594,441

The charts below summarize the Company’s other-than-temporary impairments of investments. All of the impairments were related to fixed maturities.
 
For The
Three Months Ended
March 31, 2019
 
Fixed
Maturities
 
(Dollars In Thousands)
Other-than-temporary impairments
$
(1,295
)
Non-credit impairment losses recorded in other comprehensive income
(1,847
)
Net impairment losses recognized in earnings
$
(3,142
)

17


 
For The
Three Months Ended
March 31, 2018
 
Fixed
Maturities
 
(Dollars In Thousands)
Other-than-temporary impairments
$
(691
)
Non-credit impairment losses recorded in other comprehensive income
(2,954
)
Net impairment losses recognized in earnings
$
(3,645
)
There were no other-than-temporary impairments related to fixed maturities or equity securities that the Company intended to sell or expected to be required to sell for the three months ended March 31, 2019 and 2018.
The following chart is a rollforward of available-for-sale credit losses on fixed maturities held by the Company for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (loss):
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Beginning balance
$
24,868

 
$
3,268

Additions for newly impaired securities
751

 

Additions for previously impaired securities
2,347

 

Reductions for previously impaired securities due to a change in expected cash flows
(632
)
 
(1,033
)
Reductions for previously impaired securities that were sold in the current period
(119
)
 

Ending balance
$
27,215

 
$
2,235

The following table includes the gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2019:
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
(Dollars In Thousands)
Residential mortgage-backed securities
$
158,901

 
$
(1,772
)
 
$
1,238,524

 
$
(27,543
)
 
$
1,397,425

 
$
(29,315
)
Commercial mortgage-backed securities
52,747

 
(1,235
)
 
1,454,220

 
(26,026
)
 
1,506,967

 
(27,261
)
Other asset-backed securities
531,548

 
(11,905
)
 
192,201

 
(3,718
)
 
723,749

 
(15,623
)
U.S. government-related securities
43,977

 
(640
)
 
1,045,717

 
(29,772
)
 
1,089,694

 
(30,412
)
Other government-related securities
51,767

 
(1,279
)
 
198,112

 
(10,604
)
 
249,879

 
(11,883
)
States, municipals, and political subdivisions
60,555

 
(369
)
 
911,555

 
(24,887
)
 
972,110

 
(25,256
)
Corporate securities
3,327,367

 
(136,044
)
 
17,570,174

 
(1,075,786
)
 
20,897,541

 
(1,211,830
)
Redeemable preferred stocks
10,154

 
(3
)
 
68,291

 
(4,121
)
 
78,445

 
(4,124
)
 
$
4,237,016

 
$
(153,247
)
 
$
22,678,794

 
$
(1,202,457
)
 
$
26,915,810

 
$
(1,355,704
)
Residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”) had gross unrealized losses greater than twelve months of $27.5 million and $26.0 million, respectively, as of March 31, 2019. Factors such as the credit enhancement within the deal structure, the average life of the securities, and the performance of the underlying collateral support the recoverability of these investments.
The other asset-backed securities had a gross unrealized loss greater than twelve months of $3.7 million as of March 31, 2019. This category predominately includes student loan backed auction rate securities (“ARS”) whose underlying collateral is at least 97% guaranteed by the Federal Family Education Loan Program (“FFELP”). At this time, the Company has no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary.

18


The U.S. government-related securities and the other government-related securities had gross unrealized losses greater than twelve months of $29.8 million and $10.6 million as of March 31, 2019, respectively. These declines were related to changes in interest rates.
The states, municipals, and political subdivisions category had gross unrealized losses greater than twelve months of $24.9 million as of March 31, 2019. The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered include credit ratings, the financial health of the issuer, the continued access of the issuer to capital markets, and other pertinent information.
The corporate securities category had gross unrealized losses greater than twelve months of $1.1 billion as of March 31, 2019. The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered include credit ratings, the financial health of the issuer, the continued access of the issuer to capital markets, and other pertinent information.
As of March 31, 2019, the Company had a total of 2,473 positions that were in an unrealized loss position, but the Company does not consider these unrealized loss positions to be other-than-temporary. This is based on the aggregate factors discussed previously and because the Company has the ability and intent to hold these investments until the fair values recover, and the Company does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of the securities.
The following table includes the gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2018:
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
(Dollars In Thousands)
Residential mortgage-backed securities
$
1,485,009

 
$
(31,302
)
 
$
795,765

 
$
(30,633
)
 
$
2,280,774

 
$
(61,935
)
Commercial mortgage-backed securities
419,420

 
(7,398
)
 
1,405,690

 
(49,602
)
 
1,825,110

 
(57,000
)
Other asset-backed securities
687,271

 
(30,963
)
 
148,871

 
(4,435
)
 
836,142

 
(35,398
)
U.S. government-related securities
130,290

 
(4,668
)
 
1,085,654

 
(41,054
)
 
1,215,944

 
(45,722
)
Other government-related securities
224,273

 
(15,207
)
 
131,569

 
(18,583
)
 
355,842

 
(33,790
)
States, municipals, and political subdivisions
1,004,262

 
(27,180
)
 
1,129,152

 
(91,722
)
 
2,133,414

 
(118,902
)
Corporate securities
18,225,656

 
(966,825
)
 
12,824,024

 
(1,411,415
)
 
31,049,680

 
(2,378,240
)
Redeemable preferred stocks
41,147

 
(4,467
)
 
41,655

 
(7,093
)
 
82,802

 
(11,560
)
 
$
22,217,328

 
$
(1,088,010
)
 
$
17,562,380

 
$
(1,654,537
)
 
$
39,779,708

 
$
(2,742,547
)
As of March 31, 2019, the Company had securities in its available-for-sale portfolio which were rated below investment grade of $1.6 billion and had an amortized cost of $1.7 billion. In addition, included in the Company’s trading portfolio, the Company held $120.7 million of securities which were rated below investment grade. Approximately $264.2 million of the available-for-sale and trading securities that were below investment grade were not publicly traded.
The change in unrealized gains (losses), net of income tax, on fixed maturities, classified as available-for-sale is summarized as follows:
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Fixed maturities
$
1,551,674

 
$
(915,075
)

19


The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of March 31, 2019 and December 31, 2018, are as follows:
As of March 31, 2019
 
Amortized
Cost
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Securities issued by affiliates:
 
 
 
 
 
 
 
 
 
 
Red Mountain, LLC
 
$
764,356

 
$

 
$
(56,483
)
 
$
707,873

 
$

Steel City, LLC
 
1,843,000

 
43,568

 

 
1,886,568

 

 
 
$
2,607,356

 
$
43,568

 
$
(56,483
)
 
$
2,594,441

 
$

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2018
 
Amortized
Cost
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Securities issued by affiliates:
 
 
 
 
 
 
 
 
 
 
Red Mountain, LLC
 
$
750,474

 
$

 
$
(81,657
)
 
$
668,817

 
$

Steel City, LLC
 
1,883,000

 

 
(4,607
)
 
1,878,393

 

 
 
$
2,633,474

 
$

 
$
(86,264
)
 
$
2,547,210

 
$

During the three months ended March 31, 2019 and 2018, the Company recorded no other-than-temporary impairments on held-to-maturity securities.
The Company’s held-to-maturity securities had $43.6 million of gross unrecognized holding gains and $56.5 million of gross unrecognized holding losses as of March 31, 2019. The Company does not consider these unrecognized holding losses to be other-than-temporary based on certain positive factors associated with the securities which include credit ratings of the guarantor, financial health of the issuer and guarantor, continued access of the issuer to capital markets and other pertinent information. These held-to-maturity securities are issued by affiliates of the Company which are considered variable interest entities (“VIEs”). The Company is not the primary beneficiary of these entities and thus the securities are not eliminated in consolidation. These securities are collateralized by non-recourse funding obligations issued by captive insurance companies that are affiliates of the Company.
The Company’s held-to-maturity securities had $86.3 million of gross unrecognized holding losses as of December 31, 2018. The Company does not consider these unrecognized holding losses to be other-than-temporary based on certain positive factors associated with the securities which include credit ratings of the guarantor, financial health of the issuer and guarantor, continued access of the issuer to capital markets and other pertinent information.
Variable Interest Entity
The Company holds certain investments in an entity in which its ownership interests could possibly be considered variable interests under Topic 810 of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC” or “Codification”) (excluding debt and equity securities held as trading, available-for-sale, or held-to-maturity). The Company reviews the characteristics of the applicable entity and compares those characteristics to applicable criteria to determine whether the entity is a VIE. If the entity is determined to be a VIE, the Company then performs a detailed review to determine whether the interest would be considered a variable interest under the guidance. The Company then performs a qualitative review of all variable interests with the entity and determines whether the Company is the primary beneficiary. ASC 810 provides that an entity is the primary beneficiary of a VIE if the entity has 1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and 2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.
Based on this analysis, the Company had an interest in one wholly owned subsidiary, Red Mountain, LLC (“Red Mountain”) as of March 31, 2019 and December 31, 2018, that was determined to be a VIE.
The activity most significant to Red Mountain is the issuance of a note in connection with a financing transaction involving Golden Gate V Vermont Captive Insurance Company (“Golden Gate V”) and the Company in which Golden Gate V issued non-recourse funding obligations to Red Mountain and Red Mountain issued the note to Golden Gate V. Credit enhancement on the Red Mountain Note is provided by an unrelated third party. The Company had the power, via its 100% ownership through an affiliate, to direct the activities of the VIE, but did not have the obligation to absorb losses related to the primary risks or sources of variability to the VIE. The variability of loss would be borne primarily by the third party in its function as provider of credit enhancement on the Red Mountain Note. Accordingly, it was determined that the Company is not the primary beneficiary of the VIE. The Company’s risk of loss related to the VIE is limited to its investment of $10,000. Additionally, the Company has guaranteed Red Mountain’s payment obligation for the credit enhancement fee to the unrelated third party provider. As of March 31, 2019, no payments have been made or required related to this guarantee.

20


6.    FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company determined the fair value of its financial instruments based on the fair value hierarchy established in FASB guidance referenced in the Fair Value Measurements and Disclosures Topic which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company has adopted the provisions from the FASB guidance that is referenced in the Fair Value Measurements and Disclosures Topic for non-financial assets and liabilities (such as property and equipment, goodwill, and other intangible assets) that are required to be measured at fair value on a periodic basis. The effect on the Company’s periodic fair value measurements for non-financial assets and liabilities was not material.
The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three level hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument.
 Financial assets and liabilities recorded at fair value on the consolidated balance sheets are categorized as follows:
Level 1: Unadjusted quoted prices for identical assets or liabilities in an active market.

Level 2: Quoted prices in markets that are not active or significant inputs that are observable either directly or indirectly. Level 2 inputs include the following:
 
a)
Quoted prices for similar assets or liabilities in active markets;
b)
Quoted prices for identical or similar assets or liabilities in non-active markets;
c)
Inputs other than quoted market prices that are observable; and
d)
Inputs that are derived principally from or corroborated by observable market data through correlation or other means.
 
Level 3: Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect management’s own estimates about the assumptions a market participant would use in pricing the asset or liability.


21


The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of March 31, 2019:
 
Measurement
Category
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
(Dollars In Thousands)
Assets:
 
 
 

 
 

 
 

 
 

Fixed maturity securities - available-for-sale
 
 
 

 
 

 
 

 
 

Residential mortgage-backed securities
4
 
$

 
$
3,899,531

 
$

 
$
3,899,531

Commercial mortgage-backed securities
4
 

 
2,324,098

 

 
2,324,098

Other asset-backed securities
4
 

 
942,520

 
420,091

 
1,362,611

U.S. government-related securities
4
 
911,137

 
499,969

 

 
1,411,106

State, municipals, and political subdivisions
4
 

 
3,691,664

 

 
3,691,664

Other government-related securities
4
 

 
522,126

 

 
522,126

Corporate securities
4
 

 
37,137,650

 
648,608

 
37,786,258

Redeemable preferred stocks
4
 
66,650

 
17,173

 

 
83,823

Total fixed maturity securities - available-for-sale
 
 
977,787

 
49,034,731

 
1,068,699

 
51,081,217

Fixed maturity securities - trading
 
 
 

 
 

 
 

 
 

Residential mortgage-backed securities
3
 

 
213,259

 

 
213,259

Commercial mortgage-backed securities
3
 

 
209,482

 

 
209,482

Other asset-backed securities
3
 

 
83,057

 
66,484

 
149,541

U.S. government-related securities
3
 
26,880

 
32,747

 

 
59,627

State, municipals, and political subdivisions
3
 

 
292,796

 

 
292,796

Other government-related securities
3
 

 
23,640

 

 
23,640

Corporate securities
3
 

 
1,528,005

 
5,251

 
1,533,256

Redeemable preferred stocks
3
 
11,860

 

 

 
11,860

Total fixed maturity securities - trading
 
 
38,740

 
2,382,986

 
71,735

 
2,493,461

Total fixed maturity securities
 
 
1,016,527

 
51,417,717

 
1,140,434

 
53,574,678

Equity securities
3
 
517,967

 

 
63,409

 
581,376

Other long-term investments(1)
3 & 4
 
68,379

 
359,864

 
133,694

 
561,937

Short-term investments
3
 
546,912

 
94,736

 

 
641,648

Total investments
 
 
2,149,785

 
51,872,317

 
1,337,537

 
55,359,639

Cash
3
 
217,554

 

 

 
217,554

Assets related to separate accounts
3
 
 

 
 

 
 

 
 

Variable annuity
3
 
12,737,450

 

 

 
12,737,450

Variable universal life
3
 
1,041,397

 

 

 
1,041,397

Total assets measured at fair value on a recurring basis
 
 
$
16,146,186

 
$
51,872,317

 
$
1,337,537

 
$
69,356,040

Liabilities:
 
 
 

 
 

 
 

 
 

Annuity account balances(2)
3
 
$

 
$

 
$
74,613

 
$
74,613

Other liabilities(1)
3 & 4
 
18,581

 
257,751

 
606,655

 
882,987

Total liabilities measured at fair value on a recurring basis
 
 
$
18,581

 
$
257,751

 
$
681,268

 
$
957,600

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

22


The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of December 31, 2018:
 
Measurement
Category
 
Level 1
 
Level 2
 
Level 3
 
Total
 
 
 
(Dollars In Thousands)
Assets:
 
 
 

 
 

 
 

 
 

Fixed maturity securities - available-for-sale
 
 
 

 
 

 
 

 
 

Residential mortgage-backed securities
4
 
$

 
$
3,602,991

 
$

 
$
3,602,991

Commercial mortgage-backed securities
4
 

 
2,266,387

 

 
2,266,387

Other asset-backed securities
4
 

 
970,251

 
421,642

 
1,391,893

U.S. government-related securities
4
 
985,485

 
629,020

 

 
1,614,505

State, municipals, and political subdivisions
4
 

 
3,588,841

 

 
3,588,841

Other government-related securities
4
 

 
514,036

 

 
514,036

Corporate securities
4
 

 
35,563,302

 
638,276

 
36,201,578

Redeemable preferred stocks
4
 
65,536

 
17,266

 

 
82,802

Total fixed maturity securities - available-for-sale
 
 
1,051,021

 
47,152,094

 
1,059,918

 
49,263,033

Fixed maturity securities - trading
 
 
 

 
 

 
 

 
 

Residential mortgage-backed securities
3
 

 
241,836

 

 
241,836

Commercial mortgage-backed securities
3
 

 
188,925

 

 
188,925

Other asset-backed securities
3
 

 
133,851

 
26,056

 
159,907

U.S. government-related securities
3
 
27,453

 
32,341

 

 
59,794

State, municipals, and political subdivisions
3
 

 
286,413

 

 
286,413

Other government-related securities
3
 

 
44,207

 

 
44,207

Corporate securities
3
 

 
1,417,591

 
6,242

 
1,423,833

Redeemable preferred stocks
3
 
11,277