Company Quick10K Filing
Quick10K
Protective Life Insurance
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
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
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PLICO 2018-09-30
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 1. Legal Proceedings
Item 1A. Risk Factors
Item 6. Exhibits
EX-31.A plico9301810-qxexhibit31a.htm
EX-31.B plico9301810-qxexhibit31b.htm
EX-32.A plico9301810-qxexhibit32a.htm
EX-32.B plico9301810-qxexhibit32b.htm

Protective Life Insurance Earnings 2018-09-30

PLICO 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 plico9301810q.htm 10-Q Document

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q
 
ý  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 2018
 
or
 
o  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the transition period from              to             
 
Commission File Number 001-31901
 
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)
 
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 Act).  Yes o  No ý
 
Number of shares of Common Stock, $1.00 Par Value, outstanding as of October 26, 2018:  5,000,000
 





PROTECTIVE LIFE INSURANCE COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2018
TABLE OF CONTENTS
 
 
Page
 
PART I
 
 
 
 
Item 1.
Financial Statements (unaudited):
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 6.
 

1


PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
 
For The
Three Months Ended
September 30,
 
For The
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars In Thousands)
Revenues
 

 
 
 
 
 
 

Premiums and policy fees
$
871,892

 
$
849,743

 
$
2,691,233

 
$
2,568,228

Reinsurance ceded
(267,910
)
 
(326,572
)
 
(1,005,398
)
 
(989,835
)
Net of reinsurance ceded
603,982

 
523,171

 
1,685,835

 
1,578,393

Net investment income
631,955

 
477,011

 
1,699,787

 
1,427,442

Realized investment gains (losses):
 

 
 
 
 
 
 

Derivative financial instruments
(26,710
)
 
5,302

 
37,176

 
(119,392
)
All other investments
(20,156
)
 
18,150

 
(157,350
)
 
94,526

Other-than-temporary impairment losses
(14
)
 
(366
)
 
(715
)
 
(494
)
Portion recognized in other comprehensive income (before taxes)

 
93

 
(2,949
)
 
(7,765
)
Net impairment losses recognized in earnings
(14
)
 
(273
)
 
(3,664
)
 
(8,259
)
Other income
80,906

 
82,031

 
241,334

 
243,501

Total revenues
1,269,963

 
1,105,392

 
3,503,118

 
3,216,211

Benefits and expenses
 

 
 
 
 
 
 

Benefits and settlement expenses, net of reinsurance ceded: (three months: 2018 - $214,326; 2017 - $255,063; nine months: 2018 - $855,929; 2017 - $800,868)
950,942

 
742,789

 
2,598,151

 
2,203,883

Amortization of deferred policy acquisition costs and value of business acquired
33,469

 
4,267

 
144,172

 
48,505

Other operating expenses, net of reinsurance ceded: (three months: 2018 - $50,067; 2017 - $58,009; nine months: 2018 - $152,694; 2017 - $163,902)
190,382

 
192,354

 
582,795

 
577,911

Total benefits and expenses
1,174,793

 
939,410

 
3,325,118

 
2,830,299

Income before income tax
95,170

 
165,982

 
178,000

 
385,912

Income tax expense
16,646

 
49,016

 
28,933

 
120,975

Net income
$
78,524

 
$
116,966

 
$
149,067

 
$
264,937


See Notes to the Consolidated Condensed Financial Statements
2


PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) 
 
For The
Three Months Ended
September 30,
 
For The
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars In Thousands)
Net income
$
78,524

 
$
116,966

 
$
149,067

 
$
264,937

Other comprehensive income (loss):
 

 
 
 
 
 
 

Change in net unrealized gains (losses) on investments, net of income tax: (three months: 2018 - $(53,407); 2017 - $54,143; nine months: 2018 - $(318,444); 2017 - $295,015)
(200,912
)
 
100,553

 
(1,198,669
)
 
547,885

Reclassification adjustment for investment amounts included in net income, net of income tax: (three months: 2018 - $427; 2017 - $(146); nine months: 2018 - $(542); 2017 - $(289))
1,605

 
(271
)
 
(2,042
)
 
(536
)
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: (three months: 2018 - $0; 2017 - $452; nine months: 2018 - $6; 2017 - $3,837)

 
839

 
22

 
7,125

Change in accumulated (loss) gain - derivatives, net of income tax: (three months: 2018 - $61; 2017 - $445; nine months: 2018 - $813; 2017 - $19)
229

 
828

 
3,060

 
36

Reclassification adjustment for derivative amounts included in net income, net of income tax: (three months: 2018 - $101; 2017 - $14; nine months: 2018 - $168; 2017 - $139)
380

 
24

 
631

 
257

Total other comprehensive income (loss)
(198,698
)
 
101,973

 
(1,196,998
)
 
554,767

Total comprehensive income (loss)
$
(120,174
)
 
$
218,939

 
$
(1,047,931
)
 
$
819,704


See Notes to the Consolidated Condensed Financial Statements
3


PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
 
As of
 
September 30, 2018
 
December 31, 2017
 
(Dollars In Thousands)
Assets
 

 
 

Fixed maturities, at fair value (amortized cost: 2018 - $54,348,551; 2017 - $40,952,535)
$
52,180,974

 
$
40,971,486

Fixed maturities, at amortized cost (fair value: 2018 - $2,577,841; 2017 - $2,776,327)
2,653,605

 
2,718,904

Equity securities, at fair value (cost: 2018 - $623,882; 2017 - $701,951)
623,201

 
715,498

Mortgage loans (related to securitizations: 2018 - $505; 2017 - $226,409)
7,572,349

 
6,817,723

Investment real estate, net of accumulated depreciation (2018 - $219; 2017 - $132)
7,147

 
8,355

Policy loans
1,703,462

 
1,615,615

Other long-term investments
1,050,741

 
940,047

Short-term investments
366,586

 
527,144

Total investments
66,158,065

 
54,314,772

Cash
161,173

 
178,855

Accrued investment income
650,573

 
489,979

Accounts and premiums receivable
180,971

 
152,086

Reinsurance receivables
4,532,362

 
4,800,891

Deferred policy acquisition costs and value of business acquired
2,979,384

 
2,205,401

Goodwill
793,470

 
793,470

Other intangibles, net of accumulated amortization (2018 - $183,072; 2017 - $140,232)
625,828

 
662,916

Property and equipment, net of accumulated depreciation (2018 - $28,459; 2017 - $21,305)
105,424

 
109,711

Other assets
370,742

 
337,395

Income tax receivable

 
76,986

Assets related to separate accounts
 

 
 

Variable annuity
13,555,469

 
13,956,071

Variable universal life
1,077,842

 
1,035,202

Total assets
$
91,191,303

 
$
79,113,735


See Notes to the Consolidated Condensed Financial Statements
4


PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
(continued)
 
As of
 
September 30, 2018
 
December 31, 2017
 
(Dollars In Thousands)
Liabilities
 

 
 

Future policy benefits and claims
$
42,012,551

 
$
30,956,792

Unearned premiums
772,139

 
751,130

Total policy liabilities and accruals
42,784,690

 
31,707,922

Stable value product account balances
5,211,668

 
4,698,371

Annuity account balances
13,590,482

 
10,921,190

Other policyholders’ funds
1,142,522

 
1,267,198

Other liabilities
2,150,163

 
1,859,254

Income tax payable
3,590

 

Deferred income taxes
970,859

 
1,371,989

Subordinated debt
110,000

 

Debt
1,410

 
1,682

Non-recourse funding obligations
2,890,435

 
2,952,822

Secured financing liabilities
514,413

 
1,017,749

Liabilities related to separate accounts
 

 
 

Variable annuity
13,555,469

 
13,956,071

Variable universal life
1,077,842

 
1,035,202

Total liabilities
84,003,543

 
70,789,450

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: 2018 and 2017 - 5,000,000
5,000

 
5,000

Additional paid-in-capital
7,378,496

 
7,378,496

Retained earnings
987,996

 
916,971

Accumulated other comprehensive income (loss):
 

 
 

Net unrealized gains (losses) on investments, net of income tax: (2018 - $(315,843); 2017 - $6,138)
(1,188,172
)
 
23,091

Net unrealized losses relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (2018 - $0; 2017 - $(6))

 
(22
)
Accumulated gain (loss) - derivatives, net of income tax: (2018 - $1,180; 2017 - $198)
4,438

 
747

Total shareowner’s equity
7,187,760

 
8,324,285

Total liabilities and shareowner’s equity
$
91,191,303

 
$
79,113,735


See Notes to the 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, 2017
$
2

 
$
5,000

 
$
7,378,496

 
$
916,971

 
$
23,816

 
$
8,324,285

Net income for the nine months ended September 30, 2018
 

 
 

 
 

 
149,067

 
 

 
149,067

Other comprehensive loss
 

 
 

 
 

 
 

 
(1,196,998
)
 
(1,196,998
)
Comprehensive loss for the nine months ended September 30, 2018
 

 
 

 
 

 
 

 
 

 
(1,047,931
)
Cumulative effect adjustments
 
 
 
 
 
 
(78,042
)
 
(10,552
)
 
(88,594
)
Balance, September 30, 2018
$
2

 
$
5,000

 
$
7,378,496

 
$
987,996

 
$
(1,183,734
)
 
$
7,187,760


See Notes to the Consolidated Condensed Financial Statements
6


PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 
For The
Nine Months Ended
September 30,
 
2018
 
2017
 
(Dollars In Thousands)
Cash flows from operating activities
 
 
 

Net income
$
149,067

 
$
264,937

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

 
 

Realized investment (gains) losses
123,838

 
33,125

Amortization of DAC and VOBA
144,172

 
48,505

Capitalization of DAC
(333,222
)
 
(251,472
)
Depreciation and amortization expense
50,205

 
48,591

Deferred income tax
(52,071
)
 
82,835

Accrued income tax
80,576

 
9,350

Interest credited to universal life and investment products
630,770

 
507,229

Policy fees assessed on universal life and investment products
(1,146,980
)
 
(1,004,829
)
Change in reinsurance receivables
268,866

 
150,137

Change in accrued investment income and other receivables
2,059

 
(1,498
)
Change in policy liabilities and other policyholders’ funds of traditional life and health products
(491,751
)
 
(282,841
)
Trading securities:
 

 
 

Maturities and principal reductions of investments
140,851

 
131,563

Sale of investments
307,632

 
195,733

Cost of investments acquired
(403,355
)
 
(277,423
)
Other net change in trading securities
10,641

 
9,357

Amortization of premiums and accretion of discounts on investments and mortgage loans
232,448

 
232,694

Change in other liabilities
98,321

 
181,696

Other, net
(27,322
)
 
(61,295
)
Net cash (used in) provided by operating activities
$
(215,255
)
 
$
16,394


See Notes to the Consolidated Condensed Financial Statements
7


PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued
 
For The
Nine Months Ended
September 30,
 
2018
 
2017
 
(Dollars In Thousands)
Cash flows from investing activities
 

 
 

Maturities and principal reductions of investments, available-for-sale
$
895,175

 
$
541,024

Sale of investments, available-for-sale
1,932,956

 
1,302,130

Cost of investments acquired, available-for-sale
(3,942,180
)
 
(3,232,925
)
Change in investments, held-to-maturity
62,000

 
36,000

Mortgage loans:
 

 
 

New lendings
(1,185,316
)
 
(1,081,226
)
Repayments
797,450

 
644,189

Change in investment real estate, net
647

 
3,679

Change in policy loans, net
43,642

 
24,280

Change in other long-term investments, net
(293,208
)
 
(282,688
)
Change in short-term investments, net
160,149

 
(106,888
)
Net unsettled security transactions
84,036

 
349,544

Purchase of property, equipment, and intangibles
(9,629
)
 
(34,067
)
Cash received from reinsurance transaction
20,669

 

Net cash used in investing activities
$
(1,433,609
)
 
$
(1,836,948
)
Cash flows from financing activities
 

 
 

Borrowings under subordinated debt
110,000

 

Issuance (repayment) of non-recourse funding obligations
(61,981
)
 
(35,984
)
Secured financing liabilities
(503,336
)
 
(198,165
)
Dividends/Return of capital to parent company

 
(162,999
)
Investment product deposits and change in universal life deposits
4,397,886

 
3,901,051

Investment product withdrawals
(2,311,096
)
 
(1,698,062
)
Other financing activities, net
(291
)
 
(93
)
Net cash provided by financing activities
$
1,631,182

 
$
1,805,748

Change in cash
(17,682
)
 
(14,806
)
Cash at beginning of period
178,855

 
214,439

Cash at end of period
$
161,173

 
$
199,633


See Notes to the 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. 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 and nine months ended September 30, 2018, are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2018. The year-end consolidated condensed financial data included herein was derived from audited financial statements but does not include all disclosures required by GAAP within this report. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to changing competition, economic conditions, interest rates, investment performance, insurance ratings, claims, persistency, and other factors.
Entities Included
The consolidated condensed financial statements in this report include the accounts of Protective Life 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, 2017. There were no significant changes to the Company’s accounting policies during the nine months ended September 30, 2018 other than those discussed below.
Property and Casualty Insurance Products
Property and casualty insurance products include service contract business, surety bonds, and guaranteed asset protection (“GAP”). Premiums and fees associated with service contracts and GAP products are recognized based on expected claim patterns. For all other products, premiums are generally recognized over the terms of the contract on a pro-rata basis. Commissions and fee income associated with other products are recognized as earned when the related services are provided to the customer. Unearned premium reserves are maintained for the portion of the premiums that is related to the unexpired period of the policy. Benefit reserves are recorded when insured events occur. Benefit reserves include case basis reserves for known but unpaid claims as of the balance sheet date as well as incurred but not reported (“IBNR”) reserves for claims where the insured event has occurred but has not been reported to the Company as of the balance sheet date. The case basis reserves and IBNR are calculated based on historical experience and on assumptions relating to claim severity and frequency, the level of used vehicle prices, and other factors. These assumptions are modified as necessary to reflect anticipated trends.
Effective January 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers. In consideration of the amendments in this Update, the Company revised its recognition pattern for administrative fees associated with certain vehicle service and GAP products. Previously, these fees were recognized based on the work effort involved in satisfying the Company’s contract obligations. The Company will recognize these fees on a claims occurrence basis in future periods. To reflect this change in accounting principle, the Company recorded a cumulative effect adjustment as of January 1, 2018 that resulted in a decrease in retained earnings of $88.6 million. The pre-tax impact to each affected line item on the Company’s financial statements is reflected in the table below:

9


 
 
As of September 30, 2018
 
 
As Reported
 
Previous Accounting
Method
 
 
(Dollars In Millions)
Financial Statement Line Item:
 
 
 
 
Balance Sheet
 
 
 
 
Deferred policy acquisition costs and value of business acquired
 
$
2,979.4

 
$
2,840.0

Other liabilities
 
$
2,150.2

 
$
1,891.4

 
For the
Three Months Ended
September 30, 2018
 
For The
Nine Months Ended
September 30, 2018
 
As Reported
 
Previous Accounting
Method
 
As Reported
 
Previous Accounting
Method
 
(Dollars In Millions)
 
(Dollars In Millions)
Financial Statement Line Item:
 
 
 
 
 
 
 
Statements of Income
 
 
 
 
 
 
 
Other income
$
80.9

 
$
82.4

 
$
241.3

 
$
244.9

Amortization of deferred policy acquisition costs and value of business acquired
$
33.5

 
$
21.9

 
$
144.2

 
$
108.1

Other operating expenses, net of reinsurance ceded
$
190.4

 
$
203.2

 
$
582.8

 
$
622.3

Accounting Pronouncements Recently Adopted
ASU No. 2014-09 - Revenue from Contracts with Customers (Topic 606).This Update provides for significant revisions to the recognition of revenue from contracts with customers across various industries. Under the new guidance, entities are required to apply a prescribed 5-step process to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The accounting for revenues associated with insurance products is not within the scope of this Update. The Update was originally effective for annual and interim periods beginning after December 15, 2016. However, in August 2015, the FASB issued ASU No. 2015-14 - Revenues from Contracts with Customers: Deferral of the Effective Date, to defer the effective date of ASU No. 2014-09 by one year to annual and interim periods beginning after December 15, 2017. The Company adopted this Update using the modified retrospective approach via a cumulative effect adjustment to retained earnings as of January 1, 2018. The amendments in the Update, along with clarifying updates issued subsequent to ASU 2014-09, impacted certain revenues associated with the Company’s Asset Protection products. The lines of business to which the revised guidance applies are not material to the Company’s financial statements. In consideration of the amendments in this Update, the Company revised its recognition pattern for administrative fees associated with certain vehicle service and GAP products. Previously, these fees were recognized based on the work effort involved in satisfying the Company’s contract obligations. The Company will recognize these fees on a claims occurrence basis in future periods. To reflect this change in accounting principle, the Company recorded a cumulative effect adjustment as of January 1, 2018 that resulted in a decrease in retained earnings of $88.6 million. See above for additional discussion.
    ASU No. 2016-01 - Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most notably, the Update requires that equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net income. The Update also introduces a single-step impairment model for equity investments without a readily determinable fair value. Additionally, the Update requires changes in instrument-specific credit risk for fair value option liabilities to be recorded in other comprehensive income. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2017 and were applied on a modified retrospective basis. The Company recorded a cumulative-effect adjustment at the date of adoption, January 1, 2018, transferring unrealized gains and losses on available-for-sale equity securities to retained earnings from accumulated other comprehensive income. The impact of this adjustment, net of income tax, resulted in a $10.6 million increase to retained earnings and a corresponding decrease to accumulated other comprehensive income, resulting in no net impact to consolidated shareowner’s equity. The Company has updated its disclosures in Note 5, Investment Operations and Note 6, Fair Value of Financial Instruments in accordance with the ASU.

ASU No. 2016-15 - Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The amendments in this Update are intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. Specific transactions addressed in the new guidance include: Debt prepayment/extinguishment costs, contingent consideration payments, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investments. The Update does not introduce any new accounting or financial reporting requirements, and is effective for annual and interim periods beginning after December 15, 2017 using the retrospective method. There was no financial impact.


10


ASU No. 2016-18 - Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the FASB Emerging Task Force). The amendments in this update provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows, thereby reducing diversity in practice related to the presentation of these amounts. The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The Update is effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. There was no impact to the Company on adoption.

ASU No. 2017-01 - Business Combinations (Topic 805): Clarifying the Definition of a Business. The purpose of this update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in the Update provide a specific test by which an entity may determine whether an acquisition involves a set of assets or a business. The amendments in the Update are to be applied prospectively for periods beginning after December 15, 2017. The Company has reviewed the revised requirements, and does not anticipate that the changes will impact its policies or recent conclusions related to its acquisition activities.

ASU No. 2017-07 - Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. The amendments in this update require entities to disaggregate the current-service-cost component from other components of net benefit cost and present it with other current compensation costs in the income statement. The other components of net benefit cost must be presented outside of income from operations if that subtotal is presented. In addition, the Update requires entities to disclose the income statement lines that contain the other components if they are not presented on appropriately described separate lines. The amendments in this update are effective for interim and annual periods beginning after December 15, 2017. As provided for in the ASU, the Company expects to apply the provisions of the statement retrospectively for components of net periodic pension costs and prospectively for capitalization of the service costs component of net periodic costs and net periodic postretirement benefits. The Update did not impact the Company’s financial position, results of operations, or current disclosures.
Accounting Pronouncements Not Yet Adopted
    
ASU No. 2016-02 - Leases. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of leases. The most significant change will relate to the accounting model used by lessees. The Update will require all leases with terms greater than 12 months to be recorded on the balance sheet in the form of a lease asset and liability. The lease asset and liability will be measured at the present value of the minimum lease payments less any upfront payments or fees. The amendments in the Update are effective for annual and interim periods beginning after December 15, 2018 on a modified retrospective basis. The Company has completed an inventory of all leases in the organization. Based on our lease portfolio as of September 30, 2018, the Company expects to record a right of use asset and lease liability of approximately $21 million on its consolidated condensed balance sheet in the period of adoption. However, the ultimate impact of adopting the ASU will depend on the Company’s lease portfolio as of the adoption date.

ASU No. 2016-13 - Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The amendments in this Update introduce a new current expected credit loss (“CECL”) model for certain financial assets, including mortgage loans and reinsurance receivables. The new model will not apply to debt securities classified as available-for-sale. For assets within the scope of the new model, an entity will recognize as an allowance against earnings its estimate of the contractual cash flows not expected to be collected on day one of the asset’s acquisition. The allowance may be reversed through earnings if a security recovers in value. This differs from the current impairment model, which requires recognition of credit losses when they have been incurred and recognizes a security’s subsequent recovery in value in other comprehensive income. The Update also makes targeted changes to the current impairment model for available-for-sale debt securities, which comprise the majority of the Company’s invested assets. Similar to the CECL model, credit loss impairments will be recorded in an allowance against earnings that may be reversed for subsequent recoveries in value. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2019 on a modified retrospective basis. The Company is reviewing its policies and processes to ensure compliance with the requirements in this Update, upon adoption, and assessing the impact this standard will have on its operations and financial results.

ASU No. 2017-08 - Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities. The amendments in this Update require that premiums on callable debt securities be amortized to the first call date. This is a change from current guidance, under which premiums are amortized to the maturity date of the security. The amendments are effective for annual and interim periods beginning after December 15, 2018, and early adoption is permitted. Transition will be through a modified retrospective approach in which the cumulative effect of application is recorded to retained earnings at the beginning of the annual period in which an entity adopts the revised guidance. Based on our population of callable debt securities held as of September 30, 2018, the Company estimates it would record a reduction to retained earnings of approximately $56.1 million as a result of adopting the ASU. However, the adoption impact will ultimately depend on the population of callable debt securities held as of the adoption date.

ASU No. 2017-12 - Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. The amendments in this Update are designed to permit hedge accounting to be applied to a broader range of hedging strategies as well as to more closely align hedge accounting and risk management objectives. Specific provisions include requiring changes in the fair value of a hedging instrument be recorded in the same income statement line as the hedged item when it affects earnings. In addition, after a hedge has initially qualified as an effective hedge the Update permits the use of a qualitative hedge effectiveness test in subsequent periods. The amendments in this Update are effective for annual and interim periods beginning

11


after December 15, 2018 and early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on its operations or 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, judgments, 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
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 our 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 “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 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. Other than cash received as part of the acquired Liberty investment portfolio as reflected in “amounts received from reinsurance transaction” in the Consolidated Condensed Statements of Cash Flows and as reflected in the table below, this was a non-cash transaction.

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 $13.3 billion, which amount was based on initial estimates and is subject to adjustment following the Closing. Pursuant to the terms of the 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 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 Reinsurance Agreements resulted in an acquisition of the Life Business by the Company in accordance with Accounting Standards Codification (“ASC”) Topic 805, Business Combinations.


12


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
 
20,669

Accrued investment income
 
151,610

Reinsurance receivables
 
337

Value of business acquired
 
336,437

Other assets
 
2,542

Total assets
 
13,667,001

LIABILITIES
 
 
Future policy benefits and claims
 
$
11,744,496

Unearned premiums
 

Total policy liabilities and accruals
 
11,744,496

Annuity account balances
 
1,823,444

Other policyholders’ funds
 
41,954

Other liabilities
 
57,107

Total liabilities
 
13,667,001

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
 
Unaudited
 
For The
Three Months Ended
September 30,
 
For The
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars In Thousands)
Revenue
$
1,269,963

 
$
1,418,743

 
$
3,826,857

 
$
4,170,636

 
 
 
 
 
 
 
 
Net income
$
78,524

 
$
152,971

 
$
195,211

 
$
369,826

The amount of revenue and income before income tax of the Life Business since the transaction date, May 1, 2018, included in the consolidated condensed statements of income for the three and nine months ended September 30, 2018 amounted to $218.1 million and $360.9 million and $26.1 million and $33.7 million, respectively. Also, included in the income before income tax for the nine months ended September 30, 2018, is approximately $5.5 million of non-recurring transaction costs.

13


Based on the balance recorded as of May 1, 2018, the expected amortization of VOBA for the next five years is as follows:
Years
 
Expected
Amortization
 
 
(Dollars In Thousands)
Remainder of 2018
 
$
5,265

2019
 
21,063

2020
 
19,950

2021
 
18,329

2022
 
16,611


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 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.
    

14


Summarized financial information for the Closed Block as of September 30, 2018 and December 31, 2017 is as follows:
 
As of
 
September 30, 2018
 
December 31, 2017
 
(Dollars In Thousands)
Closed block liabilities
 

 
 

Future policy benefits, policyholders’ account balances and other policyholder liabilities
$
5,699,118

 
$
5,791,867

Policyholder dividend obligation

 
160,712

Other liabilities
42,640

 
30,764

Total closed block liabilities
5,741,758

 
5,983,343

Closed block assets
 

 
 

Fixed maturities, available-for-sale, at fair value
$
4,339,342

 
$
4,669,856

Mortgage loans on real estate
76,608

 
108,934

Policy loans
679,760

 
700,769

Cash
72,868

 
31,182

Other assets
144,077

 
122,637

Total closed block assets
5,312,655

 
5,633,378

Excess of reported closed block liabilities over closed block assets
429,103

 
349,965

Portion of above representing accumulated other comprehensive income:
 

 
 

Net unrealized investment gains (losses) net of policyholder dividend obligation: $(149,219) and $(13,429); and net of income tax: $57,054 and $2,820
(96,749
)
 

Future earnings to be recognized from closed block assets and closed block liabilities
$
332,354

 
$
349,965

Reconciliation of the policyholder dividend obligation is as follows:
 
For The
Nine Months Ended
September 30,
 
2018
 
2017
 
(Dollars In Thousands)
Policyholder dividend obligation, beginning of period
$
160,712

 
$
31,932

Applicable to net revenue (losses)
(24,922
)
 
(38,147
)
Change in net unrealized investment gains (losses) allocated to the policyholder dividend obligation
(135,790
)
 
142,219

Policyholder dividend obligation, end of period
$

 
$
136,004


15


Closed Block revenues and expenses were as follows:
 
For The
Three Months Ended
September 30,
 
For The
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars In Thousands)
Revenues
 

 
 
 
 
 
 

Premiums and other income
$
39,691

 
$
40,962

 
$
121,768

 
$
128,697

Net investment income
50,833

 
50,780

 
152,248

 
153,481

Net investment gains
40

 
341

 
66

 
448

Total revenues
90,564

 
92,083

 
274,082

 
282,626

Benefits and other deductions
 

 
 
 
 
 
 

Benefits and settlement expenses
83,588

 
81,721

 
251,480

 
249,319

Other operating expenses
291

 
621

 
310

 
1,216

Total benefits and other deductions
83,879

 
82,342

 
251,790

 
250,535

Net revenues before income taxes
6,685

 
9,741

 
22,292

 
32,091

Income tax expense
1,404

 
3,409

 
4,681

 
11,232

Net revenues
$
5,281

 
$
6,332

 
$
17,611

 
$
20,859

5.    INVESTMENT OPERATIONS
Net realized gains (losses) for all other investments are summarized as follows:
 
For The
Three Months Ended
September 30,
 
For The
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars In Thousands)
Fixed maturities
$
(2,018
)
 
$
1,042

 
$
6,248

 
$
10,482

Equity gains and losses(1)
(6,925
)
 
(352
)
 
(16,693
)
 
(1,398
)
Impairments
(14
)
 
(273
)
 
(3,664
)
 
(8,259
)
Modco trading portfolio
(10,901
)
 
19,399

 
(148,427
)
 
93,181

Other investments
(312
)
 
(1,939
)
 
1,522

 
(7,739
)
Total realized gains (losses) - investments
$
(20,170
)
 
$
17,877

 
$
(161,014
)
 
$
86,267

 
 
 
 
 
 
 
 
(1) Beginning January 1, 2018, all changes in the fair market value of equity securities are recorded as a realized gains (loss) as a result of the adoption of ASU No. 2016-01.
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
September 30,
 
For The
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars In Thousands)
Gross realized gains
$
3,410

 
$
1,933

 
$
21,540

 
$
14,968

Gross realized losses:
 
 
 
 
 
 
 
Impairment losses
$
(14
)
 
$
(273
)
 
$
(3,664
)
 
$
(8,259
)
Other realized losses
$
(5,428
)
 
$
(1,243
)
 
$
(15,292
)
 
$
(5,884
)

16


The chart below summarizes the fair value (proceeds) and the gains (losses) realized on available-for-sale securities the Company sold that were in an unrealized gain position and an unrealized loss position.
 
For The
Three Months Ended
September 30,
 
For The
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars In Thousands)
Securities in an unrealized gain position:
 
 
 
 
 
 
 
Fair value (proceeds)
$
306,600

 
$
121,459

 
$
909,846

 
$
566,064

Gains realized
$
3,410

 
$
1,933

 
$
21,540

 
$
14,967

 
 
 
 
 
 
 
 
Securities in an unrealized loss position(1):
 
 
 
 
 
 
 
Fair value (proceeds)
$
122,317

 
$
37,186

 
$
380,493

 
$
121,450

Losses realized
$
(5,428
)
 
$
(1,243
)
 
$
(15,292
)
 
$
(5,884
)
 
 
 
 
 
 
 
 
(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
September 30, 2018
 
For The
Nine Months Ended
September 30, 2018
 
(Dollars In Thousands)
Net gains (losses) recognized during the period on equity securities
$
(6,925
)
 
$
(16,693
)
Less: net gains (losses) recognized on equity securities sold during the period
$
(1,476
)
 
$
(3,858
)
Gains (losses) recognized during the period on equity securities still held
$
(5,449
)
 
$
(12,835
)



17


The amortized cost and fair value of the Company’s investments classified as available-for-sale are as follows:
As of September 30, 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
 
$
3,506,384

 
$
5,808

 
$
(105,531
)
 
$
3,406,661

 
$

Commercial mortgage-backed securities
 
2,314,831

 
180

 
(80,633
)
 
2,234,378

 

Other asset-backed securities
 
1,456,768

 
13,749

 
(16,382
)
 
1,454,135

 

U.S. government-related securities
 
1,653,626

 
160

 
(72,807
)
 
1,580,979

 

Other government-related securities
 
546,356

 
2,925

 
(21,635
)
 
527,646

 

States, municipals, and political subdivisions
 
3,691,930

 
6,070

 
(139,927
)
 
3,558,073

 

Corporate securities
 
38,612,538

 
166,917

 
(1,919,248
)
 
36,860,207

 

Redeemable preferred stock
 
94,362

 

 
(7,223
)
 
87,139

 

 
 
51,876,795

 
195,809

 
(2,363,386
)
 
49,709,218

 

Short-term investments
 
310,721

 

 

 
310,721

 

 
 
$
52,187,516

 
$
195,809

 
$
(2,363,386
)
 
$
50,019,939

 
$

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI
(1)
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
 
$
2,321,811

 
$
19,412

 
$
(22,730
)
 
$
2,318,493

 
$
10

Commercial mortgage-backed securities
 
1,885,109

 
4,931

 
(29,552
)
 
1,860,488

 

Other asset-backed securities
 
1,234,376

 
20,936

 
(5,763
)
 
1,249,549

 

U.S. government-related securities
 
1,255,244

 
185

 
(32,177
)
 
1,223,252

 

Other government-related securities
 
280,780

 
9,401

 
(4,948
)
 
285,233

 

States, municipals, and political subdivisions
 
1,770,299

 
16,959

 
(45,613
)
 
1,741,645

 
(37
)
Corporate securities
 
29,446,365

 
618,582

 
(527,401
)
 
29,537,546

 
(1
)
Redeemable preferred stock
 
94,362

 
232

 
(3,503
)
 
91,091

 

 
 
38,288,346

 
690,638

 
(671,687
)
 
38,307,297

 
(28
)
Equity securities
 
696,706

 
22,319

 
(8,771
)
 
710,254

 

Short-term investments
 
470,883

 

 

 
470,883

 

 
 
$
39,455,935

 
$
712,957

 
$
(680,458
)
 
$
39,488,434

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

18


The fair values of the Company’s investments classified as trading are as follows:
 
 
As of
September 30, 2018
 
As of
December 31, 2017
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

Residential mortgage-backed securities
 
$
254,037

 
$
259,694

Commercial mortgage-backed securities
 
135,403

 
146,804

Other asset-backed securities
 
111,770

 
138,097

U.S. government-related securities
 
58,081

 
27,234

Other government-related securities
 
43,030

 
63,925

States, municipals, and political subdivisions
 
296,618

 
326,925

Corporate securities
 
1,569,652

 
1,698,183

Redeemable preferred stock
 
3,165

 
3,327

 
 
2,471,756

 
2,664,189

Equity securities
 
3,801

 
5,244

Short-term investments
 
55,865

 
56,261

 
 
$
2,531,422

 
$
2,725,694

The amortized cost and fair value of available-for-sale and held-to-maturity fixed maturities as of September 30, 2018, by expected maturity, are shown below. Expected maturities of securities without a single maturity date are allocated based on estimated rates of prepayment that may differ from actual rates of prepayment.
 
Available-for-sale
 
Held-to-maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
(Dollars In Thousands)
Due in one year or less
$
957,984

 
$
955,779

 
$

 
$

Due after one year through five years
9,252,383

 
9,079,479

 

 

Due after five years through ten years
9,099,912

 
8,847,681

 

 

Due after ten years
32,566,516

 
30,826,279

 
2,653,605

 
2,577,841

 
$
51,876,795

 
$
49,709,218

 
$
2,653,605

 
$
2,577,841

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
September 30, 2018
 
For The
Nine Months Ended
September 30, 2018
 
Fixed
Maturities
 
Fixed
Maturities
 
(Dollars In Thousands)
Other-than-temporary impairments
$
(14
)
 
$
(715
)
Non-credit impairment losses recorded in other comprehensive income

 
(2,949
)
Net impairment losses recognized in earnings
$
(14
)
 
$
(3,664
)
 
For The
Three Months Ended
September 30, 2017
 
For The
Nine Months Ended
September 30, 2017
 
Fixed
Maturities
 
Fixed
Maturities
 
(Dollars In Thousands)
Other-than-temporary impairments
$
(366
)
 
$
(494
)
Non-credit impairment losses recorded in other comprehensive income
93

 
(7,765
)
Net impairment losses recognized in earnings
$
(273
)
 
$
(8,259
)

19


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 and nine months ended September 30, 2018 and 2017.
The following chart is a rollforward of available-for-sale credit losses on fixed maturities held by the Company for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (loss):
 
For The
Three Months Ended
September 30,
 
For The
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars In Thousands)
Beginning balance
$
2

 
$
2,783

 
$
3,268

 
$
12,685

Additions for newly impaired securities

 
266

 

 
266

Additions for previously impaired securities

 
6

 
2

 
2,791

Reductions for previously impaired securities due to a change in expected cash flows

 
(37
)
 

 
(12,724
)
Reductions for previously impaired securities that were sold in the current period
(2
)
 
(600
)
 
(3,270
)
 
(600
)
Ending balance
$

 
$
2,418

 
$

 
$
2,418

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 September 30, 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
$
2,831,194

 
$
(80,839
)
 
$
399,676

 
$
(24,692
)
 
$
3,230,870

 
$
(105,531
)
Commercial mortgage-backed securities
1,433,287

 
(39,701
)
 
740,262

 
(40,932
)
 
2,173,549

 
(80,633
)
Other asset-backed securities
645,956

 
(9,131
)
 
125,847

 
(7,251
)
 
771,803

 
(16,382
)
U.S. government-related securities
551,939

 
(14,066
)
 
1,012,450

 
(58,741
)
 
1,564,389

 
(72,807
)
Other government-related securities
254,968

 
(7,405
)
 
111,089

 
(14,230
)
 
366,057

 
(21,635
)
States, municipalities, and political subdivisions
2,268,935

 
(51,019
)
 
998,399

 
(88,908
)
 
3,267,334

 
(139,927
)
Corporate securities
21,709,122

 
(782,983
)
 
9,756,347

 
(1,136,265
)
 
31,465,469

 
(1,919,248
)
Redeemable preferred stock
43,712

 
(1,902
)
 
43,427

 
(5,321
)
 
87,139

 
(7,223
)
 
$
29,739,113

 
$
(987,046
)
 
$
13,187,497

 
$
(1,376,340
)
 
$
42,926,610

 
$
(2,363,386
)
RMBS and CMBS had gross unrealized losses greater than twelve months of $24.7 million and $40.9 million, respectively, as of September 30, 2018. Factors such as the credit enhancement within the deal structure, the average life of the securities, and the performance of the underlying collateral support the recoverability of these investments.
The other asset-backed securities had a gross unrealized loss greater than twelve months of $7.3 million as of September 30, 2018. This category predominately includes student loan backed auction rate securities 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.
The U.S. government-related securities and the other government-related securities had gross unrealized losses greater than twelve months of $58.7 million and $14.2 million as of September 30, 2018, respectively. These declines were related to changes in interest rates.
The states, municipalities, and political subdivisions category had gross unrealized losses greater than twelve months of $88.9 million as of September 30, 2018. The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered include credit ratings, the financial health of the issuer, the continued access of the issuer to capital markets, and other pertinent information.
The corporate securities category had gross unrealized losses greater than twelve months of $1.1 billion as of September 30, 2018. The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the

20


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 September 30, 2018, the Company had a total of 4,367 positions that were in an unrealized loss position, but the Company does not consider these unrealized loss positions to be other-than-temporary. This is based on the aggregate factors discussed previously and because the Company has the ability and intent to hold these investments until the fair values recover, and the Company does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of the securities.
The following table includes the gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2017:
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
(Dollars In Thousands)
Residential mortgage-backed securities
$
765,641

 
$
(9,666
)
 
$
408,460

 
$
(13,064
)
 
$
1,174,101

 
$
(22,730
)
Commercial mortgage-backed securities
750,643

 
(8,521
)
 
779,086

 
(21,031
)
 
1,529,729

 
(29,552
)
Other asset-backed securities
86,506

 
(322
)
 
134,316

 
(5,441
)
 
220,822

 
(5,763
)
U.S. government-related securities
94,110

 
(688
)
 
1,072,232

 
(31,489
)
 
1,166,342

 
(32,177
)
Other government-related securities
24,830

 
(169
)
 
115,294

 
(4,779
)
 
140,124

 
(4,948
)
States, municipalities, and political subdivisions
170,268

 
(1,738
)
 
1,027,747

 
(43,875
)
 
1,198,015

 
(45,613
)
Corporate securities
5,026,417

 
(55,649
)
 
10,947,027

 
(471,752
)
 
15,973,444

 
(527,401
)
Redeemable preferred stock
22,048

 
(1,120
)
 
23,197

 
(2,383
)
 
45,245

 
(3,503
)
Equities
86,194

 
(1,400
)
 
91,195

 
(7,371
)
 
177,389

 
(8,771
)
 
$
7,026,657

 
$
(79,273
)
 
$
14,598,554

 
$
(601,185
)
 
$
21,625,211

 
$
(680,458
)
RMBS and CMBS had gross unrealized losses greater than twelve months of $13.1 million and $21.0 million, respectively, as of December 31, 2017. Factors such as the credit enhancement within the deal structure, the average life of the securities, and the performance of the underlying collateral support the recoverability of these investments.
The other asset-backed securities had a gross unrealized loss greater than twelve months of $5.4 million as of December 31, 2017. This category predominately includes student loan backed auction rate securities whose underlying collateral is at least 97% guaranteed by the FFELP. At this time, the Company has no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary.
The U.S. government-related securities and other government-related securities had gross unrealized losses greater than twelve months of $31.5 million and $4.8 million as of December 31, 2017, respectively. These declines were related to changes in interest rates.
The states, municipalities, and political subdivisions category had gross unrealized losses greater than twelve months of $43.9 million as of December 31, 2017. These declines were related to changes in interest rates.
The corporate securities category had gross unrealized losses greater than twelve months of $471.8 million as of December 31, 2017. The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered include credit ratings, the financial health of the issuer, the continued access of the issuer to capital markets, and other pertinent information.
As of September 30, 2018, the Company had securities in its available-for-sale portfolio which were rated below investment grade of $1.7 billion and had an amortized cost of $1.7 billion. In addition, included in the Company’s trading portfolio, the Company held $175.6 million of securities which were rated below investment grade. Approximately $263.1 million of the available-for-sale and trading securities that were below investment grade were not publicly traded.

21


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
September 30,
 
For The
Nine Months Ended
September 30,
 
2018
 
2017
 
2018
 
2017
 
(Dollars In Thousands)
Fixed maturities
$
(229,609
)
 
$
167,488

 
$
(1,727,358
)
 
$
865,743

The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of September 30, 2018 and December 31, 2017, are as follows:
As of September 30, 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
 
$
736,605

 
$

 
$
(77,492
)
 
$
659,113

 
$

Steel City, LLC
 
1,917,000

 
1,728

 

 
1,918,728

 

 
 
$
2,653,605

 
$
1,728

 
$
(77,492
)
 
$
2,577,841

 
$

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2017
 
Amortized
Cost
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Securities issued by affiliates:
 
 
 
 
 
 
 
 
 
 
Red Mountain, LLC
 
$
704,904

 
$

 
$
(19,163
)
 
$
685,741

 
$

Steel City, LLC
 
2,014,000

 
76,586

 

 
2,090,586

 

 
 
$
2,718,904

 
$
76,586

 
$
(19,163
)
 
$
2,776,327

 
$

During the three and nine months ended September 30, 2018 and 2017, the Company recorded no other-than-temporary impairments on held-to-maturity securities.
The Company’s held-to-maturity securities had $1.7 million of gross unrecognized holding gains and $77.5 million of gross unrecognized holding losses by maturity as of September 30, 2018. The Company does not consider these unrecognized holding losses to be other-than-temporary based on certain positive factors associated with the securities which include credit ratings of the guarantor, financial health of the issuer and guarantor, continued access of the issuer to capital markets and other pertinent information. These held-to-maturity securities are issued by affiliates of the Company which are considered variable interest entities (“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 $76.6 million of gross unrecognized holding gains and $19.2 million of gross unrecognized holding losses by maturity as of December 31, 2017. The Company does not consider these unrecognized holding losses to be other-than-temporary based on certain positive factors associated with the securities which include credit ratings of the guarantor, financial health of the issuer and guarantor, continued access of the issuer to capital markets and other pertinent information.
Variable Interest Entity
The Company holds certain investments in entities in which its ownership interests could possibly be considered variable interests under Topic 810 of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC” or “Codification”) (excluding debt and equity securities held as trading, available for sale, or held to maturity). The Company reviews the characteristics of each of these applicable entities and compares those characteristics to applicable criteria to determine whether the entity is a VIE. If the entity is determined to be a VIE, the Company then performs a detailed review to determine whether the interest would be considered a variable interest under the guidance. The Company then performs a qualitative review of all variable interests with the entity and determines whether the Company is the primary beneficiary. ASC 810 provides that an entity is the primary beneficiary of a VIE if the entity has 1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and 2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.

22


Based on this analysis, the Company had an interest in one wholly owned subsidiary, Red Mountain, LLC (“Red Mountain”) as of September 30, 2018 and December 31, 2017, 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 September 30, 2018, no payments have been made or required related to this guarantee.
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.

23


The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of September 30, 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
 
$

 
$
3,406,661

 
$

 
$
3,406,661

Commercial mortgage-backed securities
4
 

 
2,214,911

 
19,467

 
2,234,378

Other asset-backed securities
4
 

 
951,874

 
502,261

 
1,454,135

U.S. government-related securities
4
 
946,679

 
634,300

 

 
1,580,979

State, municipalities, and political subdivisions
4
 

 
3,558,073

 

 
3,558,073

Other government-related securities
4
 

 
527,646

 

 
527,646

Corporate securities
4
 

 
36,231,923

 
628,284

 
36,860,207

Redeemable preferred stock
4
 
69,550

 
17,589

 

 
87,139

Total fixed maturity securities - available-for-sale