Company Quick10K Filing
Quick10K
Reinsurance Group of America
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$144.45 63 $9,070
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 2019-01-28 Earnings, Officers, Regulation FD, Exhibits
8-K 2019-01-28 Earnings, Officers, Regulation FD, Exhibits
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-08-21 Enter Agreement, Leave Agreement, Off-BS Arrangement, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-06-07 Regulation FD, Exhibits
8-K 2018-05-23 Amend Bylaw, Shareholder Vote, Exhibits
8-K 2018-05-17 Regulation FD, Exhibits
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-04-20 Officers, Amend Bylaw, Regulation FD, Exhibits
8-K 2018-02-28 Regulation FD, Exhibits
8-K 2018-01-29 Earnings, Exhibits
8-K 2018-01-12 Officers
LFC China Life Insurance
MET Metlife
PRU Prudential Financial
LNC Lincoln National
ANAT American National Insurance
AEL American Equity Investment Life Holding
NWLI National Western Life Group
IHC Independence Holding
AAME Atlantic American
NSEC National Security Group
RGA 2018-09-30
Part I - Financial Information
Item 1. Financial Statements
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 - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 6. Exhibits
EX-31.1 ex3112018q310-q.htm
EX-31.2 ex3122018q310-q.htm
EX-32.1 ex3212018q310-q.htm
EX-32.2 ex3222018q310-q.htm

Reinsurance Group of America Earnings 2018-09-30

RGA 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 a2018q310-q.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
 
 
 
 
 
(Mark One)
  
 
  
 
 x
  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
  
 
  
OF THE SECURITIES EXCHANGE ACT OF 1934
  
 
 
  
For the quarterly period ended September 30, 2018
  
 
 
  
 OR
  
 
 ¨
  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
  
 
  
OF THE SECURITIES EXCHANGE ACT OF 1934
  
 
 
  
 
Commission File Number 1-11848
  
 
REINSURANCE GROUP OF AMERICA, INCORPORATED
(Exact name of Registrant as specified in its charter)
MISSOURI                        
  
43-1627032
(State or other jurisdiction                  
  
(IRS employer
of incorporation or organization)  
  
identification number)
16600 Swingley Ridge Road
Chesterfield, Missouri 63017
(Address of principal executive offices)
(636) 736-7000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x  No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x  No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer x     Accelerated filer o     Non-accelerated filer o     
Smaller reporting company o     Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o  No x

As of October 31, 2018, 62,774,675 shares of the registrant’s common stock were outstanding.



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

2


PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
September 30,
2018
 
December 31,
2017
 
 
(Dollars in thousands, except share data)
 
Assets
 
 
 
 
Fixed maturity securities available-for-sale, at fair value (amortized cost $37,751,132 and $35,281,412)
 
$
39,005,212

 
$
38,150,820

Equity securities, at fair value (cost $111,248 and $102,841)
 
101,069

 
100,152

Mortgage loans on real estate (net of allowances of $10,366 and $9,384)
 
4,779,074

 
4,400,533

Policy loans
 
1,320,050

 
1,357,624

Funds withheld at interest
 
5,976,301

 
6,083,388

Short-term investments
 
229,928

 
93,304

Other invested assets
 
1,706,979

 
1,505,332

Total investments
 
53,118,613

 
51,691,153

Cash and cash equivalents
 
1,730,489

 
1,303,524

Accrued investment income
 
455,296

 
392,721

Premiums receivable and other reinsurance balances
 
2,779,556

 
2,338,481

Reinsurance ceded receivables
 
769,324

 
782,027

Deferred policy acquisition costs
 
3,211,145

 
3,239,824

Other assets
 
908,219

 
767,088

Total assets
 
$
62,972,642

 
$
60,514,818

Liabilities and Stockholders’ Equity
 
 
 
 
Future policy benefits
 
$
25,139,148

 
$
22,363,241

Interest-sensitive contract liabilities
 
16,751,379

 
16,227,642

Other policy claims and benefits
 
5,424,347

 
4,992,074

Other reinsurance balances
 
482,235

 
488,739

Deferred income taxes
 
1,883,848

 
2,198,309

Other liabilities
 
1,213,595

 
1,102,975

Long-term debt
 
2,787,975

 
2,788,365

Collateral finance and securitization notes
 
710,792

 
783,938

Total liabilities
 
54,393,319

 
50,945,283

Commitments and contingent liabilities (See Note 8)
 


 


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

 

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

 
791

Additional paid-in capital
 
1,899,144

 
1,870,906

Retained earnings
 
7,215,526

 
6,736,265

Treasury stock, at cost - 16,186,890 and 14,685,663 shares
 
(1,348,943
)
 
(1,102,058
)
Accumulated other comprehensive income
 
812,805

 
2,063,631

Total stockholders’ equity
 
8,579,323

 
9,569,535

Total liabilities and stockholders’ equity
 
$
62,972,642

 
$
60,514,818

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

3


REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Revenues:
 
(Dollars in thousands, except per share data)
Net premiums
 
$
2,562,042

 
$
2,489,797

 
$
7,739,053

 
$
7,335,944

Investment income, net of related expenses
 
572,742

 
556,918

 
1,617,132

 
1,589,820

Investment related gains (losses), net:
 
 
 
 
 
 
 
 
Other-than-temporary impairments on fixed maturity securities
 
(10,705
)
 
(390
)
 
(14,055
)
 
(20,980
)
Other investment related gains (losses), net
 
(9,312
)
 
23,043

 
(17,004
)
 
160,451

Total investment related gains (losses), net
 
(20,017
)
 
22,653

 
(31,059
)
 
139,471

Other revenues
 
112,764

 
75,942

 
272,020

 
218,091

Total revenues
 
3,227,531

 
3,145,310

 
9,597,146

 
9,283,326

Benefits and Expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
2,209,920

 
2,100,680

 
6,851,614

 
6,371,188

Interest credited
 
143,292

 
126,099

 
333,068

 
349,068

Policy acquisition costs and other insurance expenses
 
310,639

 
365,424

 
987,817

 
1,064,645

Other operating expenses
 
200,262

 
168,417

 
586,495

 
481,279

Interest expense
 
33,290

 
36,836

 
107,769

 
108,590

Collateral finance and securitization expense
 
7,467

 
7,692

 
22,509

 
21,235

Total benefits and expenses
 
2,904,870

 
2,805,148

 
8,889,272

 
8,396,005

 Income before income taxes
 
322,661

 
340,162

 
707,874

 
887,321

Provision for income taxes
 
21,462

 
112,571

 
102,071

 
282,028

Net income
 
$
301,199

 
$
227,591

 
$
605,803

 
$
605,293

Earnings per share:
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
4.76

 
$
3.53

 
$
9.47

 
$
9.39

Diluted earnings per share
 
$
4.68

 
$
3.47

 
$
9.30

 
$
9.23

Dividends declared per share
 
$
0.60

 
$
0.50

 
$
1.60

 
$
1.32

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

4


REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Comprehensive income (loss)
 
(Dollars in thousands)
Net income
 
$
301,199

 
$
227,591

 
$
605,803

 
$
605,293

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
25,462

 
46,733

 
(30,375
)
 
68,085

Net unrealized investment gains (losses)
 
(215,986
)
 
(93,574
)
 
(1,218,309
)
 
415,870

Defined benefit pension and postretirement plan adjustments
 
931

 
700

 
431

 
2,473

Total other comprehensive income (loss), net of tax
 
(189,593
)
 
(46,141
)
 
(1,248,253
)
 
486,428

Total comprehensive income (loss)
 
$
111,606

 
$
181,450

 
$
(642,450
)
 
$
1,091,721

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

5


REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Nine months ended September 30,
 
 
2018
 
2017
 
 
 (Dollars in thousands)
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
605,803

 
$
605,293

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Change in operating assets and liabilities:
 
 
 
 
Accrued investment income
 
23,473

 
(63,321
)
Premiums receivable and other reinsurance balances
 
(519,107
)
 
(421,027
)
Deferred policy acquisition costs
 
23,682

 
67,471

Reinsurance ceded receivable balances
 
37,468

 
(120,013
)
Future policy benefits, other policy claims and benefits, and other reinsurance balances
 
920,492

 
982,164

Deferred income taxes
 
(8,136
)
 
236,185

Other assets and other liabilities, net
 
(47,978
)
 
78,848

Amortization of net investment premiums, discounts and other
 
(55,154
)
 
(95,227
)
Depreciation and amortization expense
 
32,153

 
21,384

Investment related (gains) losses, net
 
31,059

 
(139,471
)
Other, net
 
56,408

 
(47,787
)
Net cash provided by operating activities
 
1,100,163

 
1,104,499

Cash Flows from Investing Activities:
 
 
 
 
Sales of fixed maturity securities available-for-sale
 
6,314,968

 
6,364,236

Maturities of fixed maturity securities available-for-sale
 
461,764

 
385,993

Sales of equity securities
 
44,952

 
192,821

Principal payments and sales of mortgage loans on real estate
 
290,450

 
208,052

Principal payments on policy loans
 
43,995

 
93,286

Purchases of fixed maturity securities available-for-sale
 
(6,041,665
)
 
(7,450,749
)
Purchases of equity securities
 
(12,578
)
 
(60,790
)
Cash invested in mortgage loans on real estate
 
(671,956
)
 
(751,702
)
Cash invested in policy loans
 
(6,422
)
 
(5,830
)
Cash invested in funds withheld at interest
 
(61,969
)
 
(12,597
)
Purchase of businesses, net of cash acquired of $4,988
 
(31,441
)
 

Purchases of property and equipment
 
(20,478
)
 
(33,242
)
Change in short-term investments
 
34,856

 
65,664

Change in other invested assets
 
(313,464
)
 
(51,476
)
Net cash provided by (used in) investing activities
 
31,012

 
(1,056,334
)
Cash Flows from Financing Activities:
 
 
 
 
Dividends to stockholders
 
(102,441
)
 
(85,086
)
Repayment of collateral finance and securitization notes
 
(75,146
)
 
(56,637
)
Principal payments of long-term debt
 
(2,007
)
 
(301,927
)
Purchases of treasury stock
 
(273,873
)
 
(41,360
)
Exercise of stock options, net
 
2,336

 
4,450

Change in cash collateral for derivative positions and other arrangements
 
(21,288
)
 
(46,206
)
Deposits on universal life and other investment type policies and contracts
 
320,871

 
1,007,563

Withdrawals on universal life and other investment type policies and contracts
 
(520,649
)
 
(568,789
)
Net cash used in financing activities
 
(672,197
)
 
(87,992
)
Effect of exchange rate changes on cash
 
(32,013
)
 
43,699

Change in cash and cash equivalents
 
426,965

 
3,872

Cash and cash equivalents, beginning of period
 
1,303,524

 
1,200,718

Cash and cash equivalents, end of period
 
$
1,730,489

 
$
1,204,590

Supplemental disclosures of cash flow information:
 
 
 
 
Interest paid
 
$
124,575

 
$
129,136

Income taxes paid, net of refunds
 
$
99,554

 
$
27,385

Non-cash transactions:
 
 
 
 
Transfer of invested assets
 
$
3,763,195

 
$
2,247,136

Purchase of businesses:
 
 
 
 
Assets acquired, excluding cash acquired
 
$
69,853

 
$

Liabilities assumed
 
(38,412
)
 

Net cash paid on purchase
 
$
31,441

 
$

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

6


REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
 
1.
Business and Basis of Presentation
Reinsurance Group of America, Incorporated (“RGA”) is an insurance holding company that was formed on December 31, 1992. The accompanying unaudited condensed consolidated financial statements of RGA and its subsidiaries (collectively, the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, these condensed consolidated financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments, including normal recurring adjustments necessary for a fair presentation have been included. Results for the nine months ended September 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. These unaudited condensed consolidated financial statements include the accounts of RGA and its subsidiaries, and all intercompany accounts and transactions have been eliminated. These condensed consolidated statements should be read in conjunction with the Company’s 2017 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 27, 2018 (the “2017 Annual Report”).
2.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share on net income (in thousands, except per share information):
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Earnings:
 
 
 
 
 
 
 
 
Net income (numerator for basic and diluted calculations)
 
$
301,199

 
$
227,591

 
$
605,803

 
$
605,293

Shares:
 
 
 
 
 
 
 
 
Weighted average outstanding shares (denominator for basic calculation)
 
63,279

 
64,488

 
63,941

 
64,430

Equivalent shares from outstanding stock options
 
1,017

 
1,165

 
1,189

 
1,174

Denominator for diluted calculation
 
64,296

 
65,653

 
65,130

 
65,604

Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
4.76

 
$
3.53

 
$
9.47

 
$
9.39

Diluted
 
$
4.68

 
$
3.47

 
$
9.30

 
$
9.23

The calculation of common equivalent shares does not include the impact of options having a strike or conversion price that exceeds the average stock price for the earnings period, as the result would be antidilutive. The calculation of common equivalent shares also excludes the impact of outstanding performance contingent shares, as the conditions necessary for their issuance have not been satisfied as of the end of the reporting period. The following table presents approximate amounts of stock options and performance contingent shares excluded from the calculation of common equivalent shares (in thousands):
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Excluded from common equivalent shares:
 
 
 
 
 
 
 
 
Stock options
 
227

 
87

 
349

 
296

Performance contingent shares
 
276

 
307

 
256

 
293



7


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

 
14,685,663

 
64,452,095

Common stock acquired
 

 
1,750,295

 
(1,750,295
)
Stock-based compensation (1)
 

 
(249,068
)
 
249,068

Balance, September 30, 2018
 
79,137,758

 
16,186,890

 
62,950,868

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

 
14,835,256

 
64,302,502

Common stock acquired
 

 
208,680

 
(208,680
)
Stock-based compensation (1)
 

 
(274,449
)
 
274,449

Balance, September 30, 2017
 
79,137,758

 
14,769,487

 
64,368,271

(1)
Represents net shares issued from treasury pursuant to the Company’s equity-based compensation programs.
Common Stock Held in Treasury
Common stock held in treasury is accounted for at average cost. Gains resulting from the reissuance of common stock held in treasury are credited to additional paid-in capital. Losses resulting from the reissuance of common stock held in treasury are charged first to additional paid-in capital to the extent the Company has previously recorded gains on treasury share transactions, then to retained earnings.
In January 2017, RGA’s board of directors authorized a share repurchase program for up to $400.0 million of RGA’s outstanding common stock. The authorization was effective immediately and does not have an expiration date. During the first nine months of 2018, RGA repurchased 1.8 million shares of common stock under this program for $258.5 million. During the first nine months of 2017, RGA repurchased 0.2 million shares of common stock under this program for $26.9 million.
Accumulated Other Comprehensive Income (Loss)
The balance of and changes in each component of accumulated other comprehensive income (loss) (“AOCI”) for the nine months ended September 30, 2018 and 2017 are as follows (dollars in thousands):
 
 
Accumulated
Currency
Translation
Adjustments
 
Unrealized
Appreciation
(Depreciation)
of Investments(1)
 
Pension and
Postretirement
Benefits
 
Total
Balance, December 31, 2017
 
$
(86,350
)
 
$
2,200,661

 
$
(50,680
)
 
$
2,063,631

Other comprehensive income (loss) before reclassifications
 
(24,977
)
 
(1,638,146
)
 
(3,391
)
 
(1,666,514
)
Amounts reclassified to (from) AOCI
 

 
79,505

 
3,986

 
83,491

Deferred income tax benefit (expense)
 
(5,398
)
 
340,332

 
(164
)
 
334,770

Adoption of new accounting standard
 
(2,573
)
 

 

 
(2,573
)
Balance, September 30, 2018
 
$
(119,298
)
 
$
982,352

 
$
(50,249
)
 
$
812,805

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

 
$
(43,163
)
 
$
1,139,329

Other comprehensive income (loss) before reclassifications
 
23,117

 
671,564

 
(191
)
 
694,490

Amounts reclassified to (from) AOCI
 

 
(51,407
)
 
4,006

 
(47,401
)
Deferred income tax benefit (expense)
 
44,968

 
(204,287
)
 
(1,342
)
 
(160,661
)
Balance, September 30, 2017
 
$
(104,456
)
 
$
1,770,903

 
$
(40,690
)
 
$
1,625,757

(1)
Includes cash flow hedges of $29,043 and $2,619 as of September 30, 2018 and December 31, 2017, respectively, and $347 and $(2,496) as of September 30, 2017 and December 31, 2016, respectively. See Note 5 - “Derivative Instruments” for additional information on cash flow hedges.

8


The following table presents the amounts of AOCI reclassifications for the three and nine months ended September 30, 2018 and 2017 (dollars in thousands):
 
 
Amount Reclassified from AOCI
 
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
Details about AOCI Components
 
2018
 
2017
 
2018
 
2017
 
Affected Line Item in 
Statements of Income
Net unrealized investment gains (losses):
 
 
 
 
 
 
 
 
 
 
Net unrealized gains (losses) on available-for-sale securities
 
$
(21,249
)
 
$
10,515

 
$
(60,347
)
 
$
39,032

 
Investment related gains (losses), net
Cash flow hedges - Interest rate
 
234

 

 
(108
)
 

 
(1)
Cash flow hedges - Currency/Interest rate
 
50

 
230

 
270

 
560

 
(1)
Cash flow hedges - Forward bond purchase commitments
 

 
224

 

 
286

 
(1)
Deferred policy acquisition costs attributed to unrealized gains and losses
 
(4,893
)
 
1,116

 
(19,320
)
 
11,529

 
(2)
Total
 
(25,858
)
 
12,085

 
(79,505
)
 
51,407

 
 
Provision for income taxes
 
5,355

 
(3,991
)
 
16,978

 
(16,015
)
 
 
Net unrealized gains (losses), net of tax
 
$
(20,503
)
 
$
8,094

 
$
(62,527
)
 
$
35,392

 
 
Amortization of defined benefit plan items:
 
 
 
 
 
 
 
 
 
 
Prior service cost (credit)
 
$
246

 
$
590

 
$
739

 
$
732

 
(3)
Actuarial gains/(losses)
 
(1,866
)
 
(1,661
)
 
(4,725
)
 
(4,738
)
 
(3)
Total
 
(1,620
)
 
(1,071
)
 
(3,986
)
 
(4,006
)
 
 
Provision for income taxes
 
340

 
375

 
837

 
1,402

 
 
Amortization of defined benefit plans, net of tax
 
$
(1,280
)
 
$
(696
)
 
$
(3,149
)
 
$
(2,604
)
 
 
 
 
 
 
 
 
 
 
 
 
 
Total reclassifications for the period
 
$
(21,783
)
 
$
7,398

 
$
(65,676
)
 
$
32,788

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

Equity Based Compensation
Equity compensation expense was $28.4 million and $17.1 million in the first nine months of 2018 and 2017, respectively. In the first quarter of 2018, the Company granted 0.2 million stock appreciation rights at $150.87 weighted average exercise price per share and 0.1 million performance contingent units to employees. Additionally, non-employee directors were granted a total of 7,623 shares of common stock. As of September 30, 2018, 1.5 million share options at a weighted average strike price per share of $66.48 were vested and exercisable, with a remaining weighted average exercise period of 4.3 years. As of September 30, 2018, the total compensation cost of non-vested awards not yet recognized in the condensed consolidated financial statements was $35.1 million. It is estimated that these costs will vest over a weighted average period of 1.3 years.

9


4.
Investments
Fixed Maturity and Equity Securities Available-for-Sale
The Company holds various types of fixed maturity securities available-for-sale and classifies them as corporate securities (“Corporate”), Canadian and Canadian provincial government securities (“Canadian government”), residential mortgage-backed securities (“RMBS”), asset-backed securities (“ABS”), commercial mortgage-backed securities (“CMBS”), U.S. government and agencies (“U.S. government”), state and political subdivisions, and other foreign government, supranational and foreign government-sponsored enterprises (“Other foreign government”).
The following table provides information relating to investments in fixed maturity securities by sector as of September 30, 2018 (dollars in thousands):
September 30, 2018:
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Estimated Fair Value
 
% of Total
 
Other-than-
temporary impairments in AOCI
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
24,271,467

 
$
594,444

 
$
416,413

 
$
24,449,498

 
62.7
%
 
$

Canadian government
 
2,902,433

 
1,138,426

 
4,109

 
4,036,750

 
10.3

 

RMBS
 
1,816,949

 
14,235

 
50,422

 
1,780,762

 
4.6

 

ABS
 
1,867,650

 
10,312

 
14,945

 
1,863,017

 
4.8

 
275

CMBS
 
1,282,015

 
8,403

 
16,884

 
1,273,534

 
3.3

 

U.S. government
 
1,500,703

 
6,359

 
94,653

 
1,412,409

 
3.6

 

State and political subdivisions
 
889,218

 
36,410

 
13,637

 
911,991

 
2.3

 

Other foreign government
 
3,220,697

 
98,574

 
42,020

 
3,277,251

 
8.4

 

Total fixed maturity securities
 
$
37,751,132

 
$
1,907,163

 
$
653,083

 
$
39,005,212

 
100.0
%
 
$
275

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

 
$
1,299,594

 
$
55,429

 
$
23,210,968

 
60.9
%
 
$

Canadian government
 
2,843,273

 
1,378,510

 
1,707

 
4,220,076

 
11.1

 

RMBS
 
1,695,126

 
36,632

 
11,878

 
1,719,880

 
4.5

 

ABS
 
1,634,758

 
18,798

 
5,194

 
1,648,362

 
4.3

 
275

CMBS
 
1,285,594

 
22,627

 
4,834

 
1,303,387

 
3.4

 

U.S. government
 
1,953,436

 
12,089

 
21,933

 
1,943,592

 
5.1

 

State and political subdivisions
 
647,727

 
59,997

 
4,296

 
703,428

 
1.8

 

Other foreign government
 
3,254,695

 
154,507

 
8,075

 
3,401,127

 
8.9

 

Total fixed maturity securities
 
$
35,281,412

 
$
2,982,754

 
$
113,346

 
$
38,150,820

 
100.0
%
 
$
275

Non-redeemable preferred stock
 
$
41,553

 
$
479

 
$
2,226

 
$
39,806

 
39.7
%
 
 
Other equity securities
 
61,288

 
479

 
1,421

 
60,346

 
60.3

 
 
Total equity securities
 
$
102,841

 
$
958

 
$
3,647

 
$
100,152

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

10


 
September 30, 2018
 
December 31, 2017
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Fixed maturity securities pledged as collateral
$
67,899

 
$
69,792

 
$
72,542

 
$
75,622

Fixed maturity securities received as collateral
n/a

 
592,146

 
n/a

 
590,417

Assets in trust held to satisfy collateral requirements
19,263,724

 
19,670,559

 
15,584,296

 
16,715,281

The Company monitors its concentrations of financial instruments on an ongoing basis and mitigates credit risk by maintaining a diversified investment portfolio which limits exposure to any one issuer. The Company’s exposure to concentrations of credit risk from single issuers greater than 10% of the Company’s stockholders’ equity included securities of the U.S. government and its agencies as well as the securities disclosed below as of September 30, 2018 and December 31, 2017 (dollars in thousands).
 
September 30, 2018
 
December 31, 2017
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Fixed maturity securities guaranteed or issued by:
 
 
 
 
 
 
 
Canadian province of Quebec
$
1,158,326

 
$
1,833,972

 
$
1,119,337

 
$
1,917,996

Canadian province of Ontario
951,186

 
1,225,712

 
939,837

 
1,282,944

The amortized cost and estimated fair value of fixed maturity securities classified as available-for-sale at September 30, 2018 are shown by contractual maturity in the table below (dollars in thousands). Actual maturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset and mortgage-backed securities are shown separately in the table below, as they are not due at a single maturity date.
 
 
Amortized Cost
 
Estimated Fair Value
Available-for-sale:
 
 
 
 
Due in one year or less
 
$
986,289

 
$
993,352

Due after one year through five years
 
7,797,732

 
7,888,116

Due after five years through ten years
 
9,311,737

 
9,407,186

Due after ten years
 
14,688,760

 
15,799,245

Asset and mortgage-backed securities
 
4,966,614

 
4,917,313

Total
 
$
37,751,132

 
$
39,005,212

Corporate Fixed Maturity Securities
The tables below show the major industry types of the Company’s corporate fixed maturity holdings as of September 30, 2018 and December 31, 2017 (dollars in thousands): 
September 30, 2018:
 
 
 
Estimated
 
 
 
 
Amortized Cost    
 
Fair Value
 
% of Total           
Finance
 
$
8,561,885

 
$
8,564,254

 
35.1
%
Industrial
 
12,632,502

 
12,753,024

 
52.1

Utility
 
3,077,080

 
3,132,220

 
12.8

Total
 
$
24,271,467

 
$
24,449,498

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

 
$
8,362,774

 
36.1
%
Industrial
 
11,535,166

 
12,199,333

 
52.5

Utility
 
2,453,752

 
2,648,861

 
11.4

Total
 
$
21,966,803

 
$
23,210,968

 
100.0
%

11


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

 
$
3,677

 
$
3,677

 
$
6,013

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

 

 

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

 
$
3,677

 
$
3,677

 
$
3,677


Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale
The following table presents the total gross unrealized losses for the 2,866 fixed maturity securities as of September 30, 2018, where the estimated fair value had declined and remained below amortized cost by the indicated amount (dollars in thousands):
 
 
September 30, 2018
 
 
Gross
Unrealized
Losses
 
% of Total    
Less than 20%
 
$
640,481

 
98.1
%
20% or more for less than six months
 
309

 

20% or more for six months or greater
 
12,293

 
1.9

Total
 
$
653,083

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

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

 
0.6

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

 
2.4

Total
 
$
116,993

 
100.0
%
The Company’s determination of whether a decline in value is other-than-temporary includes an analysis of the underlying credit and the extent and duration of a decline in value. The Company’s credit analysis of an investment includes determining whether the issuer is current on its contractual payments, evaluating whether it is probable that the Company will be able to collect all amounts due according to the contractual terms of the security and analyzing the overall ability of the Company to recover the amortized cost of the investment.
The following table presents the estimated fair values and gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, for 2,866 fixed maturity securities that have estimated fair values below amortized cost as of September 30, 2018 (dollars in thousands). These investments are presented by class and grade of security, as well as the length of time the related fair value has remained below amortized cost.
 

12


 
 
Less than 12 months
 
12 months or greater
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
September 30, 2018:
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
Investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
10,117,970

 
$
303,926

 
$
1,290,804

 
$
81,236

 
$
11,408,774

 
$
385,162

Canadian government
 
58,816

 
1,211

 
107,167

 
2,736

 
165,983

 
3,947

RMBS
 
931,044

 
23,339

 
528,739

 
27,063

 
1,459,783

 
50,402

ABS
 
680,900

 
8,650

 
262,544

 
6,243

 
943,444

 
14,893

CMBS
 
555,716

 
8,304

 
207,943

 
8,580

 
763,659

 
16,884

U.S. government
 
197,114

 
3,913

 
1,002,661

 
90,740

 
1,199,775

 
94,653

State and political subdivisions
 
261,456

 
6,722

 
90,649

 
6,915

 
352,105

 
13,637

Other foreign government
 
1,034,417

 
24,666

 
297,566

 
11,062

 
1,331,983

 
35,728

Total investment grade securities
 
13,837,433

 
380,731

 
3,788,073

 
234,575

 
17,625,506

 
615,306

 
Below investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
539,521

 
23,955

 
77,675

 
7,296

 
617,196

 
31,251

Canadian government
 
2,328

 
162

 

 

 
2,328

 
162

RMBS
 

 

 
1,102

 
20

 
1,102

 
20

ABS
 

 

 
1,110

 
52

 
1,110

 
52

Other foreign government
 
140,692

 
5,931

 
6,410

 
361

 
147,102

 
6,292

Total below investment grade securities
 
682,541

 
30,048

 
86,297

 
7,729

 
768,838

 
37,777

Total fixed maturity securities
 
$
14,519,974

 
$
410,779

 
$
3,874,370

 
$
242,304

 
$
18,394,344

 
$
653,083

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

 
$
17,099

 
$
1,009,750

 
$
28,080

 
$
2,895,962

 
$
45,179

Canadian government
 
18,688

 
91

 
111,560

 
1,596

 
130,248

 
1,687

RMBS
 
566,699

 
5,852

 
224,439

 
6,004

 
791,138

 
11,856

ABS
 
434,274

 
2,707

 
168,524

 
2,434

 
602,798

 
5,141

CMBS
 
220,401

 
1,914

 
103,269

 
2,920

 
323,670

 
4,834

U.S. government
 
800,298

 
6,177

 
767,197

 
15,756

 
1,567,495

 
21,933

State and political subdivisions
 
43,510

 
242

 
68,666

 
4,054

 
112,176

 
4,296

Other foreign government
 
369,717

 
2,707

 
191,265

 
4,704

 
560,982

 
7,411

Total investment grade securities
 
4,339,799

 
36,789

 
2,644,670

 
65,548

 
6,984,469

 
102,337

Below investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
194,879

 
3,317

 
75,731

 
6,933

 
270,610

 
10,250

Canadian government
 
1,995

 
20

 

 

 
1,995

 
20

RMBS
 

 

 
1,369

 
22

 
1,369

 
22

ABS
 

 

 
1,489

 
53

 
1,489

 
53

Other foreign government
 
28,600

 
113

 
15,134

 
551

 
43,734

 
664

Total below investment grade securities
 
225,474

 
3,450

 
93,723

 
7,559

 
319,197

 
11,009

Total fixed maturity securities
 
$
4,565,273

 
$
40,239

 
$
2,738,393


$
73,107

 
$
7,303,666

 
$
113,346

Non-redeemable preferred stock
 
$
82

 
$
1

 
$
26,471

 
$
2,225

 
$
26,553

 
$
2,226

Other equity securities
 
5,820

 
1,023

 
47,251

 
398

 
53,071

 
1,421

Total equity securities
 
$
5,902

 
$
1,024

 
$
73,722


$
2,623

 
$
79,624

 
$
3,647

The Company has no intention to sell, nor does it expect to be required to sell, the securities outlined in the table above, as of the dates indicated. However, unforeseen facts and circumstances may cause the Company to sell fixed maturity securities in the

13


ordinary course of managing its portfolio to meet certain diversification, credit quality and liquidity guidelines. Changes in unrealized losses are primarily being driven by changes in interest rates.

Investment Income, Net of Related Expenses
Major categories of investment income, net of related expenses, consist of the following (dollars in thousands):
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Fixed maturity securities available-for-sale
$
378,669

 
$
359,157

 
$
1,121,496

 
$
1,039,392

Equity securities
1,319

 
942

 
3,710

 
3,296

Mortgage loans on real estate
54,424

 
50,040

 
155,083

 
138,829

Policy loans
14,730

 
15,404

 
44,285

 
45,870

Funds withheld at interest
108,232

 
102,144

 
270,094

 
327,089

Short-term investments and cash and cash equivalents
3,067

 
1,977

 
9,276

 
5,266

Other invested assets
35,594

 
46,653

 
80,207

 
87,192

Investment income
596,035

 
576,317

 
1,684,151

 
1,646,934

Investment expense
(23,293
)
 
(19,399
)
 
(67,019
)
 
(57,114
)
Investment income, net of related expenses
$
572,742

 
$
556,918

 
$
1,617,132

 
$
1,589,820

Investment Related Gains (Losses), Net
Investment related gains (losses), net consist of the following (dollars in thousands): 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Fixed maturity securities available for sale:
 
 
 
 
 
 
 
Other-than-temporary impairment losses
$
(10,705
)
 
$
(390
)
 
$
(14,055
)
 
$
(20,980
)
Gain on investment activity
20,040

 
19,512

 
52,146

 
91,611

Loss on investment activity
(37,880
)
 
(7,593
)
 
(94,194
)
 
(26,577
)
Equity securities:
 
 
 
 
 
 
 
Other-than-temporary impairment losses

 
(889
)
 

 
(889
)
Gain on investment activity
3,932

 
10

 
4,429

 
24

Loss on investment activity
(174
)
 
(85
)
 
(1,124
)
 
(4,135
)
Change in unrealized gains (losses) recognized in earnings
3,539

 

 
(7,564
)
 

Other impairment losses and change in mortgage loan provision
(6,566
)
 
(2,446
)
 
(8,235
)
 
(9,220
)
Derivatives and other, net
7,797

 
14,534

 
37,538

 
109,637

Total investment related gains (losses), net
$
(20,017
)
 
$
22,653

 
$
(31,059
)
 
$
139,471

The fixed maturity impairments for the three and nine months ended September 30, 2018 and 2017 were largely related to high-yield corporate securities. The equity impairments for the three and nine months ended September 30, 2017 were related to an equity position received as part of a debt restructuring. The other impairment losses and change in mortgage loan provision for the three and nine months ended September 30, 2018 includes impairments on real estate joint ventures and limited partnerships. The other impairment losses and change in mortgage loan provision for the three and nine months ended September 30, 2017 includes impairments on limited partnerships. The fluctuations in investment related gains (losses) for derivatives and other for the three and nine months ended September 30, 2018, compared to the same periods in 2017, are primarily due to changes in the fair value of embedded derivatives and interest rate swaps.
During the three months ended September 30, 2018 and 2017, the Company sold fixed maturity securities with fair values of $1,345.3 million and $479.7 million at losses of $37.9 million and $7.6 million, respectively. During the nine months ended September 30, 2018 and 2017, the Company sold fixed maturity securities with fair values of $3,783.3 million and $1,604.7 million at losses of $94.2 million and $26.6 million, respectively. During the three months ended September 30, 2018 and 2017, the Company sold equity securities with fair values of $3.1 million and $5.0 million at losses of $0.2 million and $0.1 million, respectively. During the nine