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, 2016
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 : 001-31911
American Equity Investment Life Holding Company
(Exact name of registrant as specified in its charter)
Iowa
 
42-1447959
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
6000 Westown Parkway
West Des Moines, Iowa 50266
(Address of principal executive offices, including zip code)
(515) 221-0002
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 and posted on its corporate Web site, if any, 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 or a smaller reporting company. See the definitions of “large accelerated filer," “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
Non-accelerated filer o
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
APPLICABLE TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of November 7, 2016, there were 88,066,714 shares of the registrant's common stock, $1 par value, outstanding.



TABLE OF CONTENTS
 
Page
 
 
 
 
 
 




Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
 
September 30, 2016
 
December 31, 2015
 
(Unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities:
 
 
 
Available for sale, at fair value (amortized cost: 2016 - $39,199,077; 2015 - $35,823,710)
$
42,304,410

 
$
36,421,839

Held for investment, at amortized cost (fair value: 2016 - $75,547; 2015 - $65,377)
76,773

 
76,622

Equity securities, available for sale, at fair value (cost: 2016 - $7,520; 2015 - $7,515)
7,843

 
7,828

Mortgage loans on real estate
2,419,230

 
2,435,257

Derivative instruments
706,007

 
337,256

Other investments
297,068

 
291,530

Total investments
45,811,331

 
39,570,332

 
 
 
 
Cash and cash equivalents
812,814

 
397,749

Coinsurance deposits
4,453,320

 
3,187,470

Accrued investment income
405,996

 
362,104

Deferred policy acquisition costs
2,370,781

 
2,905,136

Deferred sales inducements
1,800,435

 
2,232,148

Deferred income taxes

 
232,683

Income taxes recoverable
12,652

 
29,599

Other assets
180,892

 
112,171

Total assets
$
55,848,221

 
$
49,029,392

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Liabilities:
 
 
 
Policy benefit reserves
$
50,814,665

 
$
45,495,431

Other policy funds and contract claims
302,849

 
324,850

Notes and loan payable
493,445

 
393,227

Subordinated debentures
241,751

 
241,452

Deferred income taxes
110,551

 

Other liabilities
1,072,098

 
629,897

Total liabilities
53,035,359

 
47,084,857

 
 
 
 
Stockholders' equity:
 
 
 
Preferred stock, par value $1 per share, 2,000,000 shares authorized,
  2016 and 2015 - no shares issued and outstanding

 

Common stock, par value $1 per share, 200,000,000 shares authorized; issued and outstanding:
   2016 - 87,898,452 shares (excluding 3,221,258 treasury shares);
   2015 - 81,354,079 shares (excluding 3,448,750 treasury shares)
87,898

 
81,354

Additional paid-in capital
767,570

 
630,367

Accumulated other comprehensive income
963,796

 
201,663

Retained earnings
993,598

 
1,031,151

Total stockholders' equity
2,812,862

 
1,944,535

Total liabilities and stockholders' equity
$
55,848,221

 
$
49,029,392

See accompanying notes to unaudited consolidated financial statements.

2

Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Premiums and other considerations
$
12,731

 
$
8,335

 
$
31,534

 
$
25,369

Annuity product charges
47,675

 
37,975

 
125,304

 
99,066

Net investment income
463,583

 
436,085

 
1,374,239

 
1,253,930

Change in fair value of derivatives
103,794

 
(351,360
)
 
68,828

 
(405,484
)
Net realized gains (losses) on investments, excluding other than temporary impairment ("OTTI") losses
5,256

 
1,159

 
10,680

 
10,362

OTTI losses on investments:
 
 
 
 
 
 
 
Total OTTI losses
(4,554
)
 
(10,000
)
 
(11,334
)
 
(10,132
)
Portion of OTTI losses recognized in (from) other comprehensive income
1,575

 
4,771

 
(1,785
)
 
3,943

Net OTTI losses recognized in operations
(2,979
)
 
(5,229
)
 
(13,119
)
 
(6,189
)
Total revenues
630,060

 
126,965

 
1,597,466

 
977,054

 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
Insurance policy benefits and change in future policy benefits
15,065

 
10,959

 
37,567

 
32,629

Interest sensitive and index product benefits
278,943

 
213,465

 
487,735

 
802,431

Amortization of deferred sales inducements
69,245

 
65,807

 
127,396

 
152,278

Change in fair value of embedded derivatives
144,404

 
(414,724
)
 
694,564

 
(583,112
)
Interest expense on notes and loan payable
6,887

 
7,283

 
20,649

 
21,976

Interest expense on subordinated debentures
3,253

 
3,075

 
9,627

 
9,138

Amortization of deferred policy acquisition costs
98,108

 
67,885

 
198,486

 
186,871

Other operating costs and expenses
25,133

 
24,497

 
78,786

 
70,487

Total benefits and expenses
641,038

 
(21,753
)
 
1,654,810

 
692,698

Income (loss) before income taxes
(10,978
)
 
148,718

 
(57,344
)
 
284,356

Income tax expense (benefit)
(3,558
)
 
51,412

 
(19,791
)
 
98,302

Net income (loss)
$
(7,420
)
 
$
97,306

 
$
(37,553
)
 
$
186,054

 
 
 
 
 
 
 
 
Earnings (loss) per common share
$
(0.09
)
 
$
1.22

 
$
(0.45
)
 
$
2.39

Earnings (loss) per common share - assuming dilution
$
(0.09
)
 
$
1.19

 
$
(0.45
)
 
$
2.33

 
 
 
 
 
 
 
 
Weighted average common shares outstanding (in thousands):
 
 
 
 
 
 
 
Earnings (loss) per common share
86,262

 
79,676

 
83,645

 
77,995

Earnings (loss) per common share - assuming dilution
87,044

 
81,559

 
84,413

 
79,977

See accompanying notes to unaudited consolidated financial statements.

3

Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Dollars in thousands)
(Unaudited)

 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
 
 
 
 
 
 
 
Net income (loss)
$
(7,420
)
 
$
97,306

 
$
(37,553
)
 
$
186,054

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in net unrealized investment gains/losses (1)
107,003

 
60,402

 
1,167,763

 
(453,582
)
Noncredit component of OTTI losses (1)
(731
)
 
(2,381
)
 
835

 
(1,968
)
Reclassification of unrealized investment gains/losses to net income (loss) (1)
2,287

 
96

 
3,914

 
1,940

Other comprehensive income (loss) before income tax
108,559

 
58,117

 
1,172,512

 
(453,610
)
Income tax effect related to other comprehensive income (loss)
(37,995
)
 
(20,341
)
 
(410,379
)
 
158,764

Other comprehensive income (loss)
70,564

 
37,776

 
762,133

 
(294,846
)
Comprehensive income (loss)
$
63,144

 
$
135,082

 
$
724,580

 
$
(108,792
)
(1)
Net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs.
See accompanying notes to unaudited consolidated financial statements.

4

Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)
(Unaudited)

 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
Stockholders'
Equity
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
81,354

 
$
630,367

 
$
201,663

 
$
1,031,151

 
$
1,944,535

Net loss for period

 

 

 
(37,553
)
 
(37,553
)
Other comprehensive income

 

 
762,133

 

 
762,133

Share-based compensation, including excess income tax benefits

 
5,335

 

 

 
5,335

Issuance of common stock via settlement of forward sale agreements
5,590

 
129,072

 

 

 
134,662

Issuance of 861,375 shares of common stock under compensation plans, including excess income tax benefits
861

 
2,890

 

 

 
3,751

Issuance of 92,998 shares of common stock to settle warrants that have reached their expiration
93

 
(94
)
 

 

 
(1
)
Balance at September 30, 2016
$
87,898

 
$
767,570

 
$
963,796

 
$
993,598

 
$
2,812,862

 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
76,062

 
$
513,218

 
$
721,401

 
$
829,195

 
$
2,139,876

Net income for period

 

 

 
186,054

 
186,054

Other comprehensive loss

 

 
(294,846
)
 

 
(294,846
)
Share-based compensation, including excess income tax benefits

 
7,567

 

 

 
7,567

Issuance of common stock via public offering
4,300

 
100,179

 

 

 
104,479

Issuance of 828,529 shares of common stock under compensation plans, including excess income tax benefits
829

 
5,950

 

 

 
6,779

Balance at September 30, 2015
$
81,191

 
$
626,914

 
$
426,555

 
$
1,015,249

 
$
2,149,909

See accompanying notes to unaudited consolidated financial statements.

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Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

 
Nine Months Ended 
 September 30,
 
2016
 
2015
Operating activities
 
 
 
Net income (loss)
$
(37,553
)
 
$
186,054

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Interest sensitive and index product benefits
487,735

 
802,431

Amortization of deferred sales inducements
127,396

 
152,278

Annuity product charges
(125,304
)
 
(99,066
)
Change in fair value of embedded derivatives
694,564

 
(583,112
)
Change in traditional life and accident and health insurance reserves
8,977

 
3,024

Policy acquisition costs deferred
(423,525
)
 
(464,451
)
Amortization of deferred policy acquisition costs
198,486

 
186,871

Provision for depreciation and other amortization
3,000

 
3,733

Amortization of discounts and premiums on investments
(2,258
)
 
(10,730
)
Realized gains (losses) on investments and net OTTI losses recognized in operations
2,439

 
(4,173
)
Change in fair value of derivatives
(70,002
)
 
404,085

Deferred income taxes
(66,895
)
 
23,640

Share-based compensation
4,849

 
5,332

Change in accrued investment income
(43,892
)
 
(48,963
)
Change in income taxes recoverable/payable
16,947

 
4,794

Change in other assets
1,930

 
1,053

Change in other policy funds and contract claims
(27,627
)
 
(36,876
)
Change in collateral held for derivatives
254,210

 
(469,752
)
Change in other liabilities
(48,608
)
 
24,766

Other
(10,363
)
 
(9,843
)
Net cash provided by operating activities
944,506

 
71,095

 
 
 
 
Investing activities
 
 
 
Sales, maturities, or repayments of investments:
 
 
 
Fixed maturity securities - available for sale
1,853,281

 
1,280,927

Mortgage loans on real estate
302,262

 
354,391

Derivative instruments
147,887

 
563,125

Other investments
12,928

 
11,716

Acquisition of investments:
 
 
 
Fixed maturity securities - available for sale
(5,065,873
)
 
(5,041,263
)
Mortgage loans on real estate
(284,186
)
 
(362,123
)
Derivative instruments
(444,360
)
 
(427,763
)
Other investments
(9,778
)
 
(5,206
)
Purchases of property, furniture and equipment
(872
)
 
(913
)
Net cash used in investing activities
(3,488,711
)
 
(3,627,109
)

6

Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)

 
Nine Months Ended 
 September 30,
 
2016
 
2015
Financing activities
 
 
 
Receipts credited to annuity and single premium universal life policyholder account balances
$
5,712,759

 
$
4,913,473

Coinsurance deposits
(1,180,827
)
 
21,623

Return of annuity policyholder account balances
(1,806,895
)
 
(1,638,598
)
Financing fees incurred and deferred
(1,456
)
 

Repayment of notes payable

 
(48,152
)
Net proceeds from settlement of notes hedges and warrants

 
25,775

Proceeds from issuance of debt
100,000

 

Acquisition of common stock

 
(16
)
Excess tax benefits realized from share-based compensation plans
487

 
3,281

Proceeds from issuance of common stock
138,660

 
111,274

Change in checks in excess of cash balance
(3,458
)
 
(10,546
)
Net cash provided by financing activities
2,959,270

 
3,378,114

Increase in cash and cash equivalents
415,065

 
(177,900
)
Cash and cash equivalents at beginning of period
397,749

 
701,514

Cash and cash equivalents at end of period
$
812,814

 
$
523,614

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid during period for:
 
 
 
Interest expense
$
35,764

 
$
36,136

Income taxes
29,961

 
66,541

Non-cash operating activity:
 
 
 
Deferral of sales inducements
270,991

 
346,410

Non-cash financing activities:
 
 
 
Common stock issued to settle warrants that have expired
93

 

See accompanying notes to unaudited consolidated financial statements.




 

7

Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2016
(Unaudited)


1. Significant Accounting Policies
Consolidation and Basis of Presentation
The accompanying consolidated financial statements of American Equity Investment Life Holding Company (“we”, “us” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. The consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly our financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for the three and nine month periods ended September 30, 2016 are not necessarily indicative of the results that may be expected for the year ended December 31, 2016. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements requires the use of management estimates. For further information related to a description of areas of judgment and estimates and other information necessary to understand our financial position and results of operations, refer to the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2015.
Adopted Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Subsequently, in August 2015, the FASB issued an ASU that states that the Securities and Exchange Commission staff would not object to an entity deferring and presenting debt issuance costs related to line-of-credit arrangements as an asset and expensing those costs ratably over the term of the line of credit arrangement. These ASU's became effective for us on January 1, 2016, and retroactive application is required. They did not have a material impact on our consolidated financial statements.
New Accounting Pronouncements
In January 2016, the FASB issued an ASU that, among other aspects of recognition, measurement, presentation and disclosure of financial instruments, primarily requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Additionally, it changes the accounting for financial liabilities measured at fair value under the fair value option and eliminates some disclosures regarding fair value of financial assets and liabilities measured at amortized cost. This ASU will be effective for us on January 1, 2018, and we have not determined the effect it will have on our consolidated financial statements.
In February 2016, the FASB issued an ASU that will require recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU affects accounting and disclosure more dramatically for lessees as accounting for lessors is mainly unchanged. This ASU will be effective for us on January 1, 2019, with early adoption permitted, and we have not determined the effect it will have on our consolidated financial statements.
In March 2016, the FASB issued an ASU related to the accounting for share-based payment transactions. The aspects of accounting guidance affected by this ASU are income taxes, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU will be effective for us on January 1, 2017, with early adoption permitted, and we have not determined the effect it will have on our consolidated financial statements.
In June 2016, the FASB issued an ASU that significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model that requires these assets be presented at the net amount expected to be collected. In addition, credit losses on available for sale debt securities should be recorded through an allowance account.  This ASU will be effective for us on January 1, 2020, with early adoption permitted, and we have not yet determined the impact this updated guidance will have on our consolidated financial statements.
In August 2016, the FASB issued an ASU that clarifies how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. This ASU will be effective for us on January 1, 2018, with early adoption permitted, and we have not yet determined the impact this updated guidance will have on our consolidated financial statements.

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Table of Contents

2. Fair Values of Financial Instruments
The following sets forth a comparison of the carrying amounts and fair values of our financial instruments:
 
September 30, 2016
 
December 31, 2015
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale
$
42,304,410

 
$
42,304,410

 
$
36,421,839

 
$
36,421,839

Held for investment
76,773

 
75,547

 
76,622

 
65,377

Equity securities, available for sale
7,843

 
7,843

 
7,828

 
7,828

Mortgage loans on real estate
2,419,230

 
2,446,247

 
2,435,257

 
2,471,864

Derivative instruments
706,007

 
706,007

 
337,256

 
337,256

Other investments
297,068

 
290,719

 
285,044

 
290,075

Cash and cash equivalents
812,814

 
812,814

 
397,749

 
397,749

Coinsurance deposits
4,453,320

 
3,997,317

 
3,187,470

 
2,860,882

Interest rate caps
307

 
307

 
1,410

 
1,410

Counterparty collateral
144,082

 
144,082

 
82,312

 
82,312

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Policy benefit reserves
50,461,717

 
42,237,613

 
45,151,460

 
38,435,515

Single premium immediate annuity (SPIA) benefit reserves
302,428

 
313,130

 
324,264

 
336,066

Notes and loan payable
493,445

 
520,800

 
393,227

 
417,752

Subordinated debentures
241,751

 
227,755

 
241,452

 
216,933

Interest rate swap
4,944

 
4,944

 
3,139

 
3,139

Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The objective of a fair value measurement is to determine that price for each financial instrument at each measurement date. We meet this objective using various methods of valuation that include market, income and cost approaches.
We categorize our financial instruments into three levels of fair value hierarchy based on the priority of inputs used in determining fair value. The hierarchy defines the highest priority inputs (Level 1) as quoted prices in active markets for identical assets or liabilities. The lowest priority inputs (Level 3) are our own assumptions about what a market participant would use in determining fair value such as estimated future cash flows. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. We categorize financial assets and liabilities recorded at fair value in the consolidated balance sheets as follows:
Level 1—
Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not adjust the quoted price for these financial instruments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.
Level 2—
Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial instruments in markets that are not active; and models and other valuation methodologies using inputs other than quoted prices that are observable.
Level 3—
Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in Level 3 are securities for which no market activity or data exists and for which we used discounted expected future cash flows with our own assumptions about what a market participant would use in determining fair value.
Transfers of securities among the levels occur at times and depend on the type of inputs used to determine fair value of each security. There were no transfers between levels during any period presented.

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Table of Contents

Our assets and liabilities which are measured at fair value on a recurring basis as of September 30, 2016 and December 31, 2015 are presented below based on the fair value hierarchy levels:
 
Total
Fair Value
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(Dollars in thousands)
September 30, 2016
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
418,465

 
$
411,408

 
$
7,057

 
$

United States Government sponsored agencies
1,472,904

 

 
1,472,904

 

United States municipalities, states and territories
4,052,210

 

 
4,052,210

 

Foreign government obligations
254,420

 

 
254,420

 

Corporate securities
27,915,657

 
6

 
27,915,651

 

Residential mortgage backed securities
1,358,174

 

 
1,358,174

 

Commercial mortgage backed securities
5,310,156

 

 
5,310,156

 

Other asset backed securities
1,522,424

 

 
1,522,424

 

Equity securities, available for sale: finance, insurance and real estate
7,843

 

 
7,843

 

Derivative instruments
706,007

 

 
706,007

 

Cash and cash equivalents
812,814

 
812,814

 

 

Interest rate caps
307

 

 
307

 

Counterparty collateral
144,082

 

 
144,082

 

 
$
43,975,463

 
$
1,224,228

 
$
42,751,235

 
$

Liabilities
 
 
 
 
 
 
 
Interest rate swap
$
4,944

 
$

 
$
4,944

 
$

Fixed index annuities - embedded derivatives
6,678,102

 

 

 
6,678,102

 
$
6,683,046

 
$

 
$
4,944

 
$
6,678,102

 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
471,256

 
$
438,598

 
$
32,658

 
$

United States Government sponsored agencies
1,398,611

 

 
1,398,611

 

United States municipalities, states and territories
3,755,367

 

 
3,755,367

 

Foreign government obligations
212,565

 

 
212,565

 

Corporate securities
23,802,394

 
121

 
23,802,273

 

Residential mortgage backed securities
1,462,072

 

 
1,462,072

 

Commercial mortgage backed securities
4,174,396

 

 
4,174,396

 

Other asset backed securities
1,145,178

 

 
1,145,178

 

Equity securities, available for sale: finance, insurance and real estate
7,828

 

 
7,828

 

Derivative instruments
337,256

 

 
337,256

 

Cash and cash equivalents
397,749

 
397,749

 

 

Interest rate caps
1,410

 

 
1,410

 

Counterparty collateral
82,312

 

 
82,312

 

 
$
37,248,394

 
$
836,468

 
$
36,411,926

 
$

Liabilities
 
 
 
 
 
 
 
Interest rate swap
$
3,139

 
$

 
$
3,139

 
$

Fixed index annuities - embedded derivatives
5,983,622

 

 

 
5,983,622

 
$
5,986,761

 
$

 
$
3,139

 
$
5,983,622


10

Table of Contents

The following methods and assumptions were used in estimating the fair values of financial instruments during the periods presented in these consolidated financial statements.
Fixed maturity securities and equity securities
The fair values of fixed maturity securities and equity securities in an active and orderly market are determined by utilizing independent pricing services. The independent pricing services incorporate a variety of observable market data in their valuation techniques, including:
reported trading prices,
benchmark yields,
broker-dealer quotes,
benchmark securities,
bids and offers,
credit ratings,
relative credit information, and
other reference data.
The independent pricing services also take into account perceived market movements and sector news, as well as a security's terms and conditions, including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary.
The independent pricing services provide quoted market prices when available. Quoted prices are not always available due to market inactivity. When quoted market prices are not available, the third parties use yield data and other factors relating to instruments or securities with similar characteristics to determine fair value for securities that are not actively traded. We generally obtain one value from our primary external pricing service. In situations where a price is not available from this service, we may obtain further quotes or prices from additional parties as needed. In addition, for our callable United States Government sponsored agencies, we obtain multiple broker quotes and take the average of the broker prices received. Market indices of similar rated asset class spreads are considered for valuations and broker indications of similar securities are compared. Inputs used by the broker include market information, such as yield data and other factors relating to instruments or securities with similar characteristics. Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes on which one may execute the disposition of the assets.
We validate external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the pricing services, analytical reviews and performance analysis of the prices against trends, and maintenance of a securities watch list. Additionally, as needed we utilize discounted cash flow models or perform independent valuations on a case-by-case basis using inputs and assumptions similar to those used by the pricing services. Although we do identify differences from time to time as a result of these validation procedures, we did not make any significant adjustments as of September 30, 2016 and December 31, 2015.
Mortgage loans on real estate
Mortgage loans on real estate are not measured at fair value on a recurring basis. The fair values of mortgage loans on real estate are calculated using discounted expected cash flows using current competitive market interest rates currently being offered for similar loans. The fair values of impaired mortgage loans on real estate that we have considered to be collateral dependent are based on the fair value of the real estate collateral (based on appraised values) less estimated costs to sell. The inputs utilized to determine fair value of all mortgage loans are unobservable market data (competitive market interest rates and appraised property values); therefore, fair value of mortgage loans falls into Level 3 in the fair value hierarchy.
Derivative instruments
The fair values of derivative instruments, primarily call options, are based upon the amount of cash that we will receive to settle each derivative instrument on the reporting date. These amounts are determined by our investment team using industry accepted valuation models and are adjusted for the nonperformance risk of each counterparty net of any collateral held. Inputs include market volatility and risk free interest rates and are used in income valuation techniques in arriving at a fair value for each option contract. The nonperformance risk for each counterparty is based upon its credit default swap rate. We have no performance obligations related to the call options purchased to fund our fixed index annuity policy liabilities.
Other investments
None of the financial instruments included in other investments are measured at fair value on a recurring basis. Financial instruments included in other investments are policy loans, equity method investments and company owned life insurance (COLI). We have not attempted to determine the fair values associated with our policy loans, as we believe any differences between carrying value and the fair values afforded these instruments are immaterial to our consolidated financial position and, accordingly, the cost to provide such disclosure does not justify the benefit to be derived. The fair value of our equity method investments qualify as Level 3 fair values and were determined by calculating the present value of future cash flows discounted by a risk free rate, a risk spread and a liquidity discount. The risk spread and liquidity discount are rates determined by our investment professionals and are unobservable market inputs. The fair value of our COLI approximates the cash surrender value of the policies and whose fair values fall within Level 2 of the fair value hierarchy.

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Table of Contents

Cash and cash equivalents
Amounts reported in the consolidated balance sheets for these instruments are reported at their historical cost which approximates fair value due to the nature of the assets assigned to this category.
Interest rate swap and caps
The fair values of our pay fixed/receive variable interest rate swap and our interest rate caps are obtained from third parties and are determined by discounting expected future cash flows using projected LIBOR rates for the term of the swap and caps.
Counterparty collateral
Amounts reported in other assets on the consolidated balance sheets for these instruments are reported at their historical cost which approximates fair value due to the nature of the assets assigned to this category.
Policy benefit reserves, coinsurance deposits and SPIA benefit reserves
The fair values of the liabilities under contracts not involving significant mortality or morbidity risks (principally deferred annuities), are stated at the cost we would incur to extinguish the liability (i.e., the cash surrender value) as these contracts are generally issued without an annuitization date. The coinsurance deposits related to the annuity benefit reserves have fair values determined in a similar fashion. For period-certain annuity benefit contracts, the fair value is determined by discounting the benefits at the interest rates currently in effect for newly purchased immediate annuity contracts. We are not required to and have not estimated the fair value of the liabilities under contracts that involve significant mortality or morbidity risks, as these liabilities fall within the definition of insurance contracts that are exceptions from financial instruments that require disclosures of fair value. Policy benefit reserves, coinsurance deposits and SPIA benefit reserves are not measured at fair value on a recurring basis. All of the fair values presented within these categories fall within Level 3 of the fair value hierarchy as most of the inputs are unobservable market data.
Notes and loan payable
The fair values of our senior unsecured notes are based upon pricing matrices developed by a third party pricing service when quoted market prices are not available and are categorized as Level 2 within the fair value hierarchy. Fair value of our term loan is equal to the principal amount outstanding as the loan was originated on September 30, 2016. Notes and loan payable are not remeasured at fair value on a recurring basis.
Subordinated debentures
Fair values for subordinated debentures are estimated using discounted cash flow calculations based principally on observable inputs including our incremental borrowing rates, which reflect our credit rating, for similar types of borrowings with maturities consistent with those remaining for the debt being valued. These fair values are categorized as Level 2 within the fair value hierarchy. Subordinated debentures are not measured at fair value on a recurring basis.
Fixed index annuities - embedded derivatives
We estimate the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each valuation date by (i) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and (ii) discounting the excess of the projected contract value amounts at the applicable risk free interest rates adjusted for our nonperformance risk related to those liabilities. The projections of policy contract values are based on our best estimate assumptions for future policy growth and future policy decrements. Our best estimate assumptions for future policy growth include assumptions for the expected index credit on the next policy anniversary date which are derived from the fair values of the underlying call options purchased to fund such index credits and the expected costs of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.
Within this determination we have the following significant unobservable inputs: 1) the expected cost of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary and 2) our best estimates for future policy decrements, primarily lapse, partial withdrawal and mortality rates. As of September 30, 2016 and December 31, 2015, we utilized an estimate of 3.10% for the expected cost of annual call options, which are based on estimated account value growth and a historical review of our actual option costs.

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Table of Contents

Our best estimate assumptions for lapse, partial withdrawal and mortality rates are based on our actual experience and our outlook as to future expectations for such assumptions. These assumptions, which are consistent with the assumptions used in calculating deferred policy acquisition costs and deferred sales inducements, are reviewed on a quarterly basis and are revised as our experience develops and/or as future expectations change. Our mortality rate assumptions are based on 65% of the 1983 Basic Annuity Mortality Tables. The following table presents average lapse rate and partial withdrawal rate assumptions, by contract duration, used in estimating the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each reporting date:
 
 
Average Lapse Rates
 
Average Partial Withdrawal Rates
Contract Duration (Years)
 
September 30, 2016
 
December 31, 2015
 
September 30, 2016
 
December 31, 2015
1 - 5
 
1.76%
 
1.58%
 
3.30%
 
3.08%
6 - 10
 
6.59%
 
8.55%
 
3.30%
 
3.55%
11 - 15
 
11.25%
 
12.01%
 
3.32%
 
3.59%
16 - 20
 
12.03%
 
12.99%
 
3.18%
 
3.22%
20+
 
11.68%
 
12.54%
 
3.18%
 
3.22%
Lapse rates are generally expected to increase as surrender charge percentages decrease. Lapse expectations reflect a significant increase in the year in which the surrender charge period on a contract ends.
The following tables provide a reconciliation of the beginning and ending balances for our Level 3 assets and liabilities, which are measured at fair value on a recurring basis using significant unobservable inputs for the three and nine months ended September 30, 2016 and 2015:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Available for sale securities
 
 
 
 
 
 
 
Beginning balance
$

 
$
26

 
$

 
$
375

Principal returned

 
(2
)
 

 
(23
)
Amortization of premium/accretion of discount

 
(28
)
 

 
(494
)
Total gains (losses) (realized/unrealized):
 
 
 
 
 
 
 
Included in other comprehensive income (loss)

 
4

 

 
280

Included in operations

 

 

 
(138
)
Ending balance
$

 
$

 
$

 
$

The Level 3 assets included in the table above are not material to our financial position, results of operations or cash flows, and it is management's opinion that the sensitivity of the inputs used in determining the fair value of these assets is not material as well.
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Fixed index annuities - embedded derivatives
 
 
 
 
 
 
 
Beginning balance
$
6,499,015

 
$
5,984,007

 
$
5,983,622

 
$
5,574,653

Premiums less benefits
137,526

 
207,141

 
273,287

 
1,020,853

Change in fair value, net
41,561

 
(460,031
)
 
421,193

 
(864,389
)
Ending balance
$
6,678,102

 
$
5,731,117

 
$
6,678,102

 
$
5,731,117

Change in fair value, net for each period in our embedded derivatives are included in change in fair value of embedded derivatives in the unaudited consolidated statements of operations.
Certain derivatives embedded in our fixed index annuity contracts are our most significant financial instrument measured at fair value that are categorized as Level 3 in the fair value hierarchy. The contractual obligations for future annual index credits within our fixed index annuity contracts are treated as a "series of embedded derivatives" over the expected life of the applicable contracts. We estimate the fair value of these embedded derivatives at each valuation date by the method described above under fixed index annuities - embedded derivatives. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.

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Table of Contents

The most sensitive assumption in determining policy liabilities for fixed index annuities is the rates used to discount the excess projected contract values. As indicated above, the discount rate reflects our nonperformance risk. If the discount rates used to discount the excess projected contract values at September 30, 2016, were to increase by 100 basis points, the fair value of the embedded derivatives would decrease by $475.4 million recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be a corresponding decrease of $283.7 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as an increase in amortization of deferred policy acquisition costs and deferred sales inducements. A decrease by 100 basis points in the discount rate used to discount the excess projected contract values would increase the fair value of the embedded derivatives by $532.7 million recorded through operations as an increase in the change in fair value of embedded derivatives and there would be a corresponding increase of $313.5 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as a decrease in amortization of deferred policy acquisition costs and deferred sales inducements.

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Table of Contents

3. Investments
At September 30, 2016 and December 31, 2015, the amortized cost and fair value of fixed maturity securities and equity securities were as follows:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(Dollars in thousands)
September 30, 2016
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
416,503

 
$
1,962

 
$

 
$
418,465

United States Government sponsored agencies
1,410,760

 
62,563

 
(419
)
 
1,472,904

United States municipalities, states and territories
3,548,586

 
503,992

 
(368
)
 
4,052,210

Foreign government obligations
233,825

 
24,420

 
(3,825
)
 
254,420

Corporate securities
25,751,501

 
2,298,306

 
(134,150
)
 
27,915,657

Residential mortgage backed securities
1,225,720

 
134,685

 
(2,231
)
 
1,358,174

Commercial mortgage backed securities
5,121,361

 
216,346

 
(27,551
)
 
5,310,156

Other asset backed securities
1,490,821

 
46,705

 
(15,102
)
 
1,522,424

 
$
39,199,077

 
$
3,288,979

 
$
(183,646
)
 
$
42,304,410

Held for investment:
 
 
 
 
 
 
 
Corporate security
$
76,773

 
$

 
$
(1,226
)
 
$
75,547

 
 
 
 
 
 
 
 
Equity securities, available for sale:
 
 
 
 
 
 
 
Finance, insurance, and real estate
$
7,520

 
$
323

 
$

 
$
7,843

 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
470,567

 
$
988

 
$
(299
)
 
$
471,256

United States Government sponsored agencies
1,386,219

 
26,801

 
(14,409
)
 
1,398,611

United States municipalities, states and territories
3,422,667

 
341,328

 
(8,628
)
 
3,755,367

Foreign government obligations
210,953

 
12,547

 
(10,935
)
 
212,565

Corporate securities
23,597,530

 
887,288

 
(682,424
)
 
23,802,394

Residential mortgage backed securities
1,366,985

 
98,576

 
(3,489
)
 
1,462,072

Commercial mortgage backed securities
4,238,265

 
41,412

 
(105,281
)
 
4,174,396

Other asset backed securities
1,130,524

 
34,534

 
(19,880
)
 
1,145,178

 
$
35,823,710

 
$
1,443,474

 
$
(845,345
)
 
$
36,421,839

Held for investment:
 
 
 
 
 
 
 
Corporate security
$
76,622

 
$

 
$
(11,245
)
 
$
65,377

 
 
 
 
 
 
 
 
Equity securities, available for sale:
 
 
 
 
 
 
 
Finance, insurance, and real estate
$
7,515

 
$
313

 
$

 
$
7,828

At September 30, 2016, 36% of our fixed income securities have call features, of which 0.1% ($46.6 million) were subject to call redemption and another 3.4% ($1.3 billion) will become subject to call redemption during the next twelve months. Approximately 69% of our fixed income securities that have call features are not callable until within six months of their stated maturities.

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Table of Contents

The amortized cost and fair value of fixed maturity securities at September 30, 2016, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of our mortgage and other asset backed securities provide for periodic payments throughout their lives and are shown below as separate lines.
 
Available for sale
 
Held for investment
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
(Dollars in thousands)
Due in one year or less
$
585,813

 
$
591,574

 
$

 
$

Due after one year through five years
2,449,847

 
2,626,859

 

 

Due after five years through ten years
11,633,226

 
12,222,759

 

 

Due after ten years through twenty years
8,770,193

 
9,756,946

 

 

Due after twenty years
7,922,096

 
8,915,518

 
76,773

 
75,547

 
31,361,175

 
34,113,656

 
76,773

 
75,547

Residential mortgage backed securities
1,225,720

 
1,358,174

 

 

Commercial mortgage backed securities
5,121,361

 
5,310,156

 

 

Other asset backed securities
1,490,821

 
1,522,424

 

 

 
$
39,199,077

 
$
42,304,410

 
$
76,773

 
$
75,547

Net unrealized gains on available for sale fixed maturity securities and equity securities reported as a separate component of stockholders' equity were comprised of the following:
 
September 30, 2016
 
December 31, 2015
 
(Dollars in thousands)
Net unrealized gains on available for sale fixed maturity securities and equity securities
$
3,105,656

 
$
598,442

Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements
(1,657,561
)
 
(322,859
)
Deferred income tax valuation allowance reversal
22,534

 
22,534

Deferred income tax expense
(506,833
)
 
(96,454
)
Net unrealized gains reported as accumulated other comprehensive income
$
963,796

 
$
201,663

The National Association of Insurance Commissioners (“NAIC”) assigns designations to fixed maturity securities. These designations range from Class 1 (highest quality) to Class 6 (lowest quality). In general, securities are assigned a designation based upon the ratings they are given by the Nationally Recognized Statistical Rating Organizations (“NRSRO’s”). The NAIC designations are utilized by insurers in preparing their annual statutory statements. NAIC Class 1 and 2 designations are considered “investment grade” while NAIC Class 3 through 6 designations are considered “non-investment grade.” Based on the NAIC designations, we had 97% and 98% of our fixed maturity portfolio rated investment grade at September 30, 2016 and December 31, 2015, respectively.
The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:
 
 
September 30, 2016
 
December 31, 2015
NAIC
Designation
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
(Dollars in thousands)
1
 
$
25,136,784

 
$
27,489,043

 
$
23,363,259

 
$
24,207,801

2
 
12,859,996

 
13,679,587

 
11,709,730

 
11,589,325

3
 
1,107,948

 
1,062,620

 
758,531

 
643,293

4
 
147,237

 
124,317

 
60,480

 
44,312

5
 
12,794

 
18,839

 

 

6
 
11,091

 
5,551

 
8,332

 
2,485

 
 
$
39,275,850

 
$
42,379,957

 
$
35,900,332

 
$
36,487,216


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Table of Contents

The following table shows our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 364 and 1,246 securities, respectively) have been in a continuous unrealized loss position, at September 30, 2016 and December 31, 2015:
 
Less than 12 months
 
12 months or more
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
(Dollars in thousands)
September 30, 2016
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
United States Government sponsored agencies
$
76,581

 
$
(419
)
 
$

 
$

 
$
76,581

 
$
(419
)
United States municipalities, states and territories
68,084

 
(368
)
 

 

 
68,084

 
(368
)
Foreign government obligations

 

 
20,750

 
(3,825
)
 
20,750

 
(3,825
)
Corporate securities:
 
 
 
 
 
 
 
 
 
 
 
Finance, insurance and real estate
453,189

 
(5,447
)
 
100,261

 
(5,376
)
 
553,450

 
(10,823
)
Manufacturing, construction and mining
271,769

 
(5,102
)
 
764,319

 
(80,318
)
 
1,036,088

 
(85,420
)
Utilities and related sectors
157,473

 
(3,440
)
 
221,059

 
(17,989
)
 
378,532

 
(21,429
)
Wholesale/retail trade
16,064

 
(75
)
 
59,574

 
(3,914
)
 
75,638

 
(3,989
)
Services, media and other
136,667

 
(4,545
)
 
133,607

 
(7,944
)
 
270,274

 
(12,489
)
Residential mortgage backed securities
38,200

 
(2,144
)
 
1,976

 
(87
)
 
40,176

 
(2,231
)
Commercial mortgage backed securities
945,680

 
(27,518
)
 
937

 
(33
)
 
946,617

 
(27,551
)
Other asset backed securities
263,184

 
(9,224
)
 
98,048

 
(5,878
)
 
361,232

 
(15,102
)
 
$
2,426,891

 
$
(58,282
)
 
$
1,400,531

 
$
(125,364
)
 
$
3,827,422

 
$
(183,646
)
Held for investment:
 
 
 
 
 
 
 
 
 
 
 
Corporate security:
 
 
 
 
 
 
 
 
 
 
 
Insurance
$

 
$

 
$
75,547

 
$
(1,226
)
 
$
75,547

 
$
(1,226
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
United States Government full faith and credit
$
37,730

 
$
(299
)
 
$

 
$

 
$
37,730

 
$
(299
)
United States Government sponsored agencies
957,053

 
(14,409
)
 

 

 
957,053

 
(14,409
)
United States municipalities, states and territories
261,823

 
(8,474
)
 
2,846

 
(154
)
 
264,669

 
(8,628
)
Foreign government obligations
42,966

 
(1,762
)
 
15,463

 
(9,173
)
 
58,429

 
(10,935
)
Corporate securities:
 
 
 
 
 
 
 
 
 
 
 
Finance, insurance and real estate
2,077,223

 
(59,607
)
 
49,912

 
(14,855
)
 
2,127,135

 
(74,462
)
Manufacturing, construction and mining
3,517,967

 
(246,456
)
 
376,229

 
(131,003
)
 
3,894,196

 
(377,459
)
Utilities and related sectors
2,240,652

 
(138,940
)
 
97,184

 
(22,565
)
 
2,337,836

 
(161,505
)
Wholesale/retail trade
473,050

 
(17,863
)
 
38,682

 
(8,125
)
 
511,732

 
(25,988
)
Services, media and other
1,037,011

 
(39,937
)
 
32,050

 
(3,073
)
 
1,069,061

 
(43,010
)
Residential mortgage backed securities
162,770

 
(2,958
)
 
6,438

 
(531
)
 
169,208

 
(3,489
)
Commercial mortgage backed securities
2,679,510

 
(105,002
)
 
11,495

 
(279
)
 
2,691,005

 
(105,281
)
Other asset backed securities
457,055

 
(10,581
)
 
46,657

 
(9,299
)
 
503,712

 
(19,880
)
 
$
13,944,810

 
$
(646,288
)
 
$
676,956

 
$
(199,057
)
 
$
14,621,766

 
$
(845,345
)
Held for investment:
 
 
 
 
 
 
 
 
 
 
 
Corporate security:
 
 
 
 
 
 
 
 
 
 
 
Insurance
$
65,377

 
$
(11,245
)
 
$

 
$

 
$
65,377

 
$
(11,245
)
Based on the results of our process for evaluating available for sale securities in unrealized loss positions for other than temporary impairments, which is discussed in detail later in this footnote, we have determined that the unrealized losses on the securities in the preceding table are temporary. The unrealized losses at September 30, 2016 are principally related to select sectors of the credit markets with spreads that remain wide due to specific market concerns around metals, mining and energy.

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Table of Contents

The commodity related sectors had most of the gross unrealized losses in our corporate fixed income securities portfolio as of September 30, 2016 and December 31, 2015. Commodity prices, specifically oil, gas and base metals, declined significantly in late 2015, but prices have risen in 2016 to levels that appear sustainable and should support prices and NRSRO ratings longer term. The value of oil has been significantly depressed as the amount of supply from new production has exceeded demand. In addition, iron ore and other key industrial metals have depressed prices as investors perceive the economic slowdown in Asia Pacific will curb demand as supply remains high. The companies in the metal and mining sectors experienced the largest decline in values of their debt in late 2015. In the above table, oil and metals and mining exposure is reflected within the foreign government; manufacturing, construction and mining; and utilities and related sectors. Within these sectors, we continue to monitor the impact to our investment portfolio for those companies that may be adversely affected, both directly and indirectly. Even though the energy holdings and a majority of the metals and mining holdings have seen significant improvements in values as oil and iron ore prices have increased, they could continue to see price volatility and possible downgrades in credit ratings. If oil and commodity prices fall lower and remain at depressed levels for an extended period of time or decline further, certain issuers and investments may come under further stress. At this time, we believe the unrealized losses are temporary due to the fact that the price decline is driven by an over-supply of oil in the energy sector, which we feel is unsustainable long term. Our exposure is in companies that we believe have more financial flexibility and significant operational scale to manage through the downturn. In addition, price declines in the metal and mining sector have been heavily influenced by excess production and softer demand. Companies in the mining sector are more susceptible to rating downgrades and we believe companies will be under continued financial strain if prices decline again. We believe company issuers in our portfolio will be able to meet their debt service obligations.
Approximately 53% and 84% of the unrealized losses on fixed maturity securities shown in the above table for September 30, 2016 and December 31, 2015, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC designations. All of the fixed maturity securities with unrealized losses are current with respect to the payment of principal and interest.
Changes in net unrealized gains on investments for the three and nine months ended September 30, 2016 and 2015 are as follows:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Fixed maturity securities held for investment carried at amortized cost
$
6,954

 
$
(3,753
)
 
$
10,019

 
$
(13,980
)
Investments carried at fair value:
 
 
 
 
 
 
 
Fixed maturity securities, available for sale
$
224,258

 
$
118,345

 
$
2,507,204

 
$
(908,644
)
Equity securities, available for sale
28

 
(30
)
 
10

 
23

 
224,286

 
118,315

 
2,507,214

 
(908,621
)
Adjustment for effect on other balance sheet accounts:
 
 
 
 
 
 
 
Deferred policy acquisition costs and deferred sales inducements
(115,727
)
 
(60,198
)
 
(1,334,702
)
 
455,011

Deferred income tax asset/liability
(37,995
)
 
(20,341
)
 
(410,379
)
 
158,764

 
(153,722
)
 
(80,539
)
 
(1,745,081
)
 
613,775

Change in net unrealized gains on investments carried at fair value
$
70,564

 
$
37,776

 
$
762,133

 
$
(294,846
)
Proceeds from sales of available for sale securities for the nine months ended September 30, 2016 and 2015 were $364.0 million and $269.7 million, respectively. Scheduled principal repayments, calls and tenders for available for sale securities for the nine months ended September 30, 2016 and 2015 were $1.5 billion and $1.0 billion, respectively.

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Table of Contents

Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Net realized gains (losses) on investments, excluding net OTTI losses for the three and nine months ended September 30, 2016 and 2015, are as follows:
 
Three Months Ended 
 September 30,
 
Nine Months Ended 
 September 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Available for sale fixed maturity securities:
 
 
 
 
 
 
 
Gross realized gains
$
4,956

 
$
283

 
$
11,047

 
$
4,783

Gross realized losses
(79
)
 
(97
)
 
(2,678
)
 
(897
)
 
4,877

 
186

 
8,369

 
3,886

Other investments: