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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
 
ý  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended September 30, 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 001-11339
 
PROTECTIVE LIFE CORPORATION
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
95-2492236
(State or other jurisdiction of incorporation or organization)
 
(IRS Employer Identification Number)
 
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of principal executive offices and zip code)
 
Registrant’s telephone number, including area code (205) 268-1000
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý No o
 
Indicate by check mark whether the registrant has submitted electronically 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 ý No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
 
Accelerated Filer o
 
 
 
Non-accelerated filer x
 
Smaller Reporting Company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o No ý
 
Number of shares of Common Stock, $0.01 Par Value, outstanding as of October 27, 2016:  1,000

 



Table of Contents

PROTECTIVE LIFE CORPORATION
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED SEPTEMBER 30, 2016
 
TABLE OF CONTENTS
 
PART I
 
 
 
 
Page
Item 1.
Financial Statements (unaudited):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
 
 
 
 
Item 1A.
 
Item 2.
 
Item 6.
 
 
 



Table of Contents

PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
 
Successor Company
 
Predecessor Company
 
For The Three Months Ended September 30, 2016
 
For The Three Months Ended September 30, 2015
 
For The Nine Months Ended September 30, 2016
 
February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands,
Except Per Share 
Amounts)
Revenues
 

 
 
 
 
 
 

 
 

Premiums and policy fees
$
834,544

 
$
797,741

 
$
2,545,287

 
$
2,138,837

 
$
261,866

Reinsurance ceded
(322,229
)
 
(306,774
)
 
(969,161
)
 
(793,419
)
 
(89,956
)
Net of reinsurance ceded
512,315

 
490,967


1,576,126

 
1,345,418


171,910

Net investment income
482,729

 
440,620

 
1,446,306

 
1,165,783

 
175,180

Realized investment gains (losses):
 

 
 

 
 

 
 

 
 

Derivative financial instruments
116

 
(74,590
)
 
(156,749
)
 
53,654

 
(123,274
)
All other investments
24,152

 
5,348

 
194,663

 
(132,045
)
 
81,153

Other-than-temporary impairment losses
(1,898
)
 
(14,906
)
 
(10,194
)
 
(28,301
)
 
(636
)
Portion recognized in other comprehensive income (before taxes)
(1,410
)
 
4,842

 
3,302

 
12,503

 
155

Net impairment losses recognized in earnings
(3,308
)
 
(10,064
)

(6,892
)
 
(15,798
)

(481
)
Other income
107,642

 
108,312

 
313,506

 
284,669

 
36,421

Total revenues
1,123,646

 
960,593


3,366,960

 
2,701,681


340,909

Benefits and expenses
 

 
 

 
 

 
 

 
 

Benefits and settlement expenses, net of reinsurance ceded: (three and nine months: 2016 Successor - $279,109 and $855,276); (2015 Successor - $266,287 and $687,238); (2015 Predecessor - $87,674)
733,051

 
676,181

 
2,161,293

 
1,857,086

 
267,287

Amortization of deferred policy acquisition costs and value of business acquired
43,392

 
8,722

 
94,899

 
76,713

 
4,072

Other operating expenses, net of reinsurance ceded: (three and nine months: 2016 Successor - $49,073 and $148,334); (2015 Successor - $49,717 and $134,494); (2015 Predecessor - $35,036)
214,124

 
188,430

 
637,186

 
490,885

 
68,368

Total benefits and expenses
990,567

 
873,333


2,893,378

 
2,424,684


339,727

Income before income tax
133,079

 
87,260

 
473,582

 
276,997

 
1,182

Income tax expense (benefit)
39,785

 
26,853

 
152,820

 
89,889

 
(327
)
Net income
$
93,294

 
$
60,407


$
320,762

 
$
187,108


$
1,509

 
 
 
 
 
 
 
 
 
 
Net income - basic
 

 
 
 
 
 
 

 
$
0.02

Net income - diluted
 

 
 
 
 
 
 

 
$
0.02

Cash dividends paid per share
 

 
 
 
 
 
 

 
$
—

 
 
 
 
 
 
 
 
 
 
Average shares outstanding - basic
 
 
 
 
 
 

 
80,452,848

Average shares outstanding - diluted
 
 
 
 
 
 

 
81,759,287



See Notes to the Consolidated Condensed Financial Statements
2
Table of Contents

PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 
 
Successor Company
 
Predecessor Company
 
For The Three Months Ended September 30, 2016
 
For The Three Months Ended September 30, 2015
 
For The Nine Months Ended September 30, 2016
 
February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Net income
$
93,294

 
$
60,407

 
$
320,762

 
$
187,108

 
$
1,509

Other comprehensive income (loss):
 

 
 
 
 
 
 

 
 

Change in net unrealized gains (losses) on investments, net of income tax: (three and nine months 2016 Successor - $106,841 and $657,352); (2015 Successor - $(25,289) and $(506,947)); (2015 Predecessor - $259,738)
198,419

 
(46,966
)
 
1,220,796

 
(941,473
)
 
482,370

Reclassification adjustment for investment amounts included in net income, net of income tax: (three and nine months 2016 Successor - $575 and $(6,041)); (2015 Successor - $3,961 and $4,661); (2015 Predecessor - $(2,244))
1,068

 
7,356

 
(11,219
)
 
8,657

 
(4,166
)
Change in net unrealized gains (losses) relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (three and nine months 2016 Successor - $1,278 and $(106)); (2015 Successor - $781 and $(1,677)); (2015 Predecessor - $(131))
2,374

 
1,451

 
(198
)
 
(3,115
)
 
(243
)
Change in accumulated (loss) gain - derivatives, net of income tax: (2015 Successor - $0 and $(45)); (2015 Predecessor - $5)
—

 
—

 
—

 
(86
)
 
9

Reclassification adjustment for derivative amounts included in net income, net of income tax: (2015 Successor - $0 and $45); (2015 Predecessor - $13)
—

 
—

 
—

 
86

 
23

Change in postretirement benefits liability adjustment, net of income tax: (three and nine months 2016 Successor - $(874) and $(874)); (2015 Predecessor - $(6,475))
(1,624
)
 
—

 
(1,624
)
 
—

 
(12,025
)
Total other comprehensive income (loss)
200,237

 
(38,159
)
 
1,207,755


(935,931
)

465,968

Total comprehensive income (loss)
$
293,531

 
$
22,248

 
$
1,528,517


$
(748,823
)

$
467,477

 


See Notes to the Consolidated Condensed Financial Statements
3
Table of Contents

PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
 
 
Successor Company
 
As of
September 30, 2016
 
As of
December 31, 2015
 
(Dollars In Thousands)
Assets
 

 
 

Fixed maturities, at fair value (amortized cost: Successor 2016 - $39,779,532; 2015 - $38,457,049)
$
39,630,087

 
$
35,573,250

Fixed maturities, at amortized cost (fair value: Successor 2016 - $2,894,615; 2015 - $515,000)
2,775,230

 
593,314

Equity securities, at fair value (cost: Successor 2016 - $718,604; 2015 - $732,485)
737,303

 
739,263

Mortgage loans (related to securitizations: Successor 2016 - $296,716; 2015 - $359,181)
5,912,683

 
5,662,812

Investment real estate, net of accumulated depreciation (Successor 2016 - $209; 2015 - $133)
8,006

 
11,118

Policy loans
1,656,083

 
1,699,508

Other long-term investments
933,247

 
622,567

Short-term investments
180,698

 
268,718

Total investments
51,833,337


45,170,550

Cash
621,344

 
396,072

Accrued investment income
495,484

 
473,598

Accounts and premiums receivable
109,163

 
62,459

Reinsurance receivables
5,435,467

 
5,536,751

Deferred policy acquisition costs and value of business acquired
1,909,913

 
1,558,808

Goodwill
732,443

 
732,443

Other intangibles, net of accumulated amortization (Successor 2016 - $68,876; 2015 - $37,869)
614,902

 
645,131

Property and equipment, net of accumulated depreciation (Successor 2016 - $15,233; 2015 - $8,277)
104,470

 
102,865

Other assets
171,379

 
153,222

Income tax receivable
102,445

 
—

Assets related to separate accounts
 
 
 

Variable annuity
13,164,747

 
12,829,188

Variable universal life
868,818

 
827,610

Total assets
$
76,163,912


$
68,488,697

 

















See Notes to the Consolidated Condensed Financial Statements
4
Table of Contents

PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(continued)
(Unaudited)
 
 
Successor Company
 
As of
September 30, 2016
 
As of
December 31, 2015
 
(Dollars In Thousands)
Liabilities
 

 
 

Future policy benefits and claims
$
30,686,446

 
$
29,703,897

Unearned premiums
762,319

 
723,536

Total policy liabilities and accruals
31,448,765

 
30,427,433

Stable value product account balances
3,412,041

 
2,131,822

Annuity account balances
10,679,011

 
10,719,862

Other policyholders’ funds
1,406,578

 
1,069,572

Other liabilities
2,465,719

 
1,693,310

Income tax payable
—

 
49,957

Deferred income taxes
1,849,086

 
997,281

Non-recourse funding obligations
2,800,886

 
685,684

Repurchase program borrowings
219,457

 
438,185

Debt
1,385,284

 
1,588,806

Subordinated debt securities
443,122

 
448,763

Liabilities related to separate accounts
 

 
 

Variable annuity
13,164,747

 
12,829,188

Variable universal life
868,818

 
827,610

Total liabilities
70,143,514


63,907,473

Commitments and contingencies - Note 13
0

 
0

Shareowner’s equity
 

 
 

Common Stock, Successor: 2016 and 2015 - $0.01 par value; shares authorized: 5,000; shares issued: 1,000
—

 
—

Additional paid-in-capital
5,554,059

 
5,554,059

Treasury stock, at cost
—

 
—

Retained earnings
499,718

 
268,299

Accumulated other comprehensive income (loss):
 

 
 

Net unrealized gains (losses) on investments, net of income tax: (Successor 2016 - $(19,974); 2015 - $(671,285))
(37,095
)
 
(1,246,672
)
Net unrealized (losses) gains relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (Successor 2016 - $(318); 2015 - $(212))
(591
)
 
(393
)
Postretirement benefits liability adjustment, net of income tax: (Successor 2016 - $2,320; 2015 - $3,194)
4,307

 
5,931

Total shareowner’s equity
6,020,398


4,581,224

Total liabilities and shareowner’s equity
$
76,163,912


$
68,488,697

 


See Notes to the Consolidated Condensed Financial Statements
5
Table of Contents

PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF SHAREOWNER’S EQUITY
(Unaudited)

 
Common
Stock
 
Additional
Paid-In-
Capital
 
Treasury
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareowner’s
equity
 
(Dollars In Thousands)
Successor Company
 

 
 

 
 

 
 

 
 

 
 

Balance, December 31, 2015
$
—

 
$
5,554,059

 
$
—

 
$
268,299

 
$
(1,241,134
)
 
$
4,581,224

Net income for the nine months ended September 30, 2016
 

 
 

 
 

 
320,762

 
 

 
320,762

Other comprehensive income
 

 
 

 
 

 
 

 
1,207,755

 
1,207,755

Comprehensive income for the nine months ended September 30, 2016
 

 
 

 
 

 
 

 
 

 
1,528,517

Dividends to parent
 
 
 
 
 
 
(89,343
)
 
 
 
(89,343
)
Balance, September 30, 2016
$
—

 
$
5,554,059

 
$
—

 
$
499,718

 
$
(33,379
)
 
$
6,020,398










See Notes to the Consolidated Condensed Financial Statements
6
Table of Contents

PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
 

 
Successor Company
 
Predecessor Company
 
For The Nine
Months Ended
September 30, 2016
 
February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Cash flows from operating activities
 
 
 

 
 

Net income
$
320,762

 
$
187,108

 
$
1,509

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

 
 

 
 

Realized investment (gains) losses
(31,022
)
 
94,189

 
42,602

Amortization of DAC and VOBA
94,899

 
76,713

 
4,072

Capitalization of DAC
(244,252
)
 
(207,309
)
 
(22,489
)
Depreciation and amortization expense
42,520

 
35,194

 
820

Deferred income tax
201,466

 
86,315

 
30,791

Accrued income tax
(152,402
)
 
64,345

 
(32,803
)
Interest credited to universal life and investment products
532,998

 
521,760

 
79,088

Policy fees assessed on universal life and investment products
(935,702
)
 
(756,276
)
 
(90,288
)
Change in reinsurance receivables
101,284

 
142,267

 
(85,081
)
Change in accrued investment income and other receivables
(44,655
)
 
11,103

 
(5,789
)
Change in policy liabilities and other policyholders’ funds of traditional life and health products
(159,533
)
 
(147,891
)
 
176,980

Trading securities:
 

 
 

 
 

Maturities and principal reductions of investments
93,397

 
90,548

 
17,946

Sale of investments
390,412

 
107,035

 
26,422

Cost of investments acquired
(438,886
)
 
(174,455
)
 
(27,289
)
Other net change in trading securities
47,879

 
66,189

 
(26,901
)
Amortization of premiums and accretion of discounts on investments and mortgage loans
308,249

 
288,181

 
12,930

Change in other liabilities
338,199

 
(182,029
)
 
238,592

Other, net
(110,243
)
 
(58,886
)
 
(149,889
)
Net cash provided by operating activities
$
355,370

 
$
244,101

 
$
191,223



 

See Notes to the Consolidated Condensed Financial Statements
7
Table of Contents

PROTECTIVE LIFE CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)


 
Successor Company
 
Predecessor Company

 
For The Nine
Months Ended
September 30, 2016
 
February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)

Cash flows from investing activities
 

 
 

 
 

Maturities and principal reductions of investments, available-for-sale
$
984,707

 
$
756,207

 
$
59,028

Sale of investments, available-for-sale
1,544,558

 
1,154,825

 
191,062

Cost of investments acquired, available-for-sale
(3,962,879
)
 
(2,337,182
)
 
(149,887
)
Change in investments, held-to-maturity
(2,185,000
)
 
(50,000
)
 
—

Mortgage loans:
 

 
 

 
 

New lendings
(944,025
)
 
(1,101,820
)
 
(100,530
)
Repayments
648,109

 
894,164

 
45,741

Change in investment real estate, net
2,905

 
(59
)
 
7

Change in policy loans, net
43,425

 
45,470

 
6,365

Change in other long-term investments, net
(104,543
)
 
(79,030
)
 
(25,339
)
Change in short-term investments, net
51,960

 
22,313

 
(40,314
)
Net unsettled security transactions
52,292

 
(30,877
)
 
37,510

Purchase of property and equipment
(15,607
)
 
(5,855
)
 
(649
)
Amounts received from reinsurance transaction
325,800

 
—

 
—

Net cash (used in) provided by investing activities
$
(3,558,298
)
 
$
(731,844
)
 
$
22,994

Cash flows from financing activities
 

 
 

 
 

Borrowings under line of credit arrangements and debt
$
220,000

 
$
195,000

 
$
—

Principal payments on line of credit arrangement and debt
(373,074
)
 
(193,093
)
 
(60,000
)
Issuance (repayment) of non-recourse funding obligations
2,098,700

 
50,000

 
—

Repurchase program borrowings
(218,728
)
 
405,718

 
—

Dividends to shareowner
(89,343
)
 
—

 
—

Investment product deposits and change in universal life deposits
3,509,315

 
1,951,647

 
169,233

Investment product withdrawals
(1,718,670
)
 
(1,720,926
)
 
(240,147
)
Other financing activities, net
—

 
—

 
(4
)
Net cash provided by (used in) financing activities
$
3,428,200

 
$
688,346

 
$
(130,918
)
Change in cash
225,272

 
200,603

 
83,299

Cash at beginning of period
396,072

 
462,710

 
379,411

Cash at end of period
$
621,344

 
$
663,313

 
$
462,710



See Notes to the Consolidated Condensed Financial Statements
8
Table of Contents

PROTECTIVE LIFE CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 
1.                                      BASIS OF PRESENTATION
 
Basis of Presentation
 
On February 1, 2015, Protective Life Corporation (the “Company”) became a wholly owned subsidiary of The Dai-ichi Life Insurance Company, Limited, a kabushiki kaisha organized under the laws of Japan (“Dai-ichi Life”), when DL Investment (Delaware), Inc. a wholly owned subsidiary of Dai-ichi Life, merged with and into the Company (the "Merger"). Prior to February 1, 2015, and for the periods reported as “predecessor”, the Company’s stock was publicly traded on the New York Stock Exchange. Subsequent to the Merger date, the Company remains as an SEC registrant within the United States. The Company is a holding company with subsidiaries that provide financial services through the production, distribution, and administration of insurance and investment products. The Company markets individual life insurance, credit life and disability insurance, guaranteed investment contracts, guaranteed funding agreements, fixed and variable annuities, and extended service contracts throughout the United States. The Company also maintains a separate segment devoted to the acquisition of insurance policies from other companies. Founded in 1907, Protective Life Insurance Company (“PLICO”) is the Company’s largest operating subsidiary.
 
In conjunction with the Merger, the Company elected to apply “pushdown” accounting by applying the guidance allowed by ASC Topic 805, Business Combinations, including the initial recognition of most of the Company’s assets and liabilities at fair value as of the acquisition date, and similarly recognizing goodwill calculated based on the terms of the transaction and the fair value of the new basis of net assets of the Company. The new basis of accounting will be the basis of the accounting records for assets and liabilities held at the acquisition date in the preparation of future financial statements and related disclosures after the Merger date.
 
These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for the interim periods presented herein. Such accounting principles differ from statutory reporting practices used by insurance companies in reporting to state regulatory authorities. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair statement of the results for the interim periods presented. Operating results for the three and nine months ended September 30, 2016 (Successor Company) are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2016 (Successor Company). The year-end consolidated condensed financial data included herein was derived from audited financial statements but does not include all disclosures required by GAAP within this report. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (Successor Company).
 
The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to changing competition, economic conditions, interest rates, investment performance, insurance ratings, claims, persistency, and other factors.
 
Entities Included
 
The consolidated condensed financial statements for the predecessor and successor periods presented in this report include the accounts of Protective Life Corporation and subsidiaries and its affiliate companies in which the Company holds a majority voting or economic interest. Intercompany balances and transactions have been eliminated.
 
2.                                      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Significant Accounting Policies
 
For a full description of significant accounting policies, see Note 2 to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (Successor Company). There were no significant changes to the Company's accounting policies during the nine months ended September 30, 2016 (Successor Company).
 
Accounting Pronouncements Recently Adopted
 
Accounting Standards Update ("ASU") No. 2015-02-Consolidation-Amendments to the Consolidation Analysis. This Update makes several targeted changes to generally accepted accounting principles, including a) eliminating the presumption that a general partner should consolidate a limited partnership and b) eliminating the consolidation model specific to limited partnerships. The amendments also clarify when fees and related party relationships should be considered in the consolidation of variable interest entities. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2015. The Update did not impact the Company's financial position or results of operations, and the Company has revised its policies and processes to comply with the revised guidance.

ASU No. 2015-03-Interest-Imputation of Interest. The objective of this Update is to eliminate diversity in practice related to the presentation of debt issuance costs. The amendments in this Update require 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. The recognition and measurement guidance for debt issuance costs are not affected by the


Table of Contents

amendments in this Update. The Update is effective for fiscal years beginning after December 15, 2015, and requires revised presentation of debt issuance costs in all periods presented in the financial statements. The Update did not impact the Company's financial position or results of operations, and the Company has revised its policies and processes to comply with the revised guidance.

ASU No. 2015-15 - Interest - Imputation of Interest - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. The objective of this Update is to clarify the SEC Staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements given the lack of guidance on the topic in ASU No. 2015-03. This Update reflects the SEC Staff’s decision to not object when an entity defers and presents debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. The Update did not impact the Company's financial position or results of operations, and the Company has revised its policies and processes to comply with the revised guidance.

ASU No. 2015-05 - Intangibles - Goodwill and Other - Internal-Use Software. The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. The Update is effective for annual and interim periods beginning after December 15, 2015. The Update did not impact the Company's financial position or results of operations, and the Company has revised its policies and processes to comply with the new standard.

 Accounting Pronouncements Not Yet Adopted

ASU No. 2014-09-Revenue from Contracts with Customers (Topic 606). This Update provides for significant revisions to the recognition of revenue from contracts with customers across various industries. Under the new guidance, entities are required to apply a prescribed 5-step process to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The accounting for revenues associated with insurance products is not within the scope of this Update. The Update was originally effective for annual and interim periods beginning after December 15, 2016. However, in August 2015, the FASB issued ASU No. 2015-14 - Revenues from Contracts with Customers: Deferral of the Effective Date, to defer the effective date of ASU No. 2014-09 by one year to annual and interim periods beginning after December 15, 2017. Early adoption will be allowed, but not before the original effective date. The Company is reviewing its policies and processes to ensure compliance with the requirements in this Update, upon adoption, and assessing the impact this standard will have on its non-insurance operations.

ASU No. 2014-15-Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This Update will require management to assess an entity’s ability to continue as a going concern, and will require footnote disclosures in certain circumstances. Under the updated guidance, management should consider relevant conditions and evaluate whether it is probable that the entity will be unable to meet its obligations within one year after the issuance date of the financial statements. The Update is effective for annual periods ending December 31, 2016 and for annual and interim periods thereafter, with early adoption permitted. The amendments in this Update will not impact the Company’s financial position or results of operations. However, the new guidance will require a formal assessment of going concern by management based on criteria prescribed in the new guidance. The Company is prepared to comply with the revised guidance, upon adoption.

ASU No. 2015-09 - Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts. The amendments in this Update require additional disclosures for short-duration contracts issued by insurance entities. The additional disclosures focus on the liability for unpaid claims and claim adjustment expenses and include incurred and paid claims development information by accident year in tabular form, along with a reconciliation of this information to the statement of financial position. For accident years included in the development tables, the amendments also require disclosure of the total incurred-but-not-reported liabilities and expected development on reported claims, along with claims frequency information unless impracticable. Finally, the amendments require disclosure of the historical average annual percentage payout of incurred claims. With the exception of the current reporting period, claims development information may be presented as supplementary information. The Update is effective for annual periods beginning after December 15, 2015 and interim periods beginning after December 15, 2016. The Company does not anticipate that the additional disclosures introduced in this Update will be material to its financial statements.

ASU No. 2016-01 - Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most notably, the Update requires that equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net income. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2017. The Company is reviewing its policies and processes to ensure compliance with the revised guidance.

ASU No. 2016-02 - Leases. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of leases. The most significant change will relate to the accounting model used by lessees. The Update will require all leases with terms greater than 12 months to be recorded on the balance sheet in the form of a lease asset and liability. The amendments in the Update are effective for annual and interim periods beginning after December 15, 2018. The Company is reviewing its policies and processes to ensure compliance with the revised guidance.



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ASU No. 2016-13 - Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The amendments in this Update introduce a new impairment model for certain financial assets, including mortgage loans and reinsurance receivables. The new model will not apply to debt securities classified as available-for-sale. For assets within the scope of the new model, an entity will recognize as an allowance its estimate of the contractual cash flows not expected to be collected. This differs from the current impairment model, which requires recognition of credit losses when they have been incurred. The Update also makes targeted changes to the current impairment model for available-for-sale debt securities, which comprise the majority of the Company’s invested assets. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2019. The Company is reviewing its policies and processes to ensure compliance with the requirements in this Update, upon adoption, and assessing the impact this standard will have on its operations and financial results.

ASU No. 2016-15 - Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The amendments in this Update are intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. Specific transactions addressed in the new guidance include: Debt prepayment/extinguishment costs, contingent consideration payments, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investments. The Update does not introduce any new accounting or financial reporting requirements, and is effective for annual and interim periods beginning after December 15, 2018. The Company is reviewing its policies and processes to ensure compliance with the requirements in this Update, upon adoption.

ASU No. 2016-16 - Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory. The objective of this Update is to reduce complexity and diversity in practice related to certain types of intra-entity asset transfers. Under the revised guidance, entities will be required to recognize the income tax consequences of intra-entity transfers of an assets other than inventory when those transfers occur. The Update is effective for annual reporting periods beginning after December 15, 2018 and interim reporting periods beginning after December 15, 2019. The Company is currently reviewing the Update to determine whether the amendments will impact its financial position or results of operations, and whether changes are needed to its policies and processes to comply with the revised guidance.
        
3.                                      REINSURANCE AND FINANCING TRANSACTIONS
 
On January 15, 2016, PLICO completed the transaction contemplated by the Master Agreement, dated September 30, 2015 (the “Master Agreement”), with Genworth Life and Annuity Insurance Company (“GLAIC”). Pursuant to the Master Agreement, effective January 1, 2016, PLICO entered into a reinsurance agreement (the “Reinsurance Agreement”) under the terms of which PLICO coinsures certain term life insurance business of GLAIC (the “GLAIC Block”). In connection with the reinsurance transaction, on January 15, 2016, Golden Gate Captive Insurance Company (“Golden Gate”), a wholly owned subsidiary of PLICO, and Steel City, LLC (“Steel City”), a newly formed wholly owned subsidiary of the Company, entered into an 18-year transaction to finance $2.188 billion of “XXX” reserves related to the acquired GLAIC Block and the other term life insurance business reinsured to Golden Gate by PLICO and West Coast Life Insurance Company (“WCL”), a direct wholly owned subsidiary of PLICO. Steel City issued notes with an aggregate initial principal amount of $2.188 billion to Golden Gate in exchange for a surplus note issued by Golden Gate with an initial principal amount of $2.188 billion. Through the structure, Hannover Life Reassurance Company of America (Bermuda) Ltd., The Canada Life Assurance Company (Barbados Branch) and Nomura Americas Re Ltd. (collectively, the “Risk-Takers”) provide credit enhancement to the Steel City notes for the 18-year term in exchange for credit enhancement fees. The transaction is “non-recourse” to PLICO, WCL and the Company, meaning that none of these companies are liable to reimburse the Risk-Takers for any credit enhancement payments required to be made. In connection with the transaction, the Company has entered into certain support agreements under which it guarantees or otherwise supports certain obligations of Golden Gate or Steel City, including a guarantee of the fees to the Risk-Takers. As a result of the financing transaction described above, the $800 million of Golden Gate Series A Surplus Notes held by the Company were contributed to PLICO and then subsequently contributed to Golden Gate, which resulted in the extinguishment of these notes. Also on January 15, 2016, Golden Gate paid an extraordinary dividend of $300 million to PLICO as approved by the Vermont Department of Financial Regulation.
 
The transactions described above resulted in an increase to total assets and total liabilities of $2.8 billion. Of the $2.8 billion increase in total assets, $0.6 billion was the result of the reinsurance transaction with GLAIC which included a $280 million increase in VOBA. The remaining $2.2 billion increase to total assets and liabilities is associated with the financing transaction between Golden Gate and Steel City.

The Company considered whether the Reinsurance Agreement constituted the purchase of a business for accounting and reporting purposes pursuant to ASC 805, Business Combinations. While the transaction included a continuation of the revenue-producing activities associated with the reinsured policies, it did not result in the acquisition of a market distribution system, sales force or production techniques. Based on Management’s decision not to pursue distribution opportunities or future sales related to the reinsured policies, the Company accounted for the transaction as a reinsurance agreement under ASC 944, Insurance Contracts and asset acquisition under ASC 805. Accordingly, the Company recorded the assets and liabilities acquired under the reinsurance agreement at fair value and recognized an intangible asset (value of business acquired or “VOBA”) equal to the excess of the fair value of assets acquired over liabilities assumed, measured in accordance with the Company's accounting policies for insurance and reinsurance contracts that it issues or holds pursuant to ASC 944.

4.                                      DAI-ICHI MERGER
 
On February 1, 2015 the Company, subsequent to required approvals from the Company’s shareholders and relevant regulatory authorities, became a wholly owned subsidiary of Dai-ichi Life as contemplated by the Agreement and Plan of Merger (the “Merger Agreement”) with Dai-ichi Life and DL Investment (Delaware), Inc., a Delaware corporation and wholly owned subsidiary of Dai-ichi Life, which provided for the Merger of DL Investment (Delaware), Inc. with and into the Company, with


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the Company surviving the Merger as a wholly owned subsidiary of Dai-ichi Life. On February 1, 2015 each share of the Company’s common stock outstanding was converted into the right to receive $70 per share, without interest (the “Per Share Merger Consideration”). The aggregate cash consideration paid in connection with the Merger for the outstanding shares of common stock was approximately $5.6 billion and paid directly to the shareowners of record by Dai-ichi Life. The Merger provided Dai-ichi Life with a platform for growth in the United States, where it did not previously have a significant presence. In connection with the completion of the Merger, the Company’s previously publicly traded equity was delisted from the NYSE, although the Company remains an SEC registrant for financial reporting purposes in the United States.
 
The Merger was accounted for under the acquisition method of accounting under ASC Topic 805. In accordance with ASC Topic 805-20-30, all identifiable assets acquired and liabilities assumed were measured at fair value as of the acquisition date. On the date of the Merger, goodwill of $735.7 million represented the cost in excess of the fair value of net assets acquired (including identifiable intangibles) in the Merger, and reflected the Company’s assembled workforce, future growth potential and other sources of value not associated with identifiable assets. During the measurement period subsequent to February 1, 2015, the Company made adjustments to provisional amounts related to certain tax balances that resulted in a decrease to goodwill of $3.3 million from the amount recorded at the Merger date. The balance of goodwill associated with the Merger as of December 31, 2015 (Successor Company) and September 30, 2016 (Successor Company) was $732.4 million. None of the goodwill is tax deductible.



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The following table summarizes the consideration paid for the acquisition and the preliminary determination of the fair value of assets acquired and liabilities assumed at the acquisition date:
 
 
Fair Value
 
As of
 
February 1, 2015
 
(Dollars In Thousands)
Assets
 

Fixed maturities
$
38,363,025

Equity securities
745,512

Mortgage loans
5,580,229

Investment real estate
7,456

Policy loans
1,751,872

Other long-term investments
686,507

Short-term investments
316,167

Total investments
47,450,768

Cash
462,710

Accrued investment income
484,021

Accounts and premiums receivable
112,182

Reinsurance receivables
5,724,020

Value of business acquired
1,276,886

Goodwill
735,712

Other intangibles
683,000

Property and equipment
104,364

Other assets
120,762

Income tax receivable
15,458

Assets related to separate accounts
 

Variable annuity
12,970,587

Variable universal life
819,188

Total assets
$
70,959,658

Liabilities
 

Future policy and benefit claims
$
30,195,841

Unearned premiums
682,183

Total policy liabilities and accruals
30,878,024

Stable value product account balances
1,932,277

Annuity account balances
10,941,661

Other policyholders’ funds
1,388,083

Other liabilities
2,188,863

Deferred income taxes
1,535,556

Non-recourse funding obligations
621,798

Repurchase program borrowings
50,000

Debt
1,519,211

Subordinated debt securities
560,351

Liabilities related to separate accounts
 

Variable annuity
12,970,587

Variable universal life
819,188

Total liabilities
65,405,599

Net assets acquired
$
5,554,059

 
 


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Treatment of certain acquisition related costs
 
The Company recorded costs related to the Merger in either the predecessor or successor periods based on the specific facts and circumstances underlying each individual transaction. Certain of these costs were fully contingent on the consummation of the Merger on February 1, 2015 (Successor Company). These costs are not expensed in either the Predecessor or Successor Company Statement of Comprehensive Income (Loss). Liabilities for payment of these contingent costs are included in the opening balance sheet as of February 1, 2015 (Successor Company), and the nature and amount of the costs are discussed below.
 
Fees in the amount of $28.8 million which were paid to the Company’s financial advisor related to the Merger were recorded as liabilities as of the acquisition date. In accordance with the terms of the contract, payment of these fees was contingent on the successful closing of the Merger, and became payable on the date thereof.
 
Certain of the Company’s stock-based compensation arrangements provided for acceleration of benefits on the completion of a change-in-control event. Upon the completion of the Merger, benefits in the amount of $138.2 million became payable to eligible employees under these arrangements. Such accounts were recorded as liabilities as of the acquisition closing date. The portion of this payable that represented expense accelerated on the merger date was $25.4 million.

Treatment of Benefit Plans
 
At or immediately prior to the Merger, each stock appreciation right with respect to shares of Common Stock granted under any Stock Plan (each, a “SAR”) that were outstanding and unexercised immediately prior to the Merger and that had a base price per share of Common Stock underlying such SAR (the “Base Price”) that was less than the Per Share Merger Consideration (each such SAR, an “In-the-Money SAR”), whether or not exercisable or vested, was cancelled and converted into the right to receive an amount in cash less any applicable withholding taxes, determined by multiplying (i) the excess of the Per Share Merger Consideration over the Base Price of such In-the-Money SAR by (ii) the number of shares of Common Stock subject to such In-the-Money SAR (such amount, the “SAR Consideration”).
 
At or immediately prior to the effective time of the Merger, each restricted stock unit with respect to a share of Common Stock granted under any Stock Plan (each, a “RSU”) that was outstanding immediately prior to the Merger, whether or not vested, was cancelled and converted into the right to receive an amount in cash, without interest, less any applicable withholding taxes, determined by multiplying (i) the Per Share Merger Consideration by (ii) the number of RSUs.
 
The number of performance shares earned for each award of performance shares granted under any Stock Plan was calculated by determining the number of performance shares that would have been paid if the subject award period had ended on the December 31 immediately preceding the Merger (based on the conditions set for payment of performance share awards for the subject award period), provided that the number of performance shares earned for each award were not less than the aggregate number of performance shares at the target performance level. Each performance share earned that was outstanding immediately prior to the Merger, whether or not vested, was cancelled and converted into the right to receive an amount in cash, without interest, less any applicable withholding taxes, determined by multiplying (i) the Per Share Merger Consideration by (ii) the number of Performance Shares.
 
5.                                      MONY CLOSED BLOCK OF BUSINESS
 
In 1998, MONY Life Insurance Company (“MONY”) converted from a mutual insurance company to a stock corporation (“demutualization”). In connection with its demutualization, an accounting mechanism known as a closed block (the “Closed Block”) was established for certain individuals’ participating policies in force as of the date of demutualization. Assets, liabilities, and earnings of the Closed Block are specifically identified to support its participating policyholders. The Company acquired the Closed Block in conjunction with the acquisition of MONY in 2013.

Assets allocated to the Closed Block inure solely to the benefit of each Closed Block’s policyholders and will not revert to the benefit of MONY or the Company. No reallocation, transfer, borrowing or lending of assets can be made between the Closed Block and other portions of MONY’s general account, any of MONY’s separate accounts or any affiliate of MONY without the approval of the Superintendent of The New York State Department of Financial Services (the “Superintendent”). Closed Block assets and liabilities are carried on the same basis as similar assets and liabilities held in the general account.

The excess of Closed Block liabilities over Closed Block assets (adjusted to exclude the impact of related amounts in accumulated other comprehensive income (loss) (“AOCI”)) at the acquisition date of October 1, 2013, represented the estimated maximum future post-tax earnings from the Closed Block that would be recognized in income from continuing operations over the period the policies and contracts in the Closed Block remain in force. In connection with the acquisition of MONY, the Company developed an actuarial calculation of the expected timing of MONY’s Closed Block’s earnings as of October 1, 2013. Pursuant to the acquisition of the Company by Dai-ichi Life, this actuarial calculation of the expected timing of MONY’s Closed Block earnings was recalculated and reset as of February 1, 2015, along with the establishment of a policyholder dividend obligation as of such date.

If the actual cumulative earnings from the Closed Block are greater than the expected cumulative earnings, only the expected earnings will be recognized in the Company’s net income. Actual cumulative earnings in excess of expected cumulative earnings at any point in time are recorded as a policyholder dividend obligation because they will ultimately be paid to Closed Block policyholders as an additional policyholder dividend unless offset by future performance that is less favorable than originally expected. If a policyholder dividend obligation has been previously established and the actual Closed Block earnings in a subsequent period are less than the expected earnings for that period, the policyholder dividend obligation would be reduced (but not below


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zero). If, over the period the policies and contracts in the Closed Block remain in force, the actual cumulative earnings of the Closed Block are less than the expected cumulative earnings, only actual earnings would be recognized in income from continuing operations. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside the Closed Block.

Many expenses related to Closed Block operations, including amortization of VOBA, are charged to operations outside of the Closed Block; accordingly, net revenues of the Closed Block do not represent the actual profitability of the Closed Block operations. Operating costs and expenses outside of the Closed Block are, therefore, disproportionate to the business outside of the Closed Block.

Summarized financial information for the Closed Block as of September 30, 2016 (Successor Company) and December 31, 2015 (Successor Company) is as follows:
 
Successor Company
 
As of
September 30, 2016
 
As of
December 31, 2015
 
(Dollars In Thousands)
Closed block liabilities
 

 
 

Future policy benefits, policyholders’ account balances and other policyholder liabilities
$
5,913,411

 
$
6,010,520

Policyholder dividend obligation
264,107

 
—

Other liabilities
52,435

 
24,539

Total closed block liabilities
6,229,953

 
6,035,059

Closed block assets
 

 
 

Fixed maturities, available-for-sale, at fair value
$
4,696,136

 
$
4,426,090

Mortgage loans on real estate
201,078

 
247,162

Policy loans
717,887

 
746,102

Cash
79,115

 
34,420

Other assets
155,360

 
162,640

Total closed block assets
5,849,576

 
5,616,414

Excess of reported closed block liabilities over closed block assets
380,377

 
418,645

Portion of above representing accumulated other comprehensive income:
 

 
 

Net unrealized investment gains (losses) net of policyholder dividend obligation of $16,169 (Successor) and $(179,360) (Successor)
—

 
(18,597
)
Future earnings to be recognized from closed block assets and closed block liabilities
$
380,377

 
$
400,048


Reconciliation of the policyholder dividend obligation is as follows:
 
 
Successor Company
 
Predecessor Company
 
For The Nine Months Ended September 30, 2016
 
February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Policyholder dividend obligation, beginning of period
$
—

 
$
323,432

 
$
366,745

Applicable to net revenue (losses)
(36,707
)
 
(27,854
)
 
(1,369
)
Change in net unrealized investment gains (losses) allocated to the policyholder dividend obligation; includes deferred tax benefits of $(8,706) (Successor); $(83,000) (2015 - Successor); $47,277 (2015 - Predecessor)
300,814

 
(237,143
)
 
135,077

Policyholder dividend obligation, end of period
$
264,107

 
$
58,435

 
$
500,453

 


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Closed Block revenues and expenses were as follows:
 
 
Successor Company
 
Predecessor Company
 
For The Three Months Ended September 30, 2016
 
For The Three Months Ended September 30, 2015
 
For The Nine Months Ended September 30, 2016
 
February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Revenues
 

 
 
 
 
 
 

 
 

Premiums and other income
$
44,043

 
$
46,610

 
$
135,282

 
$
128,279

 
$
15,065

Net investment income
53,582

 
54,593

 
156,458

 
142,274

 
19,107

Net investment gains
326

 
167

 
963

 
3,017

 
568

Total revenues
97,951

 
101,370

 
292,703

 
273,570

 
34,740

Benefits and other deductions
 

 
 
 
 
 
 

 
 

Benefits and settlement expenses
88,143

 
90,966

 
260,227

 
245,711

 
31,152

Other operating expenses
537

 
258

 
2,214

 
733

 
—

Total benefits and other deductions
88,680

 
91,224

 
262,441

 
246,444

 
31,152

Net revenues before income taxes
9,271

 
10,146

 
30,262

 
27,126

 
3,588

Income tax expense
3,245

 
3,551

 
10,591

 
9,494

 
1,256

Net revenues
$
6,026


$
6,595

 
$
19,671

 
$
17,632


$
2,332


6.                                      INVESTMENT OPERATIONS
 
Net realized gains (losses) for all other investments are summarized as follows:
 
 
Successor Company
 
Predecessor Company
 
For The Three Months Ended September 30, 2016
 
For The Three Months Ended September 30, 2015
 
For The Nine Months Ended September 30, 2016
 
February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Fixed maturities
$
1,665

 
$
(1,304
)
 
$
24,116

 
$
2,408

 
$
6,891

Equity securities
—

 
51

 
36

 
72

 
—

Impairments on corporate securities
(3,308
)
 
(10,064
)
 
(6,892
)
 
(15,798
)
 
(481
)
Modco trading portfolio
23,995

 
8,377

 
178,353

 
(133,524
)
 
73,062

Other investments
(1,508
)
 
(1,776
)
 
(7,842
)
 
(1,001
)
 
1,200

Total realized gains (losses) - investments
$
20,844

 
$
(4,716
)
 
$
187,771

 
$
(147,843
)
 
$
80,672

 
Gross realized gains and gross realized losses on investments available-for-sale (fixed maturities, equity securities, and short-term investments) are as follows:
 
 
Successor Company
 
Predecessor Company
 
For The Three Months Ended September 30, 2016
 
For The Three Months Ended September 30, 2015
 
For The Nine Months Ended September 30, 2016
 
February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Gross realized gains
$
3,223

 
$
714

 
$
31,023

 
$
7,656

 
$
6,920

Gross realized losses
$
(4,866
)
 
$
(12,031
)
 
$
(13,763
)
 
$
(20,974
)
 
$
(469
)
Impairments losses included in gross realized losses
$
(3,308
)
 
$
(10,064
)
 
$
(6,892
)
 
$
(15,798
)
 
$
(481
)


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The chart below summarizes the fair value (proceeds) and the gains/losses realized on securities the Company sold that were in an unrealized gain position and an unrealized loss position.
 
 
Successor Company
 
Predecessor Company
 
For The Three Months Ended September 30, 2016
 
For The Three Months Ended September 30, 2015
 
For The Nine Months Ended September 30, 2016
 
February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Securities in an unrealized gain position:
 
 
 
 
 
 
 
 
 
Fair value (proceeds)
$
167,272

 
$
94,825

 
$
990,066

 
$
809,863

 
$
172,551

Gains realized
$
3,223

 
$
715

 
$
31,023

 
$
7,656

 
$
6,920

 
 
 
 
 
 
 
 
 
 
Securities in an unrealized loss
position(1):
 
 
 
 
 
 
 
 
 
Fair value (proceeds)
$
7,105

 
$
34,591

 
$
67,688

 
$
83,917

 
$
435

Losses realized
$
(1,558
)
 
$
(1,967
)
 
$
(6,871
)
 
$
(5,175
)
 
$
(29
)
 
 
 
 
 
 
 
 
 
 
(1) The Company made the decision to exit these holdings in conjunction with its overall asset liability management process.

  


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The amortized cost and fair value of the Company’s investments classified as available-for-sale as of September 30, 2016 (Successor Company) and December 31, 2015 (Successor Company), are as follows:
 
Successor Company
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI(1)
As of September 30, 2016
 
 
 
 
 
 
 
(Dollars In Thousands)
 
 
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
 
$
1,851,507

 
$
49,455

 
$
(4,558
)
 
$
1,896,404

 
$
—

Commercial mortgage-backed securities
 
1,684,149

 
32,151

 
(2,693
)
 
1,713,607

 
—

Other asset-backed securities
 
1,202,982

 
14,625

 
(15,691
)
 
1,201,916

 
—

U.S. government-related securities
 
1,299,876

 
13,092

 
(1,789
)
 
1,311,179

 
—

Other government-related securities
 
18,350

 
184

 
(2
)
 
18,532

 
—

States, municipals, and political subdivisions
 
1,725,351

 
25,239

 
(23,329
)
 
1,727,261

 
—

Corporate securities
 
29,114,514

 
495,821

 
(731,362
)
 
28,878,973

 
(909
)
Preferred stock
 
94,362

 
1,227

 
(1,815
)
 
93,774

 
—

 
 
36,991,091

 
631,794

 
(781,239
)
 
36,841,646

 
(909
)
Equity securities
 
711,326

 
25,454

 
(6,755
)
 
730,025

 
—

Short-term investments
 
155,016

 
—

 
—

 
155,016

 
—

 
 
$
37,857,433

 
$
657,248

 
$
(787,994
)
 
$
37,726,687

 
$
(909
)
As of December 31, 2015
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
 
$
1,773,099

 
$
9,286

 
$
(17,112
)
 
$
1,765,273

 
$
—

Commercial mortgage-backed securities
 
1,328,317

 
428

 
(41,858
)
 
1,286,887

 
—

Other asset-backed securities
 
813,056

 
2,758

 
(18,763
)
 
797,051

 
—

U.S. government-related securities
 
1,566,260

 
449

 
(34,532
)
 
1,532,177

 
—

Other government-related securities
 
18,483

 
—

 
(743
)
 
17,740

 
—

States, municipals, and political subdivisions
 
1,729,732

 
682

 
(126,814
)
 
1,603,600

 
—

Corporate securities
 
28,499,691

 
26,369

 
(2,682,274
)
 
25,843,786

 
(605
)
Preferred stock
 
64,362

 
192

 
(1,867
)
 
62,687

 
—

 
 
35,793,000

 
40,164

 
(2,923,963
)
 
32,909,201

 
(605
)
Equity securities
 
724,226

 
13,255

 
(6,477
)
 
731,004

 
—

Short-term investments
 
206,991

 
—

 
—

 
206,991

 
—

 
 
$
36,724,217

 
$
53,419

 
$
(2,930,440
)
 
$
33,847,196

 
$
(605
)
 
(1)These amounts are included in the gross unrealized gains and gross unrealized losses columns above.
 
     As of September 30, 2016 (Successor Company) and December 31, 2015 (Successor Company), the Company had an additional $2.8 billion and $2.7 billion of fixed maturities, $7.3 million and $8.3 million of equity securities, and $25.7 million and $61.7 million of short-term investments classified as trading securities, respectively.
 


Table of Contents

The amortized cost and fair value of available-for-sale and held-to-maturity fixed maturities as of September 30, 2016 (Successor Company), by expected maturity, are shown below. Expected maturities of securities without a single maturity date are allocated based on estimated rates of prepayment that may differ from actual rates of prepayment.
 
 
Successor Company
 
Available-for-sale
 
Held-to-maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Due in one year or less
$
786,505

 
$
787,980

 
$
—

 
$
—

Due after one year through five years
6,854,185

 
6,921,417

 
—

 
—

Due after five years through ten years
7,874,064

 
8,031,551

 
—

 
—

Due after ten years
21,476,337

 
21,100,698

 
2,775,230

 
2,894,615

 
$
36,991,091

 
$
36,841,646

 
$
2,775,230

 
$
2,894,615

 
The chart below summarizes the Company's other-than-temporary impairments of investments. All of the impairments were related to fixed maturities.
 
 
Successor Company
 
Predecessor Company
 
For The Three Months Ended September 30, 2016
 
For The Three Months Ended September 30, 2015
 
For The Nine Months Ended September 30, 2016
 
February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Other-than-temporary impairments
$
(1,898
)
 
$
(14,906
)
 
$
(10,194
)
 
$
(28,301
)
 
$
(636
)
Non-credit impairment losses recorded in other comprehensive income
(1,410
)
 
4,842

 
3,302

 
12,503

 
155

Net impairment losses recognized in earnings
$
(3,308
)
 
$
(10,064
)
 
$
(6,892
)
 
$
(15,798
)
 
$
(481
)

There were no other-than-temporary impairments related to fixed maturities or equity securities that the Company intended to sell or expected to be required to sell for the three and nine months ended September 30, 2016 (Successor Company), for the three months ended September 30, 2015 (Successor Company), for the period of February 1, 2015 to September 30, 2015 (Successor Company), and for the period of January 1, 2015 to January 31, 2015 (Predecessor Company).
 
     The following chart is a rollforward of available-for-sale credit losses on fixed maturities held by the Company for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (loss):
 
 
Successor Company
 
Predecessor Company
 
For The Three Months Ended September 30, 2016
 
For The Three Months Ended September 30, 2015
 
For The Nine Months Ended September 30, 2016
 
February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Beginning balance
$
964

 
$
4,472

 
$
22,761

 
$
—

 
$
15,478

Additions for newly impaired securities
1,721

 
—

 
4,777

 
4,472

 
—

Additions for previously impaired securities
1,521

 
9,479

 
2,046

 
9,479

 
221

Reductions for previously impaired securities due to a change in expected cash flows
(4
)
 
—

 
(22,763
)
 
—

 
—

Reductions for previously impaired securities that were sold in the current period
—

 
(687
)
 
(2,619
)
 
(687
)
 
—

Ending balance
$
4,202

 
$
13,264

 
$
4,202

 
$
13,264

 
$
15,699



Table of Contents


The following table includes the gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of September 30, 2016 (Successor Company):
 
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
(Dollars In Thousands)
Residential mortgage-backed securities
$
86,908

 
$
(433
)
 
$
180,768

 
$
(4,125
)
 
$
267,676

 
$
(4,558
)
Commercial mortgage-backed securities
187,164

 
(1,223
)
 
104,931

 
(1,470
)
 
292,095

 
(2,693
)
Other asset-backed securities
68,039

 
(268
)
 
465,787

 
(15,423
)
 
533,826

 
(15,691
)
U.S. government-related securities
128,224

 
(1,789
)
 
3

 
—

 
128,227

 
(1,789
)
Other government-related securities
1,927

 
(2
)
 
—

 
—

 
1,927

 
(2
)
States, municipalities, and political subdivisions
239,380

 
(2,842
)
 
561,253

 
(20,487
)
 
800,633

 
(23,329
)
Corporate securities
2,772,883

 
(46,680
)
 
10,879,675

 
(684,682
)
 
13,652,558

 
(731,362
)
Preferred stock
53,040

 
(128
)
 
19,251

 
(1,687
)
 
72,291

 
(1,815
)
Equities
84,188

 
(989
)
 
59,930

 
(5,766
)
 
144,118

 
(6,755
)
 
$
3,621,753

 
$
(54,354
)
 
$
12,271,598

 
$
(733,640
)
 
$
15,893,351

 
$
(787,994
)
 
RMBS and CMBS had gross unrealized losses greater than twelve months of $4.1 million and $1.5 million, respectively, as of September 30, 2016 (Successor Company). Factors such as the credit enhancement within the deal structure, the average life of the securities, and the performance of the underlying collateral support the recoverability of these investments.
 
The other asset-backed securities had a gross unrealized loss greater than twelve months of $15.4 million as of September 30, 2016 (Successor Company). This category predominately includes student-loan backed auction rate securities, the underlying collateral, of which is at least 97% guaranteed by the Federal Family Education Loan Program (“FFELP”). At this time, the Company has no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary.
 
The states, municipalities, and political subdivisions categories had gross unrealized losses greater than twelve months of $20.5 million as of September 30, 2016 (Successor Company). These declines were related to changes in interest rates.
 
The corporate securities category had gross unrealized losses greater than twelve months of $684.7 million as of September 30, 2016 (Successor Company). The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered include credit ratings, the financial health of the issuer, the continued access of the issuer to capital markets, and other pertinent information.

     As of September 30, 2016 (Successor Company), the Company had a total of 1,231 positions that were in an unrealized loss position, but the Company does not consider these unrealized loss positions to be other-than-temporary. This is based on the aggregate factors discussed previously and because the Company has the ability and intent to hold these investments until the fair values recover, and the Company does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of the securities.
 


Table of Contents

The following table includes the gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2015 (Successor Company):
 
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
(Dollars In Thousands)
Residential mortgage-backed securities
$
977,433

 
$
(17,112
)
 
$
—

 
$
—

 
$
977,433

 
$
(17,112
)
Commercial mortgage-backed securities
1,233,518

 
(41,858
)
 
—

 
—

 
1,233,518

 
(41,858
)
Other asset-backed securities
633,274

 
(18,763
)
 
—

 
—

 
633,274

 
(18,763
)
U.S. government-related securities
1,291,476

 
(34,532
)
 
—

 
—

 
1,291,476

 
(34,532
)
Other government-related securities
17,740

 
(743
)
 
—

 
—

 
17,740

 
(743
)
States, municipalities, and political subdivisions
1,566,752

 
(126,814
)
 
—

 
—

 
1,566,752

 
(126,814
)
Corporate securities
24,283,448

 
(2,682,274
)
 
—

 
—

 
24,283,448

 
(2,682,274
)
Preferred stock
34,685

 
(1,867
)
 
—

 
—

 
34,685

 
(1,867
)
Equities
248,493

 
(6,477
)
 
—

 
—

 
248,493

 
(6,477
)
 
$
30,286,819

 
$
(2,930,440
)
 
$
—

 
$
—

 
$
30,286,819

 
$
(2,930,440
)
 
The book value of the Company’s investment portfolio was marked to fair value as of February 1, 2015 (Successor Company), in conjunction with the Dai-ichi Merger which resulted in the elimination of previously unrealized gains and losses from accumulated other comprehensive income. The level of interest rates as of February 1, 2015 (Successor Company) resulted in an increase in the carrying value of the Company’s investments. Since February 1, 2015 (Successor Company), interest rates have increased resulting in net unrealized losses in the Company’s investment portfolio.

The Company does not consider these unrealized loss positions to be other-than-temporary, based on the aggregate factors discussed previously and because the Company has the ability and intent to hold these investments until the fair values recover, and does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of the securities.

As of September 30, 2016 (Successor Company), the Company had securities in its available-for-sale portfolio which were rated below investment grade of $1.9 billion and had an amortized cost of $2.0 billion. In addition, included in the Company’s trading portfolio, the Company held $266.4 million of securities which were rated below investment grade. Approximately $360.1 million of the available-for-sale and trading securities that were below investment grade were not publicly traded.

The change in unrealized gains (losses), net of income tax, on fixed maturity and equity securities, classified as available-for-sale is summarized as follows:
 
 
Successor Company
 
Predecessor Company
 
For The Three Months Ended September 30, 2016
 
For The Three Months Ended September 30, 2015
 
For The Nine Months Ended September 30, 2016
 
February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
 
(Dollars In Thousands)
 
(Dollars In Thousands)
Fixed maturities
$
295,651

 
$
(54,282
)
 
$
1,777,330

 
$
(1,437,623
)
 
$
670,229

Equity securities
(1,691
)
 
2,385

 
7,749

 
(5,152
)
 
10,226

 


Table of Contents

The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of September 30, 2016 (Successor Company) and December 31, 2015 (Successor Company), are as follows:
 
Successor Company
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI
As of September 30, 2016
 
 
 
 
 
 
 
(Dollars In Thousands)
 
 
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Securities issued by affiliates:
 
 
 
 
 
 
 
 
 
 
Red Mountain LLC
 
$
640,230

 
$
—

 
$
(1,751
)
 
$
638,479

 
$
—

Steel City LLC
 
2,135,000

 
121,136

 
—

 
2,256,136

 
—

 
 
$
2,775,230

 
$
121,136

 
$
(1,751
)
 
$
2,894,615

 
$
—

Successor Company
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI
As of December 31, 2015
 
 
 
 
 
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Securities issued by affiliates:
 
 
 
 
 
 
 
 
 
 
Red Mountain LLC
 
$
593,314

 
$
—

 
$
(78,314
)
 
$
515,000

 
$
—

 
 
$
593,314

 
$
—

 
$
(78,314
)
 
$
515,000

 
$
—