INVESTMENT OPERATIONS

Net realized gains (losses) for all other investments are summarized as follows:



	Successor Company						Predecessor Company
	For The Three Months Ended March 31, 2016			February 1, 2015 to March 31, 2015			January 1, 2015 to January 31, 2015
	(Dollars In Thousands)						(Dollars In Thousands)
Fixed maturities	$	5,702		$	373		$	6,891
Equity securities	(166		)	—			—
Impairments on corporate securities	(2,617		)	—			(481		)
Modco trading portfolio	78,154			(33,160		)	73,062
Other investments	(1,981		)	(2,269		)	1,200
Total realized gains (losses) - investments	$	79,092		$	(35,056	)	$	80,672

For the three months ended March 31, 2016 (Successor Company) and for the period of February 1, 2015 to March 31, 2015 (Successor Company), gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $9.0 million and $1.5 million and gross realized losses were $3.5 million and $1.1 million, respectively, including $2.6 million of impairment losses for the three months ended March 31, 2016 (Successor Company).

For the period of January 1, 2015 to January 31, 2015 (Predecessor Company), gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $6.9 million and gross realized losses were $0.5 million, including $0.4 million of impairment losses.

For the three months ended March 31, 2016 (Successor Company) and for the period of February 1, 2015 to March 31, 2015 (Successor Company), the Company sold securities in an unrealized gain position with a fair value (proceeds) of $306.2 million and $282.9 million, respectively. The gains realized on the sale of these securities was $9.0 million and $1.5 million, respectively.

For the period of January 1, 2015 to January 31, 2015 (Predecessor Company), the Company sold securities in an unrealized gain position with a fair value (proceeds) of $172.6 million. The gain realized on the sale of these securities was $6.9 million.

For the three months ended March 31, 2016 (Successor Company) and for the period of February 1, 2015 to March 31, 2015 (Successor Company), the Company sold securities in an unrealized loss position with a fair value (proceeds) of $53.7 million and $20.7 million, respectively. The loss realized on the sale of these securities was $3.5 million and $1.1 million, respectively. The Company made the decision to exit these holdings in conjunction with our overall asset liability management process.

For the period of January 1, 2015 to January 31, 2015 (Predecessor Company), the Company sold securities in an unrealized loss position with a fair value (proceeds) of $0.4 million. The loss realized on the sale of these securities were immaterial to the Company. The Company made the decision to exit these holdings in conjunction with our overall asset liability management process.

The amortized cost and fair value of the Company’s investments classified as available-for-sale as of March 31, 2016 (Successor Company) and December 31, 2015 (Successor Company), are as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Total OTTI Recognized in OCI⁽¹⁾
Successor Company
As of March 31, 2016
	(Dollars In Thousands)
Fixed maturities:
Residential mortgage-backed securities	$	1,844,697	$	31,184	$	(10,032	)	$	1,865,849	$	—
Commercial mortgage-backed securities	1,460,556		9,062		(12,089		)	1,457,529		—
Other asset-backed securities	992,128		813		(29,403		)	963,538		—
U.S. government-related securities	1,433,945		7,171		(2,236		)	1,438,880		—
Other government-related securities	18,667		40		(71		)	18,636		—
States, municipals, and political subdivisions	1,729,964		2,865		(71,269		)	1,661,560		—
Corporate securities	28,661,111		138,497		(1,975,561		)	26,824,047		152
Preferred stock	64,362		396		(1,795		)	62,963		—
	36,205,430		190,028		(2,102,456		)	34,293,002		152
Equity securities	673,524		14,414		(7,743		)	680,195		—
Short-term investments	406,230		—		—			406,230		—
	$	37,285,184	$	204,442	$	(2,110,199	)	$	35,379,427	$	152

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	1,327,288		428		(41,852		)	1,285,864		—
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	28,433,530		26,147		(2,681,020		)	25,778,657		(605		)
Preferred stock	64,362		192		(1,867		)	62,687		—
	35,725,810		39,942		(2,922,703		)	32,843,049		(605		)
Equity securities	684,888		13,255		(6,477		)	691,666		—
Short-term investments	202,110		—		—			202,110		—
	$	36,612,808	$	53,197	$	(2,929,180	)	$	33,736,825	$	(605	)

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

As of March 31, 2016 (Successor Company) and December 31, 2015 (Successor Company), the Company had an additional $2.7 billion and $2.7 billion of fixed maturities, $6.8 million and $8.3 million of equity securities, and $43.0 million and $61.7 million of short-term investments classified as trading securities, respectively.

The amortized cost and fair value of available-for-sale and held-to-maturity fixed maturities as of March 31, 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	$	885,886	$	884,908	$	—	$	—
Due after one year through five years	6,367,797		6,284,886		—		—
Due after five years through ten years	7,536,358		7,459,928		—		—
Due after ten years	21,415,389		19,663,280		2,783,302		2,757,674
	$	36,205,430	$	34,293,002	$	2,783,302	$	2,757,674

During the three months ended March 31, 2016 (Successor Company) the Company recorded pre-tax other-than-temporary impairments of investments of $2.8 million, all of which related to fixed maturities. Credit impairments recorded in earnings during the three months ended March 31, 2016 (Successor Company) were $2.6 million. During the three months ended March 31, 2016 (Successor Company), $0.2 million of non-credit impairment losses were recorded in other comprehensive income (loss).

For the period of February 1, 2015 to March 31, 2015 (Successor Company), the Company did not record any pre-tax other-than-temporary impairments of investments.

There were no other-than-temporary impairments related to fixed maturities or equity securities that the Company intended to sell or expected to be required to sell for the three months ended March 31, 2016 (Successor Company) and for the period of February 1, 2015 to March 31, 2015 (Successor Company).

During the period of January 1, 2015 to January 31, 2015 (Predecessor Company), the Company recorded pre-tax other-than-temporary impairments of investments of $0.6 million, all of which related to fixed maturities. Credit impairments recorded in earnings during the period were $0.5 million. During the period of January 1, 2015 to January 31, 2015 (Predecessor Company), $0.1 million of non-credit losses recorded in other comprehensive income (loss). 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 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 March 31, 2016			February 1, 2015 to March 31, 2015		January 1, 2015 to January 31, 2015
	(Dollars In Thousands)					(Dollars In Thousands)
Beginning balance	$	22,761		$	—	$	15,463
Additions for newly impaired securities	2,092			—		—
Additions for previously impaired securities	525			—		221
Reductions for previously impaired securities due to a change in expected cash flows	(22,759		)	—		—
Reductions for previously impaired securities that were sold in the current period	—			—		—
Ending balance	$	2,619		$	—	$	15,684

The following table includes the gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 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	$	352,723	$	(6,366	)	$	148,132	$	(3,666	)	$	500,855	$	(10,032	)
Commercial mortgage-backed securities	380,635		(6,994		)	455,075		(5,095		)	835,710		(12,089		)
Other asset-backed securities	664,648		(22,415		)	104,692		(6,988		)	769,340		(29,403		)
U.S. government-related securities	42,995		(106		)	150,137		(2,130		)	193,132		(2,236		)
Other government-related securities	8,000		(29		)	6,231		(42		)	14,231		(71		)
States, municipalities, and political subdivisions	549,109		(27,255		)	945,325		(44,014		)	1,494,434		(71,269		)
Corporate securities	9,482,043		(946,300		)	11,632,533		(1,029,261		)	21,114,576		(1,975,561		)
Preferred stock	22,800		(368		)	19,512		(1,427		)	42,312		(1,795		)
Equities	212,942		(7,055		)	21,150		(688		)	234,092		(7,743		)
	$	11,715,895	$	(1,016,888	)	$	13,482,787	$	(1,093,311	)	$	25,198,682	$	(2,110,199	)

RMBS had a gross unrealized loss greater than twelve months of $3.7 million as of March 31, 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.

CMBS had a gross unrealized loss greater than twelve months of $5.1 million as of March 31, 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 $7.0 million as of March 31, 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”). These unrealized losses have occurred within the Company’s auction rate securities (“ARS”) portfolio since the market collapse during 2008. 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 category had gross unrealized losses greater than twelve months of $44.0 million as of March 31, 2016 (Successor Company). These declines were entirely related to changes in interest rates.

The corporate securities category had gross unrealized losses greater than twelve months of $1.0 billion as of March 31, 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 March 31, 2016 (Successor Company), the Company had a total of 2,108 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.



	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	1,232,495		(41,852		)	—		—		1,232,495		(41,852		)
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	24,235,121		(2,681,020		)	—		—		24,235,121		(2,681,020		)
Preferred stock	34,685		(1,867		)	—		—		34,685		(1,867		)
Equities	248,493		(6,477		)	—		—		248,493		(6,477		)
	$	30,237,469	$	(2,929,180	)	$	—	$	—	$	30,237,469	$	(2,929,180	)

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 March 31, 2016 (Successor Company), the Company had securities in its available-for-sale portfolio which were rated below investment grade of $1.8 billion and had an amortized cost of $2.0 billion. In addition, included in the Company’s trading portfolio, the Company held $282.7 million of securities which were rated below investment grade. Approximately $296.7 million of the below investment grade securities 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 March 31, 2016			February 1, 2015 to March 31, 2015			January 1, 2015 to January 31, 2015
	(Dollars In Thousands)						(Dollars In Thousands)
Fixed maturities	$	630,716		$	(343,239	)	$	669,160
Equity securities	(70		)	1,511			12,172

The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of March 31, 2016 (Successor Company) and December 31, 2015 (Successor Company), are as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Total OTTI Recognized in OCI
Successor Company
As of March 31, 2016
	(Dollars In Thousands)
Fixed maturities:
Securities issued by affiliates:
Red Mountain LLC	$	612,302	$	—	$	(64,382	)	$	547,920	$	—
Steel City LLC	2,171,000		38,754		—			2,209,754		—
	$	2,783,302	$	38,754	$	(64,382	)	$	2,757,674	$	—

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Total OTTI Recognized in OCI
Successor Company
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	$	—

During the three months ended March 31, 2016 (Successor Company), the period of February 1, 2015 to March 31, 2015 (Successor Company), and the period of January 1, 2015 to January 31, 2015 (Predecessor Company), the Company did not record any other-than-temporary impairments on held-to-maturity securities. The Company’s held-to-maturity securities had $64.4 million of gross unrecognized holding losses as of March 31, 2016 (Successor Company). The Company does not consider these unrecognized holding losses to be other-than-temporary based on certain positive factors associated with the securities which include credit ratings of the guarantor, financial health of the issuer of the guarantor, continued access of the issuer to capital markets and other pertinent information. These held-to-maturity securities are issued by affiliates of the Company. These securities are collateralized by non-recourse funding obligations issued by captive insurance companies that are affiliates of the Company.

The Company’s held-to-maturity securities had $78.3 million of gross unrecognized holding losses as of December 31, 2015 (Successor Company). The Company does not consider these unrecognized holding losses to be other-than-temporary based on certain positive factors associated with the securities which include credit ratings of the guarantor, financial health of the issuer and guarantor, continued access of the issuer to capital markets and other pertinent information.

Variable Interest Entities

The Company holds certain investments in entities in which its ownership interests could possibly be considered variable interests under Topic 810 of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC” or “Codification”) (excluding debt and equity securities held as trading, available for sale, or held to maturity). The Company reviews the characteristics of each of these applicable entities and compares those characteristics to applicable criteria to determine whether the entity is a variable interest entity ("VIE"). If the entity is determined to be a VIE, the Company then performs a detailed review to determine whether the interest would be considered a variable interest under the guidance. The Company then performs a qualitative review of all variable interests with the entity and determines whether the Company is the primary beneficiary. ASC 810 provides that an entity is the primary beneficiary of a VIE if the entity has 1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and 2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.

Based on this analysis, the Company had an interest in one wholly owned subsidiary, Red Mountain, LLC ("Red Mountain") as of March 31, 2016 (Successor Company) and December 31, 2015 (Successor Company), that was determined to be a VIE.

The activity most significant to Red Mountain is the issuance of a note in connection with a financing transaction involving Golden Gate V Vermont Captive Insurance Company (“Golden Gate V”) and the Company in which Golden Gate V issued non-recourse funding obligations to Red Mountain and Red Mountain issued the note to Golden Gate V. Credit enhancement on the Red Mountain Note is provided by an unrelated third party. For details of this transaction, see Note 9, Debt and Other Obligations. The Company had the power, via its 100% ownership through an affiliate, to direct the activities of the VIE, but did not have the obligation to absorb losses related to the primary risks or sources of variability to the VIE. The variability of loss would be borne primarily by the third party in its function as provider of credit enhancement on the Red Mountain Note. Accordingly, it was determined that the Company is not the primary beneficiary of the VIE. The Company’s risk of loss related to the VIE is limited to its investment of $10,000. Additionally, the Company has guaranteed Red Mountain’s payment obligation for the credit enhancement fee to the unrelated third party provider. As of March 31, 2016 (Successor Company), no payments have been made or required related to this guarantee.