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INVESTMENT OPERATIONS
 9 Months Ended
Sep. 30, 2016
Investments, Debt and Equity Securities [Abstract]  
INVESTMENT OPERATIONS
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
)
 
$
24,097

 
$
2,398

 
$
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
)
 
(1,815
)
 
(7,842
)
 
(1,040
)
 
1,200

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

 
$
(4,755
)
 
$
187,752

 
$
(147,892
)
 
$
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

 
$
31,004

 
$
7,646

 
$
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
)


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

 
$
987,048

 
$
807,763

 
$
172,551

Gains realized
$
3,223

 
$
715

 
$
31,004

 
$
7,646

 
$
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.


 
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:
 
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI(1)
Successor Company
 
 
 
 
 
As of September 30, 2016
 
 
 
 
 
 
 
(Dollars In Thousands)
 
 
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
 
$
1,842,012

 
$
49,259

 
$
(4,558
)
 
$
1,886,713

 
$
—

Commercial mortgage-backed securities
 
1,654,152

 
31,706

 
(2,632
)
 
1,683,226

 
—

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
 
28,966,811

 
488,460

 
(731,249
)
 
28,724,022

 
(909
)
Preferred stock
 
94,362

 
1,227

 
(1,815
)
 
93,774

 
—

 
 
36,803,896

 
623,792

 
(781,065
)
 
36,646,623

 
(909
)
Equity securities
 
673,709

 
25,454

 
(6,755
)
 
692,408

 
—

Short-term investments
 
142,870

 
—

 
—

 
142,870

 
—

 
 
$
37,620,475

 
$
649,246

 
$
(787,820
)
 
$
37,481,901

 
$
(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
 
1,327,288

 
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 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.
 
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
6,834,174

 
6,901,114

 
—

 
—

Due after five years through ten years
7,735,392

 
7,887,064

 
—

 
—

Due after ten years
21,447,825

 
21,070,465

 
2,775,230

 
2,894,615

 
$
36,803,896

 
$
36,646,623

 
$
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

 
$
—

 
$
15,463

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

 
$
15,684



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 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
175,209

 
(1,162
)
 
104,931

 
(1,470
)
 
280,140

 
(2,632
)
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
2,769,939

 
(46,629
)
 
10,876,293

 
(684,620
)
 
13,646,232

 
(731,249
)
Preferred stock
53,040

 
(128
)
 
19,251

 
(1,687
)
 
72,291

 
(1,815
)
Equities
84,188

 
(989
)
 
59,929

 
(5,766
)
 
144,117

 
(6,755
)
 
$
3,606,854

 
$
(54,242
)
 
$
12,268,215

 
$
(733,578
)
 
$
15,875,069

 
$
(787,820
)

 
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 category 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 $684.6 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 1,230 positions that were in an unrealized loss position, but the Company does not consider these unrealized loss positions to be other-than-temporary. This is based on the aggregate factors discussed previously and because the Company has the ability and intent to hold these investments until the fair values recover, and the Company does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of the securities.
 
The following table includes the gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 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
1,232,495

 
(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 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 $328.6 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
$
294,917

 
$
(54,274
)
 
$
1,771,567

 
$
(1,437,340
)
 
$
669,160

Equity securities
(1,691
)
 
2,385

 
7,749

 
(5,152
)
 
12,172


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

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
 
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 and nine months ended September 30, 2016 (Successor Company), the three months ended September 30, 2015 (Successor Company), the period of February 1, 2015 to September 30, 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 $121.1 million of gross unrealized gains and $1.8 million of gross unrecognized holding losses by maturity as of September 30, 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 and guarantor, continued access of the issuer to capital markets and other pertinent information. These held-to-maturity securities are issued by affiliates of the Company which are considered variable interest entities ("VIE's"). The Company is not the primary beneficiary of these entities and thus the securities are not eliminated in consolidation. These securities are collateralized by non-recourse funding obligations issued by captive insurance companies that are affiliates of the Company.
 
The Company’s held-to-maturity securities had $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 September 30, 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 12, 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 September 30, 2016 (Successor Company), no payments have been made or required related to this guarantee.