XML 27 R14.htm IDEA: XBRL DOCUMENT v3.19.1
INVESTMENT OPERATIONS
 12 Months Ended
Dec. 31, 2018
Investments, Debt and Equity Securities [Abstract]  
INVESTMENT OPERATIONS
INVESTMENT OPERATIONS
Major categories of net investment income are summarized as follows:
 
For The Year Ended December 31,
 
2018
 
2017
 
2016
 
(Dollars In Thousands)
Fixed maturities
$
2,043,183

 
$
1,610,768

 
$
1,547,346

Equity securities
35,282

 
40,506

 
38,838

Mortgage loans
322,206

 
298,387

 
270,749

Investment real estate
1,778

 
2,405

 
2,152

Short-term investments
103,676

 
114,280

 
99,979

 
2,506,125

 
2,066,346

 
1,959,064

Other investment expenses
167,223

 
143,290

 
135,601

Net investment income
$
2,338,902

 
$
1,923,056

 
$
1,823,463


Net realized investment gains (losses) for all other investments are summarized as follows:
 
For The Year Ended December 31,
 
2018
 
2017
 
2016
 
(Dollars In Thousands)
Fixed maturities
$
9,851

 
$
12,783

 
$
32,183

Equity gains and losses(1)
(49,275
)
 
(2,330
)
 
92

Impairments
(29,724
)
 
(9,112
)
 
(17,748
)
Modco trading portfolio
(185,900
)
 
119,206

 
67,583

Other investments
2,048

 
(8,572
)
 
(9,228
)
Total realized gains (losses) - investments
$
(253,000
)
 
$
111,975

 
$
72,882

 
 
 
 
 
 
(1) Beginning January 1, 2018, all changes in the fair market value of equity securities are recorded as a realized gain (loss) as a result of the adoption of ASU No. 2016-01.

Gross realized gains and gross realized losses on investments available-for-sale (fixed maturities and short-term investments) are as follows:
 
For The Year Ended December 31,
 
2018
 
2017
 
2016
 
(Dollars In Thousands)
Gross realized gains
$
28,034

 
$
18,868

 
$
42,058

Gross realized losses
 
 
 
 
 
Impairments losses
$
(29,724
)
 
$
(9,112
)
 
$
(17,748
)
Other realized losses
$
(18,183
)
 
$
(8,257
)
 
$
(9,783
)

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.
 
For The Year Ended December 31,
 
2018
 
2017
 
2016
 
(Dollars In Thousands)
Securities in an unrealized gain position:
 
 
 
 
 
Fair value (proceeds)
$
1,291,826

 
$
879,181

 
$
1,194,808

Gains realized
$
28,034

 
$
18,868

 
$
42,058

 
 
 
 
 
 
Securities in an unrealized loss
position(1):
 
 
 
 
 
Fair value (proceeds)
$
472,371

 
$
185,157

 
$
85,835

Losses realized
$
(18,183
)
 
$
(8,257
)
 
$
(9,783
)
 
 
 
 
 
 
(1) The Company made the decision to exit these holdings in conjunction with its overall asset liability management process.

The chart below summarizes the realized gains (losses) on equity securities sold during the period and equity securities still held at the reporting date.
 
For The Year Ended December 31, 2018
 
(Dollars In Thousands)
Net gains (losses) recognized during the period on equity securities
$
(49,275
)
Less: net gains (losses) recognized on equity securities sold during the period
$
(6,165
)
Gains (losses) recognized during the period on equity securities still held
$
(43,110
)

The amortized cost and fair value of the Company’s investments classified as available-for-sale are as follows:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI(1)
 
(Dollars In Thousands)
As of December 31, 2018
 

 
 

 
 

 
 

 
 

Fixed maturities:
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
$
3,641,678

 
$
23,248

 
$
(61,935
)
 
$
3,602,991

 
$
(18
)
Commercial mortgage-backed securities
2,319,476

 
3,911

 
(57,000
)
 
2,266,387

 
—

Other asset-backed securities
1,410,059

 
17,232

 
(35,398
)
 
1,391,893

 
—

U.S. government-related securities
1,658,433

 
1,794

 
(45,722
)
 
1,614,505

 
—

Other government-related securities
543,534

 
4,292

 
(33,790
)
 
514,036

 
—

States, municipals, and political subdivisions
3,682,037

 
25,706

 
(118,902
)
 
3,588,841

 
876

Corporate securities
38,467,380

 
112,438

 
(2,378,240
)
 
36,201,578

 
(29,685
)
Redeemable preferred stock
94,362

 
—

 
(11,560
)
 
82,802

 
—

 
51,816,959

 
188,621

 
(2,742,547
)
 
49,263,033

 
(28,827
)
Short-term investments
635,375

 
—

 
—

 
635,375

 
—

 
$
52,452,334

 
$
188,621

 
$
(2,742,547
)
 
$
49,898,408

 
$
(28,827
)
As of December 31, 2017
 

 
 

 
 

 
 

 
 

Fixed maturities:
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
$
2,321,811

 
$
19,412

 
$
(22,730
)
 
$
2,318,493

 
$
41

Commercial mortgage-backed securities
1,885,109

 
4,931

 
(29,552
)
 
1,860,488

 
—

Other asset-backed securities
1,234,376

 
20,936

 
(5,763
)
 
1,249,549

 
—

U.S. government-related securities
1,255,244

 
185

 
(32,177
)
 
1,223,252

 
—

Other government-related securities
280,780

 
9,401

 
(4,948
)
 
285,233

 
—

States, municipals, and political subdivisions
1,770,299

 
16,959

 
(45,613
)
 
1,741,645

 
(37
)
Corporate securities
29,446,365

 
618,582

 
(527,401
)
 
29,537,546

 
(2,563
)
Redeemable preferred stock
94,362

 
232

 
(3,503
)
 
91,091

 
—

 
38,288,346

 
690,638

 
(671,687
)
 
38,307,297

 
(2,559
)
Equity securities
696,706

 
22,319

 
(8,771
)
 
710,254

 
—

Short-term investments
470,883

 
—

 
—

 
470,883

 
—

 
$
39,455,935

 
$
712,957

 
$
(680,458
)
 
$
39,488,434

 
$
(2,559
)
(1)
These amounts are included in the gross unrealized gains and gross unrealized losses columns above.

The Company holds certain investments pursuant to certain modified coinsurance (“Modco”) arrangements. The fixed maturities held as part of these arrangements are classified as trading securities. The fair value of the investments held pursuant to these Modco arrangements are as follows:
 
 
As of December 31,
 
 
2018
 
2017
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

Residential mortgage-backed securities
 
$
241,836

 
$
259,694

Commercial mortgage-backed securities
 
188,925

 
146,804

Other asset-backed securities
 
159,907

 
138,097

U.S. government-related securities
 
59,794

 
27,234

Other government-related securities
 
44,207

 
63,925

States, municipals, and political subdivisions
 
286,413

 
326,925

Corporate securities
 
1,423,833

 
1,698,183

Redeemable preferred stock
 
11,277

 
3,327

 
 
2,416,192

 
2,664,189

Equity securities
 
9,892

 
5,244

Short-term investments
 
30,926

 
56,261

 
 
$
2,457,010

 
$
2,725,694


The amortized cost and fair value of available-for-sale and held-to-maturity fixed maturities as of December 31, 2018, 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.
 
Available-for-sale
 
Held-to-maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
(Dollars In Thousands)
Due in one year or less
$
1,121,731

 
$
1,117,140

 
$
—

 
$
—

Due after one year through five years
9,255,369

 
9,102,884

 
—

 
—

Due after five years through ten years
9,037,543

 
8,790,872

 
—

 
—

Due after ten years
32,402,316

 
30,252,137

 
2,633,474

 
2,547,210

 
$
51,816,959

 
$
49,263,033

 
$
2,633,474

 
$
2,547,210


The chart below summarizes the Company’s other-than-temporary impairments of investments. All of the impairments were related to fixed maturities or equity securities.
 
Fixed Maturities
 
Equity Securities
 
Total Securities
 
(Dollars In Thousands)
For The Year Ended December 31, 2018
 
 
 
 
 
Other-than-temporary impairments
$
(56,578
)
 
$
—

 
$
(56,578
)
Non-credit impairment losses recorded in other comprehensive income
26,854

 
—

 
26,854

Net impairment losses recognized in earnings
$
(29,724
)
 
$
—

 
$
(29,724
)
 
 
 
 
 
 
For The Year Ended December 31, 2017
 
 
 
 
 
Other-than-temporary impairments
$
(1,332
)
 
$
—

 
$
(1,332
)
Non-credit impairment losses recorded in other comprehensive income
(7,780
)
 
—

 
(7,780
)
Net impairment losses recognized in earnings
$
(9,112
)
 
$
—

 
$
(9,112
)
 
 
 
 
 
 
For The Year Ended December 31, 2016
 
 
 
 
 
Other-than-temporary impairments
$
(32,075
)
 
$
—

 
$
(32,075
)
Non-credit impairment losses recorded in other comprehensive income
14,327

 
—

 
14,327

Net impairment losses recognized in earnings
$
(17,748
)
 
$
—

 
$
(17,748
)

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 years ended December 31, 2018, 2017, and 2016.
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):
 
For The Year Ended December 31,
 
2018
 
2017
 
2016
 
(Dollars In Thousands)
Beginning balance
$
3,268

 
$
12,685

 
$
22,761

Additions for newly impaired securities
24,858

 
734

 
14,876

Additions for previously impaired securities
12

 
3,175

 
2,063

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

 
(12,726
)
 
(24,396
)
Reductions for previously impaired securities that were sold in the current period
(3,270
)
 
(600
)
 
(2,619
)
Ending balance
$
24,868

 
$
3,268

 
$
12,685


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, 2018:
 
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
$
1,485,009

 
$
(31,302
)
 
$
795,765

 
$
(30,633
)
 
$
2,280,774

 
$
(61,935
)
Commercial mortgage-backed securities
419,420

 
(7,398
)
 
1,405,690

 
(49,602
)
 
1,825,110

 
(57,000
)
Other asset-backed securities
687,271

 
(30,963
)
 
148,871

 
(4,435
)
 
836,142

 
(35,398
)
U.S. government-related securities
130,290

 
(4,668
)
 
1,085,654

 
(41,054
)
 
1,215,944

 
(45,722
)
Other government-related securities
224,273

 
(15,207
)
 
131,569

 
(18,583
)
 
355,842

 
(33,790
)
States, municipalities, and political subdivisions
1,004,262

 
(27,180
)
 
1,129,152

 
(91,722
)
 
2,133,414

 
(118,902
)
Corporate securities
18,225,656

 
(966,825
)
 
12,824,024

 
(1,411,415
)
 
31,049,680

 
(2,378,240
)
Redeemable preferred stock
41,147

 
(4,467
)
 
41,655

 
(7,093
)
 
82,802

 
(11,560
)
 
$
22,217,328

 
$
(1,088,010
)
 
$
17,562,380

 
$
(1,654,537
)
 
$
39,779,708

 
$
(2,742,547
)

RMBS and CMBS had gross unrealized losses greater than twelve months of $30.6 million and $49.6 million, respectively, as of December 31, 2018. 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 have a gross unrealized loss greater than twelve months of $4.4 million as of December 31, 2018. 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 U.S. government-related securities and the other government-related securities had gross unrealized losses greater than twelve months of $41.1 million and $18.6 million as of December 31, 2018, respectively. These declines were related to changes in interest rates.
The states, municipalities, and political subdivisions categories had gross unrealized losses greater than twelve months of $91.7 million as of December 31, 2018. 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.
The corporate securities category has gross unrealized losses greater than twelve months of $1.4 billion as of December 31, 2018. 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 December 31, 2018, the Company had a total of 4,005 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, 2017:
 
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
$
765,641

 
$
(9,666
)
 
$
408,460

 
$
(13,064
)
 
$
1,174,101

 
$
(22,730
)
Commercial mortgage-backed securities
750,643

 
(8,521
)
 
779,086

 
(21,031
)
 
1,529,729

 
(29,552
)
Other asset-backed securities
86,506

 
(322
)
 
134,316

 
(5,441
)
 
220,822

 
(5,763
)
U.S. government-related securities
94,110

 
(688
)
 
1,072,232

 
(31,489
)
 
1,166,342

 
(32,177
)
Other government-related securities
24,830

 
(169
)
 
115,294

 
(4,779
)
 
140,124

 
(4,948
)
States, municipalities, and political subdivisions
170,268

 
(1,738
)
 
1,027,747

 
(43,875
)
 
1,198,015

 
(45,613
)
Corporate securities
5,026,417

 
(55,649
)
 
10,947,027

 
(471,752
)
 
15,973,444

 
(527,401
)
Redeemable preferred stock
22,048

 
(1,120
)
 
23,197

 
(2,383
)
 
45,245

 
(3,503
)
Equities
86,194

 
(1,400
)
 
91,195

 
(7,371
)
 
177,389

 
(8,771
)
 
$
7,026,657

 
$
(79,273
)
 
$
14,598,554

 
$
(601,185
)
 
$
21,625,211

 
$
(680,458
)

RMBS and CMBS had gross unrealized losses greater than twelve months of $13.1 million and $21.0 million, respectively, as of December 31, 2017. 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 have a gross unrealized loss greater than twelve months of $5.4 million as of December 31, 2017. This category predominately includes student-loan backed auction rate securities, the underlying collateral, of which is at least 97% guaranteed by the 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 U.S government-related securities and the other government-related securities had gross unrealized losses greater than twelve months $31.5 million and $4.8 million as of December 31, 2017, respectively. These declines were related to changes in interest rates.
The states, municipalities, and political subdivisions categories had gross unrealized losses greater than twelve months of $43.9 million as of December 31, 2017. These declines were related to changes in interest rates.
The corporate securities category has gross unrealized losses greater than twelve months of $471.8 million as of December 31, 2017. 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 December 31, 2018, the Company had securities in its available-for-sale portfolio which were rated below investment grade with a fair value of $1.6 billion and had an amortized cost of $1.8 billion. In addition, included in the Company’s trading portfolio, the Company held $144.3 million of securities which were rated below investment grade. Approximately $262.8 million of the below investment grade securities held by the Company 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:
 
For The Year Ended December 31,
 
2018
 
2017
 
2016
 
(Dollars In Thousands)
Fixed maturities
$
(2,032,573
)
 
$
1,083,865

 
$
802,248


The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of December 31, 2018 and 2017, are as follows:
 
 
Amortized
Cost
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI
As of December 31, 2018
 
 
 
 
 
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Securities issued by affiliates:
 
 
 
 
 
 
 
 
 
 
Red Mountain LLC
 
$
750,474

 
$
—

 
$
(81,657
)
 
$
668,817

 
$
—

Steel City LLC
 
1,883,000

 
—

 
(4,607
)
 
1,878,393

 
—

 
 
$
2,633,474

 
$
—

 
$
(86,264
)
 
$
2,547,210

 
$
—

 
 
Amortized
Cost
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI
As of December 31, 2017
 
 
 
 
 
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Securities issued by affiliates:
 
 
 
 
 
 
 
 
 
 
Red Mountain LLC
 
$
704,904

 
$
—

 
$
(19,163
)
 
$
685,741

 
$
—

Steel City LLC
 
2,014,000

 
76,586

 
—

 
2,090,586

 
—

 
 
$
2,718,904

 
$
76,586

 
$
(19,163
)
 
$
2,776,327

 
$
—


During the years ended December 31, 2018, 2017, and 2016, the Company did not record any other-than-temporary impairments on held-to-maturity securities.
The Company’s held-to-maturity securities had $86.3 million of gross unrecognized holding losses by maturity as of December 31, 2018. 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 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 $76.6 million of gross unrecognized holding gains and $19.2 million of gross unrecognized holding losses by maturity as of December 31, 2017. 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.
The Company held $140.5 million of non-income producing securities for the year ended December 31, 2018.
Included in the Company’s invested assets are $1.7 billion of policy loans as of December 31, 2018. The interest rates on standard policy loans range from 3.0% to 8.0%. The collateral loans on life insurance policies have an interest rate of 13.64%.
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 FASB ASC (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”), that was determined to be a VIE as of December 31, 2018 and 2017.
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 14, Debt and Other Obligations. The Company has the power, via its 100% ownership, to direct the activities of the VIE, but does 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, PLC, the holding company, has guaranteed Red Mountain’s payment obligation for the credit enhancement fee to the unrelated third party provider. As of December 31, 2018, no payments have been made or required related to this guarantee.