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INVESTMENT OPERATIONS

12 Months Ended

Dec. 31, 2019

Investments, Debt and Equity Securities [Abstract]

Investment income is recognized when earned, net of applicable management or other fees. Investment income on fixed maturity securities includes coupon interest, amortization of any premium and accretion of any discount. Investment income on equity securities includes dividend income and preferred coupons interest.

Investment income on mortgage-backed and asset-backed securities is initially based upon yield, cash flow and prepayment assumptions at the date of purchase. Subsequent revisions in those assumptions are recorded using the retrospective or prospective method. Under the retrospective method used primarily for mortgage-backed and asset-backed securities of high credit quality which cannot be contractually prepaid in such a manner that we would not recover a substantial portion of the initial investment, amortized cost of the security is adjusted to the amount that would have existed had the revised assumptions been in place at the date of purchase. The adjustments to amortized cost are recorded as a charge or credit to net investment income. Under the prospective method, which is used for all other mortgage-backed and asset-backed securities, future cash flows are estimated and interest income is recognized going forward using the new internal rate of return.

Major categories of net investment income are summarized as follows:


	For The Year Ended December 31,
	2019		2018		2017
	(Dollars In Thousands)
Fixed maturities	$	2,465,902	$	2,043,183	$	1,610,768
Equity securities	30,647		35,282		40,506
Mortgage loans	388,656		322,206		298,387
Investment real estate	1,045		1,778		2,405
Short-term investments	118,172		103,676		114,280
	3,004,422		2,506,125		2,066,346
Investment expenses	185,592		167,223		143,290
Net investment income	$	2,818,830	$	2,338,902	$	1,923,056

Realized investment gains (losses) includes realized gains and losses from the sales of investments, write-downs for other-than-temporary impairments of investments, changes in fair value of equity securities, certain derivative and embedded derivative gains and losses, gains and losses on reinsurance-related embedded derivatives and trading securities. Realized gains and losses on investments are calculated on the basis of specific identification on the trade date.

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


	For The Year Ended December 31,
	2019		2018		2017
	(Dollars In Thousands)
Fixed maturities	$	47,711	$	9,851	$	12,783
Equity securities gains and losses⁽¹⁾	46,989		(49,275)		(2,330)
Modco trading portfolio	247,331		(185,900)		119,206
Other investments	967		2,048		(8,572)
Realized gains (losses) - all other investments	342,998		(223,276)		121,087
Realized gains (losses) - derivatives	(131,459)		79,097		(137,041)
Realized investment gains (losses)	$	211,539	$	(144,179)	$	(15,954)

Net impairment losses recognized in earnings	$	(34,453)	$	(29,724)	$	(9,112)

(1) Beginning January 1, 2018, all changes in the fair 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,
	2019		2018		2017
	(Dollars In Thousands)
Gross realized gains	$	61,608	$	28,034	$	18,868
Gross realized losses:
Impairments losses	$	(34,453)	$	(29,724)	$	(9,112)
Other realized losses	$	(13,897)	$	(18,183)	$	(8,257)

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,
	2019		2018		2017
	(Dollars In Thousands)
Securities in an unrealized gain position:
Fair value proceeds	$	2,511,764	$	1,291,826	$	879,181
Gains realized	$	61,608	$	28,034	$	18,868

Securities in an unrealized loss position⁽¹⁾:
Fair value proceeds	$	542,733	$	472,371	$	185,157
Losses realized	$	(13,897)	$	(18,183)	$	(8,257)

⁽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,
	2019		2018
	(Dollars In Thousands)
Net gains (losses) recognized during the period on equity securities	$	46,989	$	(49,275)
Less: net gains (losses) recognized on equity securities sold during the period	$	(3,225)	$	(6,165)
Gains (losses) recognized during the period on equity securities still held	$	50,214	$	(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, 2019
Fixed maturities:
Residential mortgage-backed securities	$	5,812,170	$	125,493	$	(6,322)	$	5,931,341	$	—
Commercial mortgage-backed securities	2,588,575		54,385		(3,292)		2,639,668		—
Other asset-backed securities	1,764,120		32,041		(14,926)		1,781,235		(7)
U.S. government-related securities	1,032,048		5,664		(5,316)		1,032,396		—
Other government-related securities	548,136		51,024		(1,991)		597,169		—
States, municipals, and political subdivisions	4,415,008		225,072		(1,230)		4,638,850		1,236
Corporate securities	44,493,799		2,603,636		(288,334)		46,809,101		(34,580)
Redeemable preferred stocks	87,237		3,677		(4,249)		86,665		—
	60,741,093		3,100,992		(325,660)		63,516,425		(33,351)
Short-term investments	1,229,651		—		—		1,229,651		—
	$	61,970,744	$	3,100,992	$	(325,660)	$	64,746,076	$	(33,351)
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 stocks	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)

(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, equity securities, and short-term investments 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,
	2019		2018
	(Dollars In Thousands)
Fixed maturities:
Residential mortgage-backed securities	$	209,521	$	241,836
Commercial mortgage-backed securities	201,284		188,925
Other asset-backed securities	143,361		159,907
U.S. government-related securities	47,067		59,794
Other government-related securities	28,775		44,207
States, municipals, and political subdivisions	293,791		286,413
Corporate securities	1,590,936		1,423,833
Redeemable preferred stocks	12,832		11,277
	2,527,567		2,416,192
Equity securities	6,656		9,892
Short-term investments	91,213		30,926
	$	2,625,436	$	2,457,010

The amortized cost and fair value of available-for-sale and held-to-maturity fixed maturities as of December 31, 2019, 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	$	1,833,383	$	1,832,073	$	—	$	—
Due after one year through five years	10,513,141		10,732,319		—		—
Due after five years through ten years	13,423,688		14,018,121		—		—
Due after ten years	34,970,881		36,933,912		2,823,881		3,025,790
	$	60,741,093	$	63,516,425	$	2,823,881	$	3,025,790

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, 2019
Other-than-temporary impairments	$	(67,161)	$	—	$	(67,161)
Non-credit impairment losses recorded in other comprehensive income	32,708		—		32,708
Net impairment losses recognized in earnings	$	(34,453)	$	—	$	(34,453)

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)

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, 2019, 2018, and 2017.

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,
	2019		2018		2017
	(Dollars In Thousands)
Beginning balance	$	24,868	$	3,268	$	12,685
Additions for newly impaired securities	30,299		24,858		734
Additions for previously impaired securities	3,553		12		3,175
Reductions for previously impaired securities due to a change in expected cash flows	(21,332)		—		(12,726)
Reductions for previously impaired securities that were sold in the current period	(7,294)		(3,270)		(600)

Ending balance	$	30,094	$	24,868	$	3,268

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, 2019:


	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	$	851,333	$	(4,231)	$	220,843	$	(2,091)	$	1,072,176	$	(6,322)
Commercial mortgage-backed securities	371,945		(1,721)		115,566		(1,571)		487,511		(3,292)
Other asset-backed securities	482,547		(6,516)		214,058		(8,410)		696,605		(14,926)
U.S. government-related securities	383,451		(3,373)		353,517		(1,943)		736,968		(5,316)
Other government-related securities	22,962		(669)		6,230		(1,322)		29,192		(1,991)
States, municipalities, and political subdivisions	56,470		(1,001)		12,907		(229)		69,377		(1,230)
Corporate securities	3,176,489		(68,289)		2,886,648		(220,045)		6,063,137		(288,334)
Redeemable preferred stocks	—		—		16,689		(4,249)		16,689		(4,249)

	$	5,345,197	$	(85,800)	$	3,826,458	$	(239,860)	$	9,171,655	$	(325,660)

RMBS and CMBS had gross unrealized losses greater than twelve months of $2.1 million and $1.6 million, respectively, as of December 31, 2019. 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 $8.4 million as of December 31, 2019. 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 $1.9 million and $1.3 million as of December 31, 2019, 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 $0.2 million as of December 31, 2019. The aggregate decline in fair 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 $220.0 million as of December 31, 2019. The aggregate decline in fair 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, interest rate movement, and other pertinent information.

As of December 31, 2019, the Company had a total of 876 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	$	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 stocks	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)

As of December 31, 2019, 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 $1.7 billion. In addition, included in the Company’s trading portfolio, the Company held $124.4 million of securities which were rated below investment grade. Approximately $227.0 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 maturities classified as available-for-sale is summarized as follows:


	For The Year Ended December 31,
	2019		2018		2017
	(Dollars In Thousands)
Fixed maturities	$	4,210,114	$	(2,032,573)	$	1,083,865

The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of December 31, 2019 and 2018, are as follows:


	Amortized Cost		Gross Unrecognized Holding Gains		Gross Unrecognized Holding Losses		Fair Value		Total OTTI Recognized in OCI
As of December 31, 2019
	(Dollars In Thousands)
Fixed maturities:
Securities issued by affiliates:
Red Mountain LLC	$	795,881	$	81,022	$	—	$	876,903	$	—
Steel City LLC	2,028,000		120,887		—		2,148,887		—
	$	2,823,881	$	201,909	$	—	$	3,025,790	$	—


	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	$	—

During the years ended December 31, 2019, 2018, and 2017, the Company did not record any other-than-temporary impairments on held-to-maturity securities.

The Company’s held-to-maturity securities had $201.9 million of gross unrecognized holding gains as of December 31, 2019. 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 $86.3 million of gross unrecognized holding losses 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.

The Company held $155.1 million and $140.5 million of non-income producing securities for the year ended December 31, 2019 and 2018, respectively.

Included in the Company’s invested assets are $1.7 billion of policy loans as of December 31, 2019. 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, 2019 and 2018.

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, 2019, no payments have been made or required related to this guarantee.