Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
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 : 001-31911
American Equity Investment Life Holding Company
(Exact name of registrant as specified in its charter)
Iowa
 
42-1447959
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
6000 Westown Parkway
West Des Moines, Iowa 50266
(Address of principal executive offices, including zip code)
(515) 221-0002
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 x 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 x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer," “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
APPLICABLE TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of August 2, 2017, there were 88,917,403 shares of the registrant's common stock, $1 par value, outstanding.



TABLE OF CONTENTS
 
Page
 
 
 
 
 
 




Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
 
June 30, 2017
 
December 31, 2016
 
(Unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities:
 
 
 
Available for sale, at fair value (amortized cost: 2017 - $41,907,744; 2016 - $39,953,955)
$
43,893,785

 
$
41,060,494

Held for investment, at amortized cost (fair value: 2017 - $76,702; 2016 - $68,766)
76,931

 
76,825

Mortgage loans on real estate
2,553,391

 
2,480,956

Derivative instruments
1,086,624

 
830,519

Other investments
314,421

 
308,774

Total investments
47,925,152

 
44,757,568

 
 
 
 
Cash and cash equivalents
1,574,913

 
791,266

Coinsurance deposits
4,710,650

 
4,639,492

Accrued investment income
416,482

 
397,773

Deferred policy acquisition costs
2,721,596

 
2,905,377

Deferred sales inducements
2,042,889

 
2,208,218

Deferred income taxes
64,074

 
168,578

Income taxes recoverable
952

 
11,474

Other assets
178,882

 
173,726

Total assets
$
59,635,590

 
$
56,053,472

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Liabilities:
 
 
 
Policy benefit reserves
$
53,903,497

 
$
51,637,026

Other policy funds and contract claims
287,381

 
298,347

Notes and loan payable
888,660

 
493,755

Subordinated debentures
242,045

 
241,853

Amounts due under repurchase agreements
61,673

 

Other liabilities
1,600,926

 
1,090,896

Total liabilities
56,984,182

 
53,761,877

 
 
 
 
Stockholders' equity:
 
 
 
Preferred stock, par value $1 per share, 2,000,000 shares authorized,
  2017 and 2016 - no shares issued and outstanding

 

Common stock, par value $1 per share, 200,000,000 shares authorized; issued and outstanding:
   2017 - 88,741,014 shares (excluding 2,573,000 treasury shares);
   2016 - 88,001,130 shares (excluding 2,887,082 treasury shares)
88,741

 
88,001

Additional paid-in capital
778,376

 
770,344

Accumulated other comprehensive income
610,122

 
339,966

Retained earnings
1,174,169

 
1,093,284

Total stockholders' equity
2,651,408

 
2,291,595

Total liabilities and stockholders' equity
$
59,635,590

 
$
56,053,472

See accompanying notes to unaudited consolidated financial statements.

2

Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
Revenues:
 
 
 
 
 
 
 
Premiums and other considerations
$
7,720

 
$
11,458

 
$
17,122

 
$
18,803

Annuity product charges
48,603

 
41,124

 
92,175

 
77,629

Net investment income
493,489

 
459,830

 
979,086

 
910,656

Change in fair value of derivatives
266,820

 
39,099

 
653,353

 
(34,966
)
Net realized gains on investments, excluding other than temporary impairment ("OTTI") losses
3,873

 
2,737

 
6,211

 
5,424

OTTI losses on investments:
 
 
 
 
 
 
 
Total OTTI losses

 
(762
)
 

 
(6,780
)
Portion of OTTI losses recognized from other comprehensive income
(949
)
 
(3,684
)
 
(1,090
)
 
(3,360
)
Net OTTI losses recognized in operations
(949
)
 
(4,446
)
 
(1,090
)
 
(10,140
)
Loss on extinguishment of debt
(428
)
 

 
(428
)
 

Total revenues
819,128

 
549,802

 
1,746,429

 
967,406

 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
Insurance policy benefits and change in future policy benefits
9,986

 
13,393

 
21,861

 
22,502

Interest sensitive and index product benefits
472,596

 
111,121

 
891,735

 
208,792

Amortization of deferred sales inducements
33,695

 
30,672

 
96,020

 
58,151

Change in fair value of embedded derivatives
174,973

 
284,303

 
399,143

 
550,160

Interest expense on notes and loan payable
8,678

 
6,882

 
16,400

 
13,762

Interest expense on subordinated debentures
3,422

 
3,206

 
6,758

 
6,374

Amortization of deferred policy acquisition costs
49,547

 
50,665

 
139,225

 
100,378

Other operating costs and expenses
25,964

 
26,823

 
53,543

 
53,653

Total benefits and expenses
778,861

 
527,065

 
1,624,685

 
1,013,772

Income (loss) before income taxes
40,267

 
22,737

 
121,744

 
(46,366
)
Income tax expense (benefit)
13,321

 
8,029

 
40,859

 
(16,233
)
Net income (loss)
$
26,946

 
$
14,708

 
$
80,885

 
$
(30,133
)
 
 
 
 
 
 
 
 
Earnings (loss) per common share
$
0.30

 
$
0.18

 
$
0.91

 
$
(0.37
)
Earnings (loss) per common share - assuming dilution
$
0.30

 
$
0.18

 
$
0.90

 
$
(0.37
)
 
 
 
 
 
 
 
 
Weighted average common shares outstanding (in thousands):
 
 
 
 
 
 
 
Earnings (loss) per common share
88,897

 
82,517

 
88,773

 
82,323

Earnings (loss) per common share - assuming dilution
90,112

 
83,184

 
90,045

 
83,073

See accompanying notes to unaudited consolidated financial statements.

3

Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)

 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
 
 
 
 
 
Net income (loss)
$
26,946

 
$
14,708

 
$
80,885

 
$
(30,133
)
Other comprehensive income:
 
 
 
 
 
 
 
Change in net unrealized investment gains/losses (1)
283,345

 
555,412

 
412,469

 
1,060,760

Noncredit component of OTTI losses (1)
450

 
1,713

 
515

 
1,566

Reclassification of unrealized investment gains/losses to net income (loss) (1)
1,711

 
1,511

 
2,641

 
1,627

Other comprehensive income before income tax
285,506

 
558,636

 
415,625

 
1,063,953

Income tax effect related to other comprehensive income
(99,927
)
 
(195,523
)
 
(145,469
)
 
(372,384
)
Other comprehensive income
185,579

 
363,113

 
270,156

 
691,569

Comprehensive income
$
212,525

 
$
377,821

 
$
351,041

 
$
661,436

(1)
Net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs.
See accompanying notes to unaudited consolidated financial statements.

4

Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)
(Unaudited)

 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
Stockholders'
Equity
Balance at December 31, 2015
$
81,354

 
$
630,367

 
$
201,663

 
$
1,031,151

 
$
1,944,535

Net loss for period

 

 

 
(30,133
)
 
(30,133
)
Other comprehensive income

 

 
691,569

 

 
691,569

Share-based compensation, including excess income tax benefits

 
3,889

 

 

 
3,889

Issuance of 831,694 shares of common stock under compensation plans, including excess income tax benefits
832

 
2,699

 

 

 
3,531

Issuance of 92,998 shares of common stock to settle warrants that have reached their expiration
93

 
(94
)
 

 

 
(1
)
Balance at June 30, 2016
$
82,279

 
$
636,861

 
$
893,232

 
$
1,001,018

 
$
2,613,390

 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2016
$
88,001

 
$
770,344

 
$
339,966

 
$
1,093,284

 
$
2,291,595

Net income for period

 

 

 
80,885

 
80,885

Other comprehensive income

 

 
270,156

 

 
270,156

Share-based compensation

 
4,154

 

 

 
4,154

Issuance of 739,884 shares of common stock under compensation plans
740

 
3,878

 

 

 
4,618

Balance at June 30, 2017
$
88,741

 
$
778,376

 
$
610,122

 
$
1,174,169

 
$
2,651,408

See accompanying notes to unaudited consolidated financial statements.

5

Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

 
Six Months Ended 
 June 30,
 
2017
 
2016
Operating activities
 
 
 
Net income (loss)
$
80,885

 
$
(30,133
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Interest sensitive and index product benefits
891,735

 
208,792

Amortization of deferred sales inducements
96,020

 
58,151

Annuity product charges
(92,175
)
 
(77,629
)
Change in fair value of embedded derivatives
399,143

 
550,160

Change in traditional life and accident and health insurance reserves
122

 
2,261

Policy acquisition costs deferred
(221,909
)
 
(304,877
)
Amortization of deferred policy acquisition costs
139,225

 
100,378

Provision for depreciation and other amortization
1,961

 
1,745

Amortization of discounts and premiums on investments
8,644

 
(5,342
)
Realized gains (losses) on investments and net OTTI losses recognized in operations
(5,121
)
 
4,716

Change in fair value of derivatives
(653,939
)
 
34,172

Deferred income taxes
(40,965
)
 
(40,257
)
Loss on extinguishment of debt
428

 

Share-based compensation
4,154

 
3,448

Change in accrued investment income
(18,709
)
 
(15,289
)
Change in income taxes recoverable/payable
10,522

 
(6,078
)
Change in other assets
433

 
706

Change in other policy funds and contract claims
(14,824
)
 
(23,793
)
Change in collateral held for derivatives
289,258

 
10,615

Change in other liabilities
(36,848
)
 
(41,573
)
Other
(6,960
)
 
(7,793
)
Net cash provided by operating activities
831,080

 
422,380

 
 
 
 
Investing activities
 
 
 
Sales, maturities, or repayments of investments:
 
 
 
Fixed maturity securities - available for sale
970,752

 
1,421,976

Mortgage loans on real estate
185,406

 
215,904

Derivative instruments
750,345

 
15,859

Other investments
7,511

 
11,597

Acquisitions of investments:
 
 
 
Fixed maturity securities - available for sale
(2,680,972
)
 
(2,542,281
)
Mortgage loans on real estate
(257,050
)
 
(229,328
)
Derivative instruments
(320,583
)
 
(289,412
)
Other investments
(6,950
)
 
(6,945
)
Purchases of property, furniture and equipment
(2,494
)
 
(506
)
Net cash used in investing activities
(1,354,035
)
 
(1,403,136
)

6

Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)

 
Six Months Ended 
 June 30,
 
2017
 
2016
Financing activities
 
 
 
Receipts credited to annuity and single premium universal life policyholder account balances
$
2,243,180

 
$
4,181,709

Coinsurance deposits
30,938

 
(884,741
)
Return of annuity policyholder account balances
(1,401,086
)
 
(1,168,302
)
Financing fees incurred and deferred
(5,823
)
 

Proceeds from issuance of notes payable
499,650

 

Repayment of debt
(100,000
)
 

Net proceeds from amounts due under repurchase agreements
61,673

 

Excess tax benefits realized from share-based compensation plans

 
441

Proceeds from issuance of common stock
4,618

 
3,779

Change in checks in excess of cash balance
(26,548
)
 
(2,838
)
Net cash provided by financing activities
1,306,602

 
2,130,048

Increase in cash and cash equivalents
783,647

 
1,149,292

Cash and cash equivalents at beginning of period
791,266

 
397,749

Cash and cash equivalents at end of period
$
1,574,913

 
$
1,547,041

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid during period for:
 
 
 
Interest expense
$
22,739

 
$
19,390

Income taxes
71,526

 
29,961

Non-cash operating activity:
 
 
 
Deferral of sales inducements
128,092

 
196,207

Non-cash financing activity:
 
 
 
Common stock issued to settle warrants that have expired

 
93

See accompanying notes to unaudited consolidated financial statements.




 

7

Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2017
(Unaudited)


1. Significant Accounting Policies
Consolidation and Basis of Presentation
The accompanying consolidated financial statements of American Equity Investment Life Holding Company (“we”, “us” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. The consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly our financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for the three and six month periods ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ended December 31, 2017. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements requires the use of management estimates. For further information related to a description of areas of judgment and estimates and other information necessary to understand our financial position and results of operations, refer to the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2016.
Adopted Accounting Pronouncements
In March 2016, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") related to the accounting for share-based payment transactions. The aspects of accounting guidance affected by this ASU are income taxes, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted this ASU on January 1, 2017. The adoption of this ASU resulted in an income tax benefit of $0.3 million and $1.6 million being recognized in operations during the three and six month periods ended June 30, 2017 due to the requirement under this standard to recognize excess tax benefits related to share-based payment awards in income tax expense.
New Accounting Pronouncements
In January 2016, the FASB issued an ASU that, among other aspects of recognition, measurement, presentation and disclosure of financial instruments, primarily requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. Additionally, it changes the accounting for financial liabilities measured at fair value under the fair value option and eliminates some disclosures regarding fair value of financial assets and liabilities measured at amortized cost. This ASU will be effective for us on January 1, 2018, and we have not determined the effect it will have on our consolidated financial statements.
In February 2016, the FASB issued an ASU that will require recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU affects accounting and disclosure more dramatically for lessees as accounting for lessors is mainly unchanged. This ASU will be effective for us on January 1, 2019, with early adoption permitted, and we have not determined the effect it will have on our consolidated financial statements.
In June 2016, the FASB issued an ASU that significantly changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model that requires these assets be presented at the net amount expected to be collected. In addition, credit losses on available for sale debt securities should be recorded through an allowance account.  This ASU will be effective for us on January 1, 2020, with early adoption permitted, and we have not yet determined the impact this updated guidance will have on our consolidated financial statements.
In August 2016, the FASB issued an ASU that clarifies how certain cash receipts and cash payments are to be presented and classified in the statement of cash flows. This ASU will be effective for us on January 1, 2018, with early adoption permitted, and we have not yet determined the impact this updated guidance will have on our consolidated financial statements.
In March 2017, the FASB issued an ASU that applies to certain callable debt securities where the amortized cost basis is at a premium to the price repayable by the issuer at the earliest call date. Under this guidance, the premium will be amortized to the first call date. This ASU will be effective for us on January 1, 2019, with early adoption permitted, and we have not yet determined the impact this updated guidance will have on our consolidated financial statements.

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Table of Contents

2. Fair Values of Financial Instruments
The following sets forth a comparison of the carrying amounts and fair values of our financial instruments:
 
June 30, 2017
 
December 31, 2016
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale
$
43,893,785

 
$
43,893,785

 
$
41,060,494

 
$
41,060,494

Held for investment
76,931

 
76,702

 
76,825

 
68,766

Mortgage loans on real estate
2,553,391

 
2,554,995

 
2,480,956

 
2,522,035

Derivative instruments
1,086,624

 
1,086,624

 
830,519

 
830,519

Other investments
314,421

 
305,551

 
308,774

 
300,918

Cash and cash equivalents
1,574,913

 
1,574,913

 
791,266

 
791,266

Coinsurance deposits
4,710,650

 
4,213,996

 
4,639,492

 
4,150,792

Interest rate caps
468

 
468

 
1,082

 
1,082

Counterparty collateral
144,283

 
144,283

 
145,693

 
145,693

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Policy benefit reserves
53,546,680

 
44,785,605

 
51,280,331

 
43,104,183

Single premium immediate annuity (SPIA) benefit reserves
286,856

 
296,948

 
297,724

 
308,028

Notes and loan payable
888,660

 
929,437

 
493,755

 
519,440

Subordinated debentures
242,045

 
245,190

 
241,853

 
225,106

Amounts due under repurchase agreements
61,673

 
61,673

 

 

Interest rate swap
2,001

 
2,001

 
2,113

 
2,113

Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The objective of a fair value measurement is to determine that price for each financial instrument at each measurement date. We meet this objective using various methods of valuation that include market, income and cost approaches.
We categorize our financial instruments into three levels of fair value hierarchy based on the priority of inputs used in determining fair value. The hierarchy defines the highest priority inputs (Level 1) as quoted prices in active markets for identical assets or liabilities. The lowest priority inputs (Level 3) are our own assumptions about what a market participant would use in determining fair value such as estimated future cash flows. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. We categorize financial assets and liabilities recorded at fair value in the consolidated balance sheets as follows:
Level 1—
Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not adjust the quoted price for these financial instruments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.
Level 2—
Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial instruments in markets that are not active; and models and other valuation methodologies using inputs other than quoted prices that are observable.
Level 3—
Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in Level 3 are securities for which no market activity or data exists and for which we used discounted expected future cash flows with our own assumptions about what a market participant would use in determining fair value.
Transfers of securities among the levels occur at times and depend on the type of inputs used to determine fair value of each security. There were no transfers between levels during any period presented.

9

Table of Contents

Our assets and liabilities which are measured at fair value on a recurring basis as of June 30, 2017 and December 31, 2016 are presented below based on the fair value hierarchy levels:
 
Total
Fair Value
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(Dollars in thousands)
June 30, 2017
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
12,174

 
$
5,807

 
$
6,367

 
$

United States Government sponsored agencies
1,340,839

 

 
1,340,839

 

United States municipalities, states and territories
4,137,714

 

 
4,137,714

 

Foreign government obligations
238,869

 

 
238,869

 

Corporate securities
29,287,071

 
6

 
29,287,065

 

Residential mortgage backed securities
1,181,850

 

 
1,181,850

 

Commercial mortgage backed securities
5,540,383

 

 
5,540,383

 

Other asset backed securities
2,154,885

 

 
2,154,885

 

Other investments: equity securities, available for sale
7,982

 

 
7,982

 

Derivative instruments
1,086,624

 

 
1,086,624

 

Cash and cash equivalents
1,574,913

 
1,574,913

 

 

Interest rate caps
468

 

 
468

 

Counterparty collateral
144,283

 

 
144,283

 

 
$
46,708,055

 
$
1,580,726

 
$
45,127,329

 
$

Liabilities
 
 
 
 
 
 
 
Interest rate swap
$
2,001

 
$

 
$
2,001

 
$

Fixed index annuities - embedded derivatives
7,552,365

 

 

 
7,552,365

 
$
7,554,366

 
$

 
$
2,001

 
$
7,552,365

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
11,805

 
$
5,381

 
$
6,424

 
$

United States Government sponsored agencies
1,344,787

 

 
1,344,787

 

United States municipalities, states and territories
3,926,950

 

 
3,926,950

 

Foreign government obligations
236,341

 

 
236,341

 

Corporate securities
27,114,418

 
6

 
27,114,412

 

Residential mortgage backed securities
1,254,835

 

 
1,254,835

 

Commercial mortgage backed securities
5,365,235

 

 
5,365,235

 

Other asset backed securities
1,806,123

 

 
1,806,123

 

Other investments: equity securities, available for sale
8,000

 

 
8,000

 

Derivative instruments
830,519

 

 
830,519

 

Cash and cash equivalents
791,266

 
791,266

 

 

Interest rate caps
1,082

 

 
1,082

 

Counterparty collateral
145,693

 

 
145,693

 

 
$
42,837,054

 
$
796,653

 
$
42,040,401

 
$

Liabilities
 
 
 
 
 
 
 
Interest rate swap
$
2,113

 
$

 
$
2,113

 
$

Fixed index annuities - embedded derivatives
6,563,288

 

 

 
6,563,288

 
$
6,565,401

 
$

 
$
2,113

 
$
6,563,288


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Table of Contents

The following methods and assumptions were used in estimating the fair values of financial instruments during the periods presented in these consolidated financial statements.
Fixed maturity securities and equity securities
The fair values of fixed maturity securities and equity securities in an active and orderly market are determined by utilizing independent pricing services. The independent pricing services incorporate a variety of observable market data in their valuation techniques, including:
reported trading prices,
benchmark yields,
broker-dealer quotes,
benchmark securities,
bids and offers,
credit ratings,
relative credit information, and
other reference data.
The independent pricing services also take into account perceived market movements and sector news, as well as a security's terms and conditions, including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary.
The independent pricing services provide quoted market prices when available. Quoted prices are not always available due to market inactivity. When quoted market prices are not available, the third parties use yield data and other factors relating to instruments or securities with similar characteristics to determine fair value for securities that are not actively traded. We generally obtain one value from our primary external pricing service. In situations where a price is not available from this service, we may obtain quotes or prices from additional parties as needed. In addition, for our callable United States Government sponsored agencies, we obtain multiple broker quotes and take the average of the broker prices received. Market indices of similar rated asset class spreads are considered for valuations and broker indications of similar securities are compared. Inputs used by the broker include market information, such as yield data and other factors relating to instruments or securities with similar characteristics. Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes on which one may execute the disposition of the assets.
We validate external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the pricing services, analytical reviews and performance analysis of the prices against trends, and maintenance of a securities watch list. Additionally, as needed we utilize discounted cash flow models or perform independent valuations on a case-by-case basis using inputs and assumptions similar to those used by the pricing services. Although we do identify differences from time to time as a result of these validation procedures, we did not make any significant adjustments as of June 30, 2017 and December 31, 2016.
Mortgage loans on real estate
Mortgage loans on real estate are not measured at fair value on a recurring basis. The fair values of mortgage loans on real estate are calculated using discounted expected cash flows using current competitive market interest rates currently being offered for similar loans. The fair values of impaired mortgage loans on real estate that we have considered to be collateral dependent are based on the fair value of the real estate collateral (based on appraised values) less estimated costs to sell. The inputs utilized to determine fair value of all mortgage loans are unobservable market data (competitive market interest rates); therefore, fair value of mortgage loans falls into Level 3 in the fair value hierarchy.
Derivative instruments
The fair values of derivative instruments, primarily call options, are based upon the amount of cash that we will receive to settle each derivative instrument on the reporting date. These amounts are determined by our investment team using industry accepted valuation models and are adjusted for the nonperformance risk of each counterparty net of any collateral held. Inputs include market volatility and risk free interest rates and are used in income valuation techniques in arriving at a fair value for each option contract. The nonperformance risk for each counterparty is based upon its credit default swap rate. We have no performance obligations related to the call options purchased to fund our fixed index annuity policy liabilities.
Other investments
Available for sale equity securities are the only financial instruments included in other investments that are measured at fair value on a recurring basis (see determination of fair value above). Financial instruments included in other investments that are not measured at fair value on a recurring basis are policy loans, equity method investments and company owned life insurance (COLI). We have not attempted to determine the fair values associated with our policy loans, as we believe any differences between carrying value and the fair values afforded these instruments are immaterial to our consolidated financial position and, accordingly, the cost to provide such disclosure does not justify the benefit to be derived. The fair value of our equity method investments qualify as Level 3 fair values and were determined by calculating the present value of future cash flows discounted by a risk free rate, a risk spread and a liquidity discount. The risk spread and liquidity discount are rates determined by our investment professionals and are unobservable market inputs. The fair value of our COLI approximates the cash surrender value of the policies and whose fair values fall within Level 2 of the fair value hierarchy.

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Table of Contents

Cash and cash equivalents
Amounts reported in the consolidated balance sheets for these instruments are reported at their historical cost which approximates fair value due to the nature of the assets assigned to this category.
Interest rate swap and caps
The fair values of our pay fixed/receive variable interest rate swap and our interest rate caps are obtained from third parties and are determined by discounting expected future cash flows using projected LIBOR rates for the term of the swap and caps.
Counterparty collateral
Amounts reported in other assets in the consolidated balance sheets for these instruments are reported at their historical cost which approximates fair value due to the nature of the assets assigned to this category.
Policy benefit reserves, coinsurance deposits and SPIA benefit reserves
The fair values of the liabilities under contracts not involving significant mortality or morbidity risks (principally deferred annuities), are stated at the cost we would incur to extinguish the liability (i.e., the cash surrender value) as these contracts are generally issued without an annuitization date. The coinsurance deposits related to the annuity benefit reserves have fair values determined in a similar fashion. For period-certain annuity benefit contracts, the fair value is determined by discounting the benefits at the interest rates currently in effect for newly issued immediate annuity contracts. We are not required to and have not estimated the fair value of the liabilities under contracts that involve significant mortality or morbidity risks, as these liabilities fall within the definition of insurance contracts that are exceptions from financial instruments that require disclosures of fair value. Policy benefit reserves, coinsurance deposits and SPIA benefit reserves are not measured at fair value on a recurring basis. All of the fair values presented within these categories fall within Level 3 of the fair value hierarchy as most of the inputs are unobservable market data.
Notes and loan payable
The fair values of our senior unsecured notes are based upon pricing matrices developed by a third party pricing service when quoted market prices are not available and are categorized as Level 2 within the fair value hierarchy. The fair value of our term loan is estimated using discounted cash flow calculations based principally on observable inputs including our incremental borrowing rate, which reflects our credit rating, for a similar type of borrowing with a maturity consistent with that remaining for the term loan. Notes and loan payable are not remeasured at fair value on a recurring basis.
Subordinated debentures
Fair values for subordinated debentures are estimated using discounted cash flow calculations based principally on observable inputs including our incremental borrowing rates, which reflect our credit rating, for similar types of borrowings with maturities consistent with those remaining for the debt being valued. These fair values are categorized as Level 2 within the fair value hierarchy. Subordinated debentures are not measured at fair value on a recurring basis.
Amounts due under repurchase agreements
The amounts reported in the consolidated balance sheets for short term indebtedness under repurchase agreements with variable interest rates approximate their fair values.
Fixed index annuities - embedded derivatives
We estimate the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each valuation date by (i) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and (ii) discounting the excess of the projected contract value amounts at the applicable risk free interest rates adjusted for our nonperformance risk related to those liabilities. The projections of policy contract values are based on our best estimate assumptions for future policy growth and future policy decrements. Our best estimate assumptions for future policy growth include assumptions for the expected index credit on the next policy anniversary date which are derived from the fair values of the underlying call options purchased to fund such index credits and the expected costs of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.
Within this determination we have the following significant unobservable inputs: 1) the expected cost of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary and 2) our best estimates for future policy decrements, primarily lapse, partial withdrawal and mortality rates. As of June 30, 2017 and December 31, 2016, we utilized an estimate of 3.10% for the expected cost of annual call options, which are based on estimated long-term account value growth and a historical review of our actual option costs.

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Our best estimate assumptions for lapse, partial withdrawal and mortality rates are based on our actual experience and our outlook as to future expectations for such assumptions. These assumptions, which are consistent with the assumptions used in calculating deferred policy acquisition costs and deferred sales inducements, are reviewed on a quarterly basis and are revised as our experience develops and/or as future expectations change. Our mortality rate assumptions are based on 65% of the 1983 Basic Annuity Mortality Tables. The following table presents average lapse rate and partial withdrawal rate assumptions, by contract duration, used in estimating the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each reporting date:
 
 
Average Lapse Rates
 
Average Partial Withdrawal Rates
Contract Duration (Years)
 
June 30, 2017
 
December 31, 2016
 
June 30, 2017
 
December 31, 2016
1 - 5
 
1.95%
 
1.76%
 
3.31%
 
3.30%
6 - 10
 
6.85%
 
6.58%
 
3.32%
 
3.30%
11 - 15
 
11.28%
 
11.25%
 
3.33%
 
3.32%
16 - 20
 
11.99%
 
12.04%
 
3.19%
 
3.18%
20+
 
11.65%
 
11.68%
 
3.19%
 
3.18%
Lapse rates are generally expected to increase as surrender charge percentages decrease. Lapse expectations reflect a significant increase in the year in which the surrender charge period on a contract ends.
The following table provides a reconciliation of the beginning and ending balances for our Level 3 liabilities, which are measured at fair value on a recurring basis using significant unobservable inputs for the three and six months ended June 30, 2017 and 2016:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Fixed index annuities - embedded derivatives
 
 
 
 
 
 
 
Beginning balance
$
7,051,000

 
$
6,254,466

 
$
6,563,288

 
$
5,983,622

Premiums less benefits
497,689

 
44,632

 
909,191

 
135,761

Change in fair value, net
3,676

 
199,917

 
79,886

 
379,632

Ending balance
$
7,552,365

 
$
6,499,015

 
$
7,552,365

 
$
6,499,015

Change in fair value, net for each period in our embedded derivatives are included in change in fair value of embedded derivatives in the unaudited consolidated statements of operations.
Certain derivatives embedded in our fixed index annuity contracts are our most significant financial instrument measured at fair value that are categorized as Level 3 in the fair value hierarchy. The contractual obligations for future annual index credits within our fixed index annuity contracts are treated as a "series of embedded derivatives" over the expected life of the applicable contracts. We estimate the fair value of these embedded derivatives at each valuation date by the method described above under fixed index annuities - embedded derivatives. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.
The most sensitive assumption in determining policy liabilities for fixed index annuities is the rates used to discount the excess projected contract values. As indicated above, the discount rate reflects our nonperformance risk. If the discount rates used to discount the excess projected contract values at June 30, 2017, were to increase by 100 basis points, the fair value of the embedded derivatives would decrease by $510.7 million recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be a corresponding decrease of $307.0 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as an increase in amortization of deferred policy acquisition costs and deferred sales inducements. A decrease by 100 basis points in the discount rate used to discount the excess projected contract values would increase the fair value of the embedded derivatives by $570.3 million recorded through operations as an increase in the change in fair value of embedded derivatives and there would be a corresponding increase of $337.7 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as a decrease in amortization of deferred policy acquisition costs and deferred sales inducements.

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Table of Contents

3. Investments
At June 30, 2017 and December 31, 2016, the amortized cost and fair value of fixed maturity securities were as follows:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(Dollars in thousands)
June 30, 2017
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
12,114

 
$
228

 
$
(168
)
 
$
12,174

United States Government sponsored agencies
1,348,391

 
30,288

 
(37,840
)
 
1,340,839

United States municipalities, states and territories
3,777,760

 
369,526

 
(9,572
)
 
4,137,714

Foreign government obligations
228,896

 
12,462

 
(2,489
)
 
238,869

Corporate securities
27,813,420

 
1,656,805

 
(183,154
)
 
29,287,071

Residential mortgage backed securities
1,090,846

 
93,316

 
(2,312
)
 
1,181,850

Commercial mortgage backed securities
5,519,767

 
89,865

 
(69,249
)
 
5,540,383

Other asset backed securities
2,116,550

 
51,796

 
(13,461
)
 
2,154,885

 
$
41,907,744

 
$
2,304,286

 
$
(318,245
)
 
$
43,893,785

Held for investment:
 
 
 
 
 
 
 
Corporate security
$
76,931

 
$

 
$
(229
)
 
$
76,702

 
 
 
 
 
 
 
 
Other investments: equity securities, available for sale:
 
 
 
 
 
 
 
Finance, insurance, and real estate
$
7,525

 
$
457

 
$

 
$
7,982

 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
11,864

 
$
229

 
$
(288
)
 
$
11,805

United States Government sponsored agencies
1,368,340

 
23,360

 
(46,913
)
 
1,344,787

United States municipalities, states and territories
3,626,395

 
322,948

 
(22,393
)
 
3,926,950

Foreign government obligations
229,589

 
11,832

 
(5,080
)
 
236,341

Corporate securities
26,333,213

 
1,149,978

 
(368,773
)
 
27,114,418

Residential mortgage backed securities
1,166,944

 
91,445

 
(3,554
)
 
1,254,835

Commercial mortgage backed securities
5,422,255

 
59,994

 
(117,014
)
 
5,365,235

Other asset backed securities
1,795,355

 
31,471

 
(20,703
)
 
1,806,123

 
$
39,953,955

 
$
1,691,257

 
$
(584,718
)
 
$
41,060,494

Held for investment:
 
 
 
 
 
 
 
Corporate security
$
76,825

 
$

 
$
(8,059
)
 
$
68,766

 
 
 
 
 
 
 
 
Other investments: equity securities, available for sale:
 
 
 
 
 
 
 
Finance, insurance, and real estate
$
7,521

 
$
479

 
$

 
$
8,000

At June 30, 2017, 37% of our fixed income securities have call features, of which 2.1% ($899.1 million) were subject to call redemption and another 1.0% ($409.5 million) will become subject to call redemption during the next twelve months. Approximately 72% of our fixed income securities that have call features are not callable until within six months of their stated maturities.

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Table of Contents

The amortized cost and fair value of fixed maturity securities at June 30, 2017, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of our mortgage and other asset backed securities provide for periodic payments throughout their lives and are shown below as separate lines.
 
Available for sale
 
Held for investment
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
(Dollars in thousands)
Due in one year or less
$
287,042

 
$
294,085

 
$

 
$

Due after one year through five years
3,482,397

 
3,645,145

 

 

Due after five years through ten years
11,828,053

 
12,116,887

 

 

Due after ten years through twenty years
8,981,750

 
9,715,165

 

 

Due after twenty years
8,601,339

 
9,245,385

 
76,931

 
76,702

 
33,180,581

 
35,016,667

 
76,931

 
76,702

Residential mortgage backed securities
1,090,846

 
1,181,850

 

 

Commercial mortgage backed securities
5,519,767

 
5,540,383

 

 

Other asset backed securities
2,116,550

 
2,154,885

 

 

 
$
41,907,744

 
$
43,893,785

 
$
76,931

 
$
76,702

Net unrealized gains on available for sale fixed maturity securities and equity securities reported as a separate component of stockholders' equity were comprised of the following:
 
June 30, 2017
 
December 31, 2016
 
(Dollars in thousands)
Net unrealized gains on available for sale fixed maturity securities and equity securities
$
1,986,498

 
$
1,107,018

Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements
(1,082,516
)
 
(618,661
)
Deferred income tax valuation allowance reversal
22,534

 
22,534

Deferred income tax expense
(316,394
)
 
(170,925
)
Net unrealized gains reported as accumulated other comprehensive income
$
610,122

 
$
339,966

The National Association of Insurance Commissioners (“NAIC”) assigns designations to fixed maturity securities. These designations range from Class 1 (highest quality) to Class 6 (lowest quality). In general, securities are assigned a designation based upon the ratings they are given by the Nationally Recognized Statistical Rating Organizations (“NRSRO’s”). The NAIC designations are utilized by insurers in preparing their annual statutory statements. NAIC Class 1 and 2 designations are considered “investment grade” while NAIC Class 3 through 6 designations are considered “non-investment grade.” Based on the NAIC designations, we had 97% of our fixed maturity portfolio rated investment grade at both June 30, 2017 and December 31, 2016, respectively.
The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:
 
 
June 30, 2017
 
December 31, 2016
NAIC
Designation
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
(Dollars in thousands)
1
 
$
26,718,443

 
$
28,144,706

 
$
25,607,268

 
$
26,507,798

2
 
13,907,192

 
14,499,548

 
13,037,592

 
13,295,648

3
 
1,229,695

 
1,207,581

 
1,201,059

 
1,155,702

4
 
97,349

 
89,144

 
154,226

 
137,188

5
 
19,559

 
20,698

 
17,475

 
24,664

6
 
12,437

 
8,810

 
13,160

 
8,260

 
 
$
41,984,675

 
$
43,970,487

 
$
40,030,780

 
$
41,129,260


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Table of Contents

The following table shows our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 956 and 1,514 securities, respectively) have been in a continuous unrealized loss position, at June 30, 2017 and December 31, 2016:
 
Less than 12 months
 
12 months or more
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
(Dollars in thousands)
June 30, 2017
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
United States Government full faith and credit
$
6,867

 
$
(168
)
 
$

 
$

 
$
6,867

 
$
(168
)
United States Government sponsored agencies
945,126

 
(35,343
)
 
49,503

 
(2,497
)
 
994,629

 
(37,840
)
United States municipalities, states and territories
273,302

 
(9,572
)
 

 

 
273,302

 
(9,572
)
Foreign government obligations

 

 
11,844

 
(2,489
)
 
11,844

 
(2,489
)
Corporate securities:
 
 
 
 
 
 
 
 
 
 
 
Finance, insurance and real estate
1,132,134

 
(37,599
)
 
86,335

 
(1,495
)
 
1,218,469

 
(39,094
)
Manufacturing, construction and mining
458,458

 
(9,156
)
 
200,709

 
(13,648
)
 
659,167

 
(22,804
)
Utilities and related sectors
523,863

 
(14,319
)
 
43,553

 
(2,612
)
 
567,416

 
(16,931
)
Wholesale/retail trade
282,589

 
(9,583
)
 
42,120

 
(4,812
)
 
324,709

 
(14,395
)
Services, media and other
1,156,695

 
(33,573
)
 
619,260

 
(56,357
)
 
1,775,955

 
(89,930
)
Residential mortgage backed securities
40,684

 
(1,631
)
 
8,036

 
(681
)
 
48,720

 
(2,312
)
Commercial mortgage backed securities
1,924,949

 
(44,461
)
 
439,081

 
(24,788
)
 
2,364,030

 
(69,249
)
Other asset backed securities
528,570

 
(6,387
)
 
65,296

 
(7,074
)
 
593,866

 
(13,461
)
 
$
7,273,237

 
$
(201,792
)
 
$
1,565,737

 
$
(116,453
)
 
$
8,838,974

 
$
(318,245
)
Held for investment:
 
 
 
 
 
 
 
 
 
 
 
Corporate security:
 
 
 
 
 
 
 
 
 
 
 
Insurance
$

 
$

 
$
76,702

 
$
(229
)
 
$
76,702

 
$
(229
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
United States Government full faith and credit
$
7,405

 
$
(288
)
 
$

 
$

 
$
7,405

 
$
(288
)
United States Government sponsored agencies
995,548

 
(46,913
)
 

 

 
995,548

 
(46,913
)
United States municipalities, states and territories
463,409

 
(22,393
)
 

 

 
463,409

 
(22,393
)
Foreign government obligations
29,158

 
(913
)
 
20,388

 
(4,167
)
 
49,546

 
(5,080
)
Corporate securities:
 
 
 
 
 
 
 
 
 
 
 
Finance, insurance and real estate
1,940,107

 
(70,421
)
 
82,907

 
(7,723
)
 
2,023,014

 
(78,144
)
Manufacturing, construction and mining
1,199,420

 
(34,304
)
 
311,591

 
(23,273
)
 
1,511,011

 
(57,577
)
Utilities and related sectors
1,401,650

 
(45,015
)
 
58,597

 
(5,820
)
 
1,460,247

 
(50,835
)
Wholesale/retail trade
637,121

 
(18,880
)
 
29,719

 
(1,930
)
 
666,840

 
(20,810
)
Services, media and other
2,539,519

 
(82,196
)
 
716,857

 
(79,211
)
 
3,256,376

 
(161,407
)
Residential mortgage backed securities
81,762

 
(3,463
)
 
1,853

 
(91
)
 
83,615

 
(3,554
)
Commercial mortgage backed securities
3,148,395

 
(116,938
)
 
895

 
(76
)
 
3,149,290

 
(117,014
)
Other asset backed securities
751,533

 
(12,289
)
 
146,167

 
(8,414
)
 
897,700

 
(20,703
)
 
$
13,195,027

 
$
(454,013
)
 
$
1,368,974

 
$
(130,705
)
 
$
14,564,001

 
$
(584,718
)
Held for investment:
 
 
 
 
 
 
 
 
 
 
 
Corporate security:
 
 
 
 
 
 
 
 
 
 
 
Insurance
$

 
$

 
$
68,766

 
$
(8,059
)
 
$
68,766

 
$
(8,059
)
Based on the results of our process for evaluating available for sale securities in unrealized loss positions for other than temporary impairments, which is discussed in detail later in this footnote, we have determined that the unrealized losses on the securities in the preceding table are temporary. The unrealized losses at June 30, 2017 are principally related to timing of the purchases of these securities, which carry less yield than those available at June 30, 2017.


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Table of Contents

Approximately 81% and 86% of the unrealized losses on fixed maturity securities shown in the above table for June 30, 2017 and December 31, 2016, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC designations. All of the fixed maturity securities with unrealized losses are current with respect to the payment of principal and interest.
Changes in net unrealized gains on investments for the three and six months ended June 30, 2017 and 2016 are as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Fixed maturity securities held for investment carried at amortized cost
$
9,806

 
$
820

 
$
7,830

 
$
3,065

Investments carried at fair value:
 
 
 
 
 
 
 
Fixed maturity securities, available for sale
$
598,408

 
$
1,167,861

 
$
879,502

 
$
2,282,946

Equity securities, available for sale
(9
)
 
(1
)
 
(22
)
 
(18
)
 
598,399

 
1,167,860

 
879,480

 
2,282,928

Adjustment for effect on other balance sheet accounts:
 
 
 
 
 
 
 
Deferred policy acquisition costs and deferred sales inducements
(312,893
)
 
(609,224
)
 
(463,855
)
 
(1,218,975
)
Deferred income tax asset/liability
(99,927
)
 
(195,523
)
 
(145,469
)
 
(372,384
)
 
(412,820
)
 
(804,747
)
 
(609,324
)
 
(1,591,359
)
Change in net unrealized gains on investments carried at fair value
$
185,579

 
$
363,113

 
$
270,156

 
$
691,569

Proceeds from sales of available for sale securities for the six months ended June 30, 2017 and 2016 were $376.9 million and $186.1 million, respectively. Scheduled principal repayments, calls and tenders for available for sale securities for the six months ended June 30, 2017 and 2016 were $593.8 million and $1.2 billion, respectively.
Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Net realized gains on investments, excluding net OTTI losses for the three and six months ended June 30, 2017 and 2016, are as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2017
 
2016
 
2017
 
2016
 
(Dollars in thousands)
Available for sale fixed maturity securities:
 
 
 
 
 
 
 
Gross realized gains
$
4,479

 
$
4,604

 
$
10,051

 
$
6,091

Gross realized losses
(899
)
 
(1,368
)
 
(4,462
)
 
(2,599
)
 
3,580

 
3,236

 
5,589

 
3,492

Other investments:
 
 
 
 
 
 
 
Gain on sale of real estate
15

 
705

 
44

 
836

Loss on sale of real estate

 
(1
)
 

 
(93
)
 
15

 
704

 
44

 
743

Mortgage loans on real estate:
 
 
 
 
 
 
 
Decrease (increase) in allowance for credit losses
278

 
(2,885
)
 
578

 
(3,833
)
Recovery of specific allowance

 
1,682

 

 
5,022

 
278

 
(1,203
)
 
578

 
1,189

 
$
3,873

 
$
2,737

 
$
6,211

 
$
5,424

Losses on available for sale fixed maturity securities were realized primarily due to strategies to reposition the fixed maturity security portfolio that result in improved net investment income, credit risk or duration profiles as they pertain to our asset liability management. Securities were sold at losses in 2017 and 2016 due to our long-term fundamental concern with the issuers' ability to meet their future financial obligations.
We review and analyze all investments on an ongoing basis for changes in market interest rates and credit deterioration. This review process includes analyzing our ability to recover the amortized cost basis of each investment that has a fair value that is materially lower than its amortized cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for other than temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties.
We have a policy and process to identify securities that could potentially have impairments that are other than temporary. This process involves monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:
the length of time and the extent to which the fair value has been less than amortized cost or cost;
whether the issuer is current on all payments and all contractual payments have been made as agreed;
the remaining payment terms and the financial condition and near-term prospects of the issuer;

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the lack of ability to refinance due to liquidity problems in the credit market;
the fair value of any underlying collateral;
the existence of any credit protection available;
our intent to sell and whether it is more likely than not we would be required to sell prior to recovery for debt securities;
our assessment in the case of equity securities including perpetual preferred stocks with credit deterioration that the security cannot recover to cost in a reasonable period of time;
our intent and ability to retain equity securities for a period of time sufficient to allow for recovery;