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Section 1: 10-Q (10-Q)

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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, 2016
 
 
 
or
 
 
 
[ ]
 
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: 1-11917
(Exact name of registrant as specified in its charter)
 
 
 
Iowa
 
42-1411715
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
5400 University Avenue, West Des Moines, Iowa
 
50266-5997
(Address of principal executive offices)
 
(Zip Code)
 
 
 
(515) 225-5400
(Registrant's telephone number, including area code)
 
 
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
 
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 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. [X] Yes [ ] No
 
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 (Section 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). [X] Yes [ ] No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer [ ]
Accelerated filer [X]
Non-accelerated filer [ ]
Smaller reporting company [ ]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [X] No
 
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
 Title of each class
 
Outstanding at August 1, 2016
Class A Common Stock, without par value
 
24,851,296
Class B Common Stock, without par value
 
11,413


















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FBL FINANCIAL GROUP, INC.
FORM 10-Q FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2016
TABLE OF CONTENTS


PART I.
FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (Unaudited)
 
 
Consolidated Balance Sheets
 
Consolidated Statements of Operations
 
Consolidated Statements of Comprehensive Income (Loss)
 
Consolidated Statements of Changes in Stockholders' Equity
 
Consolidated Statements of Cash Flows
 
Notes to Consolidated Financial Statements
 
 
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
 
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
 
 
Item 4.
Controls and Procedures
 
 
 
PART II.
OTHER INFORMATION
 
 
 
Item 1A.
Risk Factors
 
 
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
 
 
Item 6.
Exhibits
 
 
 
SIGNATURES
 
    



1


ITEM 1. FINANCIAL STATEMENTS

FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Unaudited)
(Dollars in thousands)

 
June 30,
2016
 
December 31,
2015
Assets
 
 
 
Investments:
 
 
 
Fixed maturities - available for sale, at fair value (amortized cost: 2016 - $6,443,993; 2015 - $6,379,919)
$
7,066,458

 
$
6,637,776

Equity securities - available for sale, at fair value (cost: 2016 - $132,006; 2015 - $116,336)
139,473

 
121,667

Mortgage loans
763,427

 
744,303

Real estate
1,955

 
1,955

Policy loans
187,439

 
185,784

Short-term investments
22,557

 
28,251

Other investments
6,323

 
3,017

Total investments
8,187,632

 
7,722,753

 
 
 
 
Cash and cash equivalents
125,545

 
29,490

Securities and indebtedness of related parties
132,367

 
134,570

Accrued investment income
77,048

 
78,274

Amounts receivable from affiliates
5,452

 
2,834

Reinsurance recoverable
105,778

 
103,898

Deferred acquisition costs
219,626

 
335,783

Value of insurance in force acquired
19,724

 
20,913

Current income taxes recoverable

 
2,421

Other assets
83,579

 
75,811

Assets held in separate accounts
603,706

 
625,257

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
9,560,457

 
$
9,132,004


 


2




FBL FINANCIAL GROUP, INC.
CONSOLIDATED BALANCE SHEETS (Continued)
(Dollars in thousands)

 
June 30,
2016
 
December 31,
2015
Liabilities and stockholders' equity
 
 
 
Liabilities:
 
 
 
Future policy benefits:
 
 
 
Interest sensitive products
$
4,950,857

 
$
4,764,159

Traditional life insurance and accident and health products
1,669,990

 
1,637,322

Other policy claims and benefits
34,163

 
44,157

Supplementary contracts without life contingencies
335,898

 
339,929

Advance premiums and other deposits
254,931

 
254,276

Amounts payable to affiliates
678

 
575

Short-term debt payable to non-affiliates

 
15,000

Long-term debt payable to non-affiliates
97,000

 
97,000

Current income taxes
6,152

 

Deferred income taxes
224,074

 
135,063

Other liabilities
105,500

 
84,792

Liabilities related to separate accounts
603,706

 
625,257

Total liabilities
8,282,949

 
7,997,530

 
 
 
 
Stockholders' equity:
 
 
 
FBL Financial Group, Inc. stockholders' equity:
 
 
 
Preferred stock, without par value, at liquidation value - authorized 10,000,000 shares, issued and outstanding 5,000,000 Series B shares
3,000

 
3,000

Class A common stock, without par value - authorized 88,500,000 shares, issued and outstanding 24,849,262 shares in 2016 and 24,796,763 shares in 2015
151,499

 
149,248

Class B common stock, without par value - authorized 1,500,000 shares, issued and outstanding 11,413 shares in 2016 and 2015
72

 
72

Accumulated other comprehensive income
276,122

 
114,532

Retained earnings
846,752

 
867,574

Total FBL Financial Group, Inc. stockholders' equity
1,277,445

 
1,134,426

Noncontrolling interest
63

 
48

Total stockholders' equity
1,277,508

 
1,134,474

Total liabilities and stockholders' equity
$
9,560,457

 
$
9,132,004


See accompanying notes.


3




FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)
(Dollars in thousands, except per share data)

 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Revenues:
 
 
 
 
 
 
 
Interest sensitive product charges
$
29,027

 
$
28,273

 
$
57,138

 
$
56,394

Traditional life insurance premiums
49,605

 
48,891

 
99,743

 
96,039

Net investment income
100,722

 
97,489

 
199,107

 
196,262

Net realized capital gains (losses) on sales of investments
(2,269
)
 
7,968

 
(679
)
 
7,602

 
 
 
 
 
 
 
 
Total other-than-temporary impairment losses
(25
)
 
(160
)
 
(3,744
)
 
(160
)
Non-credit portion in other comprehensive income

 

 
1,522

 

Net impairment losses recognized in earnings
(25
)
 
(160
)
 
(2,222
)
 
(160
)
Other income
4,225

 
4,284

 
7,864

 
8,554

Total revenues
181,285

 
186,745

 
360,951

 
364,691

 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
Interest sensitive product benefits
58,559

 
53,373

 
112,978

 
109,181

Traditional life insurance benefits
43,369

 
44,654

 
87,938

 
90,363

Policyholder dividends
2,515

 
2,956

 
5,555

 
5,917

Underwriting, acquisition and insurance expenses
38,938

 
35,818

 
76,652

 
71,359

Interest expense
1,213

 
1,212

 
2,425

 
2,424

Other expenses
4,435

 
4,618

 
8,793

 
9,148

Total benefits and expenses
149,029

 
142,631

 
294,341

 
288,392

 
32,256

 
44,114

 
66,610

 
76,299

Income taxes
(10,477
)
 
(14,153
)
 
(21,546
)
 
(24,537
)
Equity income, net of related income taxes
2,613

 
2,402

 
5,265

 
4,171

Net income
24,392

 
32,363

 
50,329

 
55,933

Net loss (income) attributable to noncontrolling interest
(12
)
 
9

 
(3
)
 
30

Net income attributable to FBL Financial Group, Inc.
$
24,380

 
$
32,372

 
$
50,326

 
$
55,963

 
 
 
 
 
 
 
 
Earnings per common share
$
0.97

 
$
1.30

 
$
2.01

 
$
2.24

Earnings per common share - assuming dilution
$
0.97

 
$
1.29

 
$
2.01

 
$
2.23

 
 
 
 
 
 
 
 
Cash dividend per common share
$
0.42

 
$
0.40

 
$
0.84

 
$
0.80

Special cash dividend per common share
$

 
$

 
$
2.00

 
$
2.00


See accompanying notes.


4




FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (Unaudited)
(Dollars in thousands)
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Net income
$
24,392

 
$
32,363

 
$
50,329

 
$
55,933

Other comprehensive income (loss) (1)
 
 
 
 
 
 
 
Change in net unrealized investment gains/losses
90,055

 
(115,873
)
 
162,258

 
(86,686
)
Non-credit impairment losses

 

 
(952
)
 

Change in underfunded status of postretirement benefit plans
149

 
246

 
284

 
477

Total other comprehensive income (loss), net of tax
90,204

 
(115,627
)
 
161,590

 
(86,209
)
Total comprehensive income net of tax
114,596

 
(83,264
)
 
211,919

 
(30,276
)
Comprehensive loss (income) attributable to noncontrolling interest
(12
)
 
9

 
(3
)
 
30

Total comprehensive income (loss) applicable to FBL Financial Group, Inc.
$
114,584

 
$
(83,255
)
 
$
211,916

 
$
(30,246
)

(1)
Other comprehensive income (loss) is recorded net of deferred income taxes and other adjustments for assumed changes in deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities.


FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Unaudited)
(Dollars in thousands)
 
FBL Financial Group, Inc. Stockholders' Equity
 
 
 
 
 
Series B Preferred Stock
 
Class A and Class B Common Stock
 
Accumulated Other Comprehensive Income
 
Retained Earnings
 
Non-
controlling Interest
 
Total Stockholders' Equity
Balance at January 1, 2015
$
3,000

 
$
144,697

 
$
258,410

 
$
846,737

 
$
38

 
$
1,252,882

Net income - six months ended June 30, 2015

 

 

 
55,963

 
(30
)
 
55,933

Other comprehensive loss

 

 
(86,209
)
 

 

 
(86,209
)
Issuance of common stock under compensation plans

 
3,302

 

 

 

 
3,302

Dividends on preferred stock

 

 

 
(75
)
 

 
(75
)
Dividends on common stock

 

 

 
(69,364
)
 

 
(69,364
)
Receipts related to noncontrolling interest

 

 

 

 
33

 
33

Balance at June 30, 2015
$
3,000

 
$
147,999

 
$
172,201

 
$
833,261

 
$
41

 
$
1,156,502

 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2016
$
3,000

 
$
149,320

 
$
114,532

 
$
867,574

 
$
48

 
$
1,134,474

Net income - six months ended June 30, 2016

 

 

 
50,326

 
3

 
50,329

Other comprehensive income

 

 
161,590

 

 

 
161,590

Issuance of common stock under compensation plans

 
2,314

 

 

 

 
2,314

Purchase of common stock

 
(63
)
 

 
(523
)
 

 
(586
)
Dividends on preferred stock

 

 

 
(75
)
 

 
(75
)
Dividends on common stock

 

 

 
(70,550
)
 

 
(70,550
)
Receipts related to noncontrolling interest

 

 

 

 
12

 
12

Balance at June 30, 2016
$
3,000

 
$
151,571

 
$
276,122

 
$
846,752

 
$
63

 
$
1,277,508


See accompanying notes.


5




FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
(Dollars in thousands)

 
Six months ended June 30,
 
2016
 
2015
Operating activities
 
 
 
Net income
$
50,329

 
$
55,933

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Interest credited to account balances
75,226

 
76,043

Charges for mortality, surrenders and administration
(55,579
)
 
(53,992
)
Net realized (gains) losses on investments
2,901

 
(7,442
)
Change in fair value of derivatives
2,800

 
(131
)
Increase in liabilities for life insurance and other future policy benefits
44,169

 
26,462

Deferral of acquisition costs
(20,977
)
 
(20,693
)
Amortization of deferred acquisition costs and value of insurance in force
22,379

 
18,683

Change in reinsurance recoverable
(1,880
)
 
(10,904
)
Provision for deferred income taxes
1,993

 
462

Other
(4,270
)
 
4,620

Net cash provided by operating activities
117,091

 
89,041

 
 
 
 
Investing activities
 
 
 
Sales, maturities or repayments:
 
 
 
Fixed maturities - available for sale
289,644

 
322,036

Equity securities - available for sale
3,571

 
12,320

Mortgage loans
34,641

 
24,254

Derivative instruments
75

 
1,953

Policy loans
18,532

 
17,833

Securities and indebtedness of related parties
7,293

 
12,662

Acquisitions:
 
 
 
Fixed maturities - available for sale
(328,264
)
 
(434,563
)
Equity securities - available for sale
(11,162
)
 
(22,582
)
Mortgage loans
(61,125
)
 
(83,935
)
Derivative instruments
(3,311
)
 
(1,727
)
Policy loans
(20,187
)
 
(18,987
)
Securities and indebtedness of related parties
(8,131
)
 
(14,429
)
Short-term investments, net change
5,694

 
19,309

Purchases and disposals of property and equipment, net
(5,831
)
 
(5,624
)
Net cash used in investing activities
(78,561
)
 
(171,480
)




6




FBL FINANCIAL GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)

 
Six months ended June 30,
 
2016
 
2015
Financing activities
 
 
 
Contract holder account deposits
$
319,337

 
$
363,387

Contract holder account withdrawals
(177,676
)
 
(239,091
)
Repayments of debt
(15,000
)
 

Receipts related to noncontrolling interests, net
12

 
33

Excess tax deductions on stock-based compensation
472

 
806

Issuance or repurchase of common stock, net
1,005

 
2,094

Dividends paid
(70,625
)
 
(69,439
)
Net cash provided by financing activities
57,525

 
57,790

Increase (decrease) in cash and cash equivalents
96,055

 
(24,649
)
Cash and cash equivalents at beginning of period
29,490

 
76,632

Cash and cash equivalents at end of period
$
125,545

 
$
51,983

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid during the period for:
 
 
 
Interest
$
2,429

 
$
2,425

Income taxes
2,001

 
8,501


See accompanying notes.


7


FBL FINANCIAL GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
June 30, 2016

1. Significant Accounting Policies

Basis of Presentation

The accompanying unaudited consolidated financial statements of FBL Financial Group, Inc. (we or the Company) 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 of the information and notes required by GAAP for complete financial statements. Our financial statements include all adjustments (consisting of normal recurring accruals) necessary for a fair presentation of our financial position and results of operations.

Operating results for the quarter ended June 30, 2016 are not necessarily indicative of the results that may be expected for the year ending December 31, 2016. We encourage you to refer to our consolidated financial statements and notes for the year ended December 31, 2015 included in our Annual Report on Form 10-K for a complete description of our material accounting policies. Also included in the Form 10-K is a description of areas of judgments and estimates and other information necessary to understand our financial position and results of operations.

Recent Accounting Pronouncements

In February 2015, the Financial Accounting Standards Board (FASB) issued guidance that amends existing consolidation guidance. The decision to consolidate an entity that a company has an ownership stake in is based on one of two consolidation models: the voting interest entity model and the variable interest entity model. The new guidance revises certain criteria used to determine which consolidation model to use, as well as the criteria considered in each model to determine whether consolidation is required. We adopted the new guidance on January 1, 2016. Adoption of the guidance had no impact on our financial statements as it did not alter any of our prior consolidation decisions. Adoption did result in certain entities which were previously evaluated under the voting interest entity model to be evaluated under the variable interest entity model. See Note 2 for details regarding our variable interest entities.

In March 2016, the FASB issued guidance that will impact the accounting for share-based compensation. The guidance will impact several areas including the accounting for excess tax benefits and deficiencies, classification of excess tax benefits within the consolidated statement of cash flows, and the accounting for forfeitures. The guidance becomes effective for fiscal years beginning after December 15, 2016. Certain requirements must be adopted prospectively, while others are required to be adopted on a modified prospective basis, or retroactively. We are currently evaluating the impact of this new guidance on our consolidated financial statements.

In January 2016, the FASB issued guidance that amends certain aspects of the recognition and measurement of financial instruments. The new guidance primarily affects the accounting for equity investments, the presentation and disclosure requirements for financial instruments and the methodology for assessing the need for a valuation allowance on deferred tax assets resulting from unrealized losses on available-for-sale fixed maturity securities. The guidance becomes effective for fiscal years beginning after December 15, 2017. We are currently evaluating the impact of this guidance on our consolidated financial statements.

In May 2014, the FASB issued guidance that outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers, which supersedes most current revenue recognition guidance, including industry-specific guidance. Although insurance contracts are specifically excluded from the scope of this guidance, almost all entities will be affected to some extent by the significant increase in required disclosures. The new guidance is based on the principle that an entity should recognize revenue to reflect the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to fulfill a contract. Entities have the option of using either a full retrospective or a modified retrospective approach for the adoption of the new standard, which becomes effective for fiscal years beginning after December 15, 2017; early adoption is not permitted. We are currently evaluating the impact of this new guidance on our consolidated financial statements.



8

Table of Contents

In February 2016, the FASB issued a new lease accounting standard, which, for most lessees, will result in a gross-up of the balance sheet. Under the new standard, lessees will recognize the leased assets on the balance sheet and will recognize a corresponding liability for the present value of lease payments over the lease term. The new standard requires the application of judgment and estimates. Also, there are accounting policy elections that may be taken both at transition and for the accounting post-transition, including whether to adopt a short-term lease recognition exemption. The guidance becomes effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The new standard will be applied as of the beginning of the earliest comparative period presented in the financial statements (date of initial application). We are currently evaluating the impact of this guidance on our consolidated financial statements.

In June 2016, the FASB issued guidance amending the accounting for the credit impairment of financial instruments. Under the new guidance, impairment losses are required to be estimated using an expected loss model under which a valuation allowance is established and adjusted over time. The valuation allowance will be based on the probability of loss over the life of the instrument, considering historical, current and forecasted information. The new guidance differs significantly from the incurred loss model used today, and will result in the earlier recognition of impairment losses. The new guidance will also increase the volatility of earnings to the extent actual results differ from the assumptions used in the establishment of the valuation allowance. The financial instruments for which we will be required to use the new model include but are not limited to, mortgage loans, lease receivables, and reinsurance recoverables. Our available-for-sale fixed maturities will continue to apply the incurred loss model, however, rather than impairment losses resulting in a permanent reduction of carrying value as they do today, such losses will be in the form of a valuation allowance which can be increased in the case of future credit losses or decreased should conditions improve. The guidance becomes effective for fiscal years beginning after December 15, 2019, with early adoption permitted on January 1, 2019. We are currently evaluating the impact of this new guidance on our consolidated financial statements.


2. Investment Operations

Fixed Maturity and Equity Securities

Available-For-Sale Fixed Maturity and Equity Securities by Investment Category
 
 
 
 
 
 
 
June 30, 2016
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Non-credit losses on other-than-temporary impairments (1)
 
(Dollars in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
 
Corporate (2)
$
3,415,019

 
$
350,826

 
$
(46,345
)
 
$
3,719,500

 
$
98

Residential mortgage-backed
399,625

 
40,284

 
(3,337
)
 
436,572

 
(1,404
)
Commercial mortgage-backed
551,349

 
73,452

 
(539
)
 
624,262

 

Other asset-backed
676,366

 
12,647

 
(6,974
)
 
682,039

 
3,866

United States Government and agencies
39,042

 
4,576

 

 
43,618

 

State, municipal and other governments
1,362,592

 
197,876

 
(1
)
 
1,560,467

 

Total fixed maturities
$
6,443,993

 
$
679,661

 
$
(57,196
)
 
$
7,066,458

 
$
2,560

 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
$
100,041

 
$
8,515

 
$
(1,523
)
 
$
107,033

 
 
Common stocks
31,965

 
475

 

 
32,440

 
 
Total equity securities
$
132,006

 
$
8,990

 
$
(1,523
)
 
$
139,473

 
 


9

Table of Contents

Available-For-Sale Fixed Maturity and Equity Securities by Investment Category
 
 
 
 
 
 
 
December 31, 2015
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Non-credit losses on other-than-temporary impairments (1)
 
(Dollars in thousands)
Fixed maturities:
 
 
 
 
 
 
 
 
 
Corporate (2)
$
3,464,402

 
$
192,149

 
$
(137,844
)
 
$
3,518,707

 
$
351

Residential mortgage-backed
436,969

 
33,880

 
(5,343
)
 
465,506

 
(3,584
)
Commercial mortgage-backed
514,195

 
42,284

 
(2,487
)
 
553,992

 

Other asset-backed
578,692

 
11,554

 
(7,124
)
 
583,122

 
3,058

United States Government and agencies
41,050

 
3,129

 
(81
)
 
44,098

 

State, municipal and other governments
1,344,611

 
129,923

 
(2,183
)
 
1,472,351

 

Total fixed maturities
$
6,379,919

 
$
412,919

 
$
(155,062
)
 
$
6,637,776

 
$
(175
)
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
$
87,029

 
$
6,095

 
$
(1,173
)
 
$
91,951

 
 
Common stocks
29,307

 
450

 
(41
)
 
29,716

 
 
Total equity securities
$
116,336

 
$
6,545

 
$
(1,214
)
 
$
121,667

 
 

(1)
Non-credit losses, subsequent to the initial impairment measurement date, on other-than-temporary impairment (OTTI) losses are included in the gross unrealized gains and gross unrealized losses columns above. The non-credit loss component of OTTI losses for corporate and other asset-backed securities were in an unrealized gain position at June 30, 2016 and December 31, 2015 due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities.
(2)
Corporate securities include hybrid preferred securities with a carrying value of $27.2 million at June 30, 2016 and $43.5 million at December 31, 2015. Corporate securities also include redeemable preferred stock with a carrying value of $26.1 million at June 30, 2016 and $24.8 million at December 31, 2015.

Available-For-Sale Fixed Maturities by Maturity Date
 
 
 
 
 
 
 
 
June 30, 2016
 
Amortized
Cost
 

Fair Value
 
(Dollars in thousands)
Due in one year or less
$
74,983

 
$
76,678

Due after one year through five years
743,828

 
808,721

Due after five years through ten years
751,522

 
801,916

Due after ten years
3,246,320

 
3,636,270

 
4,816,653

 
5,323,585

Mortgage-backed and other asset-backed
1,627,340

 
1,742,873

Total fixed maturities
$
6,443,993

 
$
7,066,458


Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Fixed maturities not due at a single maturity date have been included in the above table in the year of final contractual maturity.



10

Table of Contents

Net Unrealized Gains (Losses) on Investments in Accumulated Other Comprehensive Income
 
 
 
 
 
June 30,
2016
 
December 31,
2015
 
(Dollars in thousands)
Net unrealized appreciation on:
 
 
 
Fixed maturities - available for sale
$
622,465

 
$
257,857

Equity securities - available for sale
7,467

 
5,331

 
629,932

 
263,188

Adjustments for assumed changes in amortization pattern of:
 
 
 
Deferred acquisition costs
(191,075
)
 
(73,735
)
Value of insurance in force acquired
(2,978
)
 
(3,087
)
Unearned revenue reserve
10,530

 
3,352

Adjustments for assumed changes in policyholder liabilities
(12,597
)
 
(4,090
)
Provision for deferred income taxes
(151,833
)
 
(64,955
)
Net unrealized investment gains
$
281,979

 
$
120,673


Net unrealized investment gains and losses are recorded net of deferred income taxes and other adjustments for assumed changes in deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities. Subsequent changes in the fair value of securities for which a previous non-credit OTTI loss was recognized in accumulated other comprehensive income, are reported along with changes in fair value for which no OTTI losses were previously recognized.

Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time
 
 
 
 
 
 
 
 
 
June 30, 2016
 
 
Less than one year
 
One year or more
 
Total
 
 
Description of Securities
 

Fair Value
 
Unrealized Losses
 

Fair Value
 
Unrealized Losses
 
 Fair Value
 
Unrealized Losses
 
Percent of Total
 
 
(Dollars in thousands)
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
173,503

 
$
(11,032
)
 
$
287,820

 
$
(35,313
)
 
$
461,323

 
$
(46,345
)
 
81.0
%
Residential mortgage-backed
 
28,821

 
(963
)
 
25,346

 
(2,374
)
 
54,167

 
(3,337
)
 
5.8

Commercial mortgage-backed
 
6,755

 
(7
)
 
20,217

 
(532
)
 
26,972

 
(539
)
 
0.9

Other asset-backed
 
134,122

 
(1,659
)
 
96,872

 
(5,315
)
 
230,994

 
(6,974
)
 
12.3

State, municipal and other governments
 
4,074

 
(1
)
 

 

 
4,074

 
(1
)
 

Total fixed maturities
 
$
347,275

 
$
(13,662
)
 
$
430,255

 
$
(43,534
)
 
$
777,530

 
$
(57,196
)
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
 
$
2,978

 
$
(23
)
 
$
13,463

 
$
(1,500
)
 
$
16,441

 
$
(1,523
)
 
 
Total equity securities
 
$
2,978

 
$
(23
)
 
$
13,463

 
$
(1,500
)
 
$
16,441

 
$
(1,523
)
 
 



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Table of Contents

Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
Less than one year
 
One year or more
 
Total
 
 
Description of Securities
 
Estimated
Fair Value
 
Unrealized Losses
 
Estimated
Fair Value
 
Unrealized Losses
 
Estimated Fair Value
 
Unrealized Losses
 
Percent of Total
 
 
(Dollars in thousands)
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate
 
$
1,115,324

 
$
(96,062
)
 
$
115,730

 
$
(41,782
)
 
$
1,231,054

 
$
(137,844
)
 
88.9
%
Residential mortgage-backed
 
21,646

 
(725
)
 
26,537

 
(4,618
)
 
48,183

 
(5,343
)
 
3.4

Commercial mortgage-backed
 
48,424

 
(1,947
)
 
7,657

 
(540
)
 
56,081

 
(2,487
)
 
1.6

Other asset-backed
 
285,395

 
(3,323
)
 
65,298

 
(3,801
)
 
350,693

 
(7,124
)
 
4.6

United States Government and agencies
 
4,807

 
(81
)
 

 

 
4,807

 
(81
)
 
0.1

State, municipal and other governments
 
77,980

 
(2,183
)
 

 

 
77,980

 
(2,183
)
 
1.4

Total fixed maturities
 
$
1,553,576

 
$
(104,321
)
 
$
215,222

 
$
(50,741
)
 
$
1,768,798

 
$
(155,062
)
 
100.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-redeemable preferred stocks
 
$
21,280

 
$
(573
)
 
$
4,400

 
$
(600
)
 
$
25,680

 
$
(1,173
)
 
 
Common stocks
 
1,428

 
(41
)
 

 

 
1,428

 
(41
)
 
 
Total equity securities
 
$
22,708

 
$
(614
)
 
$
4,400

 
$
(600
)
 
$
27,108

 
$
(1,214
)
 
 

Fixed maturities in the above tables include 244 securities from 201 issuers at June 30, 2016 and 542 securities from 435 issuers at December 31, 2015. We do not intend to sell or believe we will be required to sell any of our temporarily-impaired fixed maturities before recovery of their amortized cost basis. The following summarizes the more significant unrealized losses of fixed maturities and equity securities by investment category as of June 30, 2016.

Corporate securities: The largest unrealized losses were in the energy sector ($176.1 million fair value and $23.2 million unrealized loss) and the basic industrial sector ($84.6 million fair value and $9.2 million unrealized loss). The largest unrealized losses in the energy sector were in the midstream ($73.3 million fair value and $8.2 million unrealized loss) and the oil field services ($24.2 million fair value and $7.4 million unrealized loss) sub-sectors, with the majority of losses attributable to credit spread widening and low oil prices. Energy-related companies have been negatively impacted by the rapid decline in oil prices, which has pressured revenues and margins. The largest unrealized losses in the basic industrial sector were in the metal/mining ($127.7 million fair value and $7.2 million unrealized loss) and the chemicals ($150.3 million fair value and $1.7 million unrealized loss) sub-sectors and are primarily attributable to credit spread widening and low prices for industrial commodities. The metal/mining sub-sector companies are experiencing lower demand for coal, copper, iron ore and other basic industrial minerals due to the economic slowdown in China in addition to sluggish demand in Europe and the U.S. Lower metal prices are leading metal and mining companies to shut down production at high-cost mines and defer capital expenditures at mines in the development stage.

Residential mortgage-backed securities: The unrealized losses on residential mortgage-backed securities were primarily due to continued uncertainty regarding mortgage defaults on Alt-A loans. We purchased most of these investments at a discount to their face amount and the contractual cash flows of these investments are based on mortgages backing the securities.

Commercial mortgage-backed securities: The unrealized losses on commercial mortgage-backed securities were primarily due to spread widening and concerns regarding the potential for future defaults. The contractual cash flows of these investments are based on mortgages backing the securities. Unrealized losses on military housing bonds were mainly attributable to spread widening relative to spreads at which we acquired the bonds. Insured military housing bonds have also been impacted by the removal of their ratings following downgrades of the insurance providers after we purchased the bonds.

Other asset-backed securities: The unrealized losses on other asset-backed securities were primarily due to market concerns regarding defaults on subprime mortgages and home equity loans. We purchased most of these investments at a discount to their face amount and the contractual cash flows of these investments are based on mortgages and other assets backing the securities.
Equity securities: Our gross unrealized losses on equity securities were on investment grade non-redeemable perpetual preferred securities within the finance sector. These securities provide periodic cash flows, contain call features and are


12

Table of Contents

similarly rated and priced like other long-term callable bonds and are evaluated for OTTIs similar to fixed maturities. The decline in fair value is primarily due to market concerns regarding the finance sector. We have evaluated the near-term prospects of our equity securities in relation to the severity and duration of their impairment as well as our intent and ability to hold these investments until recovery of fair value, and have concluded they are not other-than-temporarily impaired.

Excluding mortgage- and asset-backed securities, no securities from the same issuer had an aggregate unrealized loss in excess of $2.4 million at June 30, 2016, with the largest unrealized loss from an energy service provider. With respect to mortgage- and asset-backed securities not backed by the United States Government, our largest aggregate unrealized loss from the same issuer at June 30, 2016 was $1.4 million, consisting of two different securities that are backed by different pools of Alt-A residential mortgage loans. Both securities are rated non-investment grade and the largest unrealized loss totaled $0.9 million.

The carrying values of all our investments are reviewed on an ongoing basis for credit deterioration. When our review indicates a decline in fair value for a fixed maturity security is an OTTI and we do not intend to sell or believe we will be required to sell the security before recovery of our amortized cost, a specific write down is charged to earnings for the credit loss and a specific charge is recognized in accumulated other comprehensive income for the non-credit loss component. If we intend to sell or believe we will be required to sell a fixed maturity security before its recovery, the full amount of the impairment write down to fair value is charged to earnings. For all equity securities, the full amount of an OTTI write down is recognized as a realized loss on investments in the consolidated statements of operations and the new cost basis for the security is equal to its fair value.

We monitor the financial condition and operations of the issuers of fixed maturities and equity securities that could potentially have a credit impairment that is an OTTI. In determining whether or not an unrealized loss is an OTTI, we review factors such as:

historical operating trends;
business prospects;
status of the industry in which the company operates;
analyst ratings on the issuer and sector;
quality of management;
size of unrealized loss;
level of current market interest rates compared to market interest rates when the security was purchased; and
length of time the security has been in an unrealized loss position.

In order to determine the credit and non-credit impairment loss for fixed maturities, every quarter we estimate the future cash flows we expect to receive over the remaining life of the instrument as well as review our plans to hold or sell the instrument. Significant assumptions regarding the present value of expected cash flows for each security are used when an OTTI occurs and there is a non-credit portion of the unrealized loss that won't be recognized in earnings. Our assumptions for residential mortgage-backed securities, commercial mortgage-backed securities and other asset-backed securities include collateral pledged, guarantees, vintage, anticipated principal and interest payments, prepayments, default levels, severity assumptions, delinquency rates and the level of nonperforming assets for the remainder of the investments' expected term. We use a single best estimate of cash flows approach and use the effective yield prior to the date of impairment to calculate the present value of cash flows. Our assumptions for corporate and other fixed maturities include anticipated principal and interest payments and an estimated recovery value, generally based on a percentage return of the current fair value.

After an OTTI write down of all equity securities and any fixed maturities with a credit-only impairment, the cost basis is not adjusted for subsequent recoveries in fair value. For fixed maturities for which we can reasonably estimate future cash flows after a write down, the discount or reduced premium recorded, based on the new cost basis, is amortized over the remaining life of the security. Amortization in this instance is computed using the prospective method and the current estimate of the amount and timing of future cash flows.



13

Table of Contents

Credit Loss Component of Other-Than-Temporary Impairments on Fixed Maturities
 
 
 
 
 
Six months ended June 30,
 
2016

2015
 
(Dollars in thousands)
Balance at beginning of period
$
(11,498
)
 
$
(16,772
)
Increases to previously impaired investments
(2,172
)
 

Reductions due to investments sold
622

 
496

Balance at end of period
$
(13,048
)
 
$
(16,276
)

The table above sets forth the amount of credit loss impairments on fixed maturities held by the Company as of the dates indicated for which a portion of the OTTI was recognized in other comprehensive income (loss) and corresponding changes in such amounts.
Realized Gains (Losses) - Recorded in Income 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Realized gains (losses) on sales of investments
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
Gross gains
$
5,789

 
$
2,528

 
$
7,379

 
$
2,748

Gross losses
(8,378
)
 
(1,017
)
 
(8,378
)
 
(1,603
)
Securities and indebtedness of related parties
320

 
6,457

 
320

 
6,457

 
(2,269
)
 
7,968

 
(679
)
 
7,602

Impairment losses recognized in earnings:
 
 
 
 
 
 
 
Credit-related portion of fixed maturity losses (1)

 

 
(2,172
)
 

Other credit-related
(25
)
 
(160
)
 
(50
)
 
(160
)
Net realized losses on investments recorded in income
$
(2,294
)
 
$
7,808

 
$
(2,901
)
 
$
7,442


(1)
Amount represents the credit-related losses recognized for fixed maturities that were impaired to the present value of estimated future cash flows through income but not written down to fair value. As discussed above, the non-credit portion of the losses have been recognized in other comprehensive income (loss).

Proceeds from sales of fixed maturities totaled $105.4 million during the six months ended June 30, 2016 and $69.2 million during the six months ended June 30, 2015.

Realized gains and losses on sales of investments are determined on the basis of specific identification.

Mortgage Loans

Our mortgage loan portfolio consists of commercial mortgage loans that we have originated. Our lending policies require that the loans be collateralized by the value of the related property, establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. We originate loans with an initial loan-to-value ratio that provides sufficient collateral to absorb losses should we be required to foreclose and take possession of the collateral. In order to identify impairment losses, management maintains and regularly reviews a watch list of mortgage loans that have heightened risk. These loans may include those with borrowers delinquent on contractual payments, borrowers experiencing financial difficulty, increases in rental real estate vacancies and significant declines in collateral value. We evaluate each of our mortgage loans individually and establish an estimated loss, if needed, for each impaired loan identified. An estimated loss is needed for loans for which we do not believe we will collect all amounts due according to the contractual terms of the respective loan agreements.

Any loan delinquent on contractual payments is considered non-performing. At June 30, 2016 and December 31, 2015, there were no non-performing loans over 90 days past due on contractual payments. Mortgage loans are placed on non-accrual status if we have concerns regarding the collectability of future payments. Interest income on non-performing loans is generally


14

Table of Contents

recognized on a cash basis. Once mortgage loans are classified as nonaccrual loans, the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan has been restructured such that the collection of interest is considered likely. At June 30, 2016, we had committed to provide additional funding for mortgage loans totaling $31.6 million. These commitments arose in the normal course of business at terms that are comparable to similar investments.

Mortgage Loans by Collateral Type
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
Collateral Type
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
Office
 
$
350,577

 
45.9
%
 
$
333,400

 
44.8
%
Retail
 
223,492

 
29.3

 
227,039

 
30.5

Industrial
 
139,384

 
18.3

 
133,085

 
17.9

Other
 
49,974

 
6.5

 
50,779

 
6.8

Total
 
$
763,427

 
100.0
%
 
$
744,303

 
100.0
%

Mortgage Loans by Geographic Location within the United States
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
Region of the United States
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
South Atlantic
 
$
239,503

 
31.4
%
 
$
233,522

 
31.4
%
Pacific
 
104,599

 
13.7

 
100,188

 
13.4

West North Central
 
95,791

 
12.4

 
102,555

 
13.8

East North Central
 
89,089

 
11.7

 
86,019

 
11.5

Mountain
 
76,520

 
10.0

 
78,750

 
10.6

West South Central
 
61,463

 
8.1

 
66,677

 
9.0

Other
 
96,462

 
12.7

 
76,592

 
10.3

Total
 
$
763,427

 
100.0
%
 
$
744,303

 
100.0
%

Mortgage Loans by Loan-to-Value Ratio
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
Loan-to-Value Ratio
 

Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
0% - 50%
 
$
269,661

 
35.3
%
 
$
264,605

 
35.6
%
51% - 60%
 
196,223

 
25.7

 
169,045

 
22.7

61% - 70%
 
243,203

 
31.9

 
234,544

 
31.5

71% - 80%
 
45,371

 
5.9

 
67,072

 
9.0

81% - 90%
 
8,969

 
1.2

 
9,037

 
1.2

Total
 
$
763,427

 
100.0
%
 
$
744,303

 
100.0
%

The loan-to-value ratio is determined using the most recent appraised value. Appraisals are updated periodically including when there is indication of a possible significant collateral decline or there are loan modifications or refinance requests.



15

Table of Contents

Mortgage Loans by Year of Origination
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
Year of Origination
 
Carrying Value
 
Percent of Total
 
Carrying Value
 
Percent of Total
 
 
(Dollars in thousands)
2016
 
$
60,983

 
8.0
%
 
$

 
%
2015
 
152,706

 
20.0

 
154,582

 
20.9

2014
 
82,174

 
10.8

 
83,546

 
11.2

2013
 
78,058

 
10.2

 
79,879

 
10.7

2012
 
64,484

 
8.4

 
65,817

 
8.8

2011 and prior
 
325,022

 
42.6

 
360,479

 
48.4

Total
 
$
763,427

 
100.0
%
 
$
744,303

 
100.0
%

 Impaired Mortgage Loans
 
 
 
June 30, 2016
 
December 31, 2015
 
(Dollars in thousands)
Unpaid principal balance
$
21,602

 
$
21,766

Less:
 
 
 
Related allowance
(844
)
 
(851
)
Discount

 
(87
)
Carrying value of impaired mortgage loans
$
20,758

 
$
20,828

 Allowance on Mortgage Loans
 
Six months ended June 30,
 
2016
 
2015
 
(Dollars in thousands)
Balance at beginning of period
$
851

 
$
857

Charge offs
(7
)
 
(6
)
Balance at end of period
$
844

 
$
851


Mortgage Loan Modifications

Our commercial mortgage loan portfolio includes loans that have been modified. We assess loan modifications on a loan-by-loan basis to evaluate whether a troubled debt restructuring has occurred. Generally, the types of concessions include: reduction of the contractual interest rate to a below-market rate, extension of the maturity date and/or a reduction of accrued interest. The amount, timing and extent of the concession granted is considered in determining if an impairment loss is needed for the restructuring.

There were no loan modifications during the six months ended June 30, 2016 or 2015.

Low Income Housing Tax Credit Investments (LIHTC)

We invest in non-guaranteed federal LIHTC, which are included in securities and indebtedness of related parties on the balance sheet. The carrying value of these investments totaled $92.8 million at June 30, 2016 and $94.2 million at December 31, 2015. There were no impairment losses recorded on these investments during the second quarter of 2016 or 2015. We use the equity method of accounting for these investments and recorded the following in our consolidated statement of operations.


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Table of Contents

LIHTC Equity Income (Loss), Net of Related Income Taxes
 
 
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2016
 
2015
 
2016
 
2015
 
 
(Dollars in thousands)
Equity losses from LIHTC
 
$
(2,508
)
 
$
(1,997
)
 
$
(4,047
)
 
$
(3,842
)
Income tax benefits:
 
 
 
 
 
 
 
 
Tax benefits from equity losses
 
878

 
699

 
1,416

 
1,345

Investment tax credits
 
3,552

 
3,488

 
7,002

 
6,675

Equity income from LIHTC, net of related income tax benefits
 
$
1,922

 
$
2,190

 
$
4,371

 
$
4,178


At June 30, 2016, we had committed to provide additional funds for limited partnerships and limited liability companies in which we invest. The amounts of these unfunded commitments totaled $29.3 million, including $5.7 million for LIHTC commitments, which are summarized by year in the following table.

LIHTC Commitments by Year
 
 
June 30, 2016
 
(Dollars in thousands)
2016
$
3,666

2017
1,518

2018-2024
564

Total
$
5,748


Variable Interest Entities

We evaluate our variable interest entity (VIE) investees to determine whether the level of our direct ownership interest, our rights to manage operations, or our obligation to provide ongoing financial support are such that we are the primary beneficiary of the entity, and would therefore be required to consolidate it for financial reporting purposes. After determining that a VIE exists, we review our involvement in the VIE to determine whether we have both the power to direct activities that most significantly impact the economic performance of the VIE, and the obligation to absorb losses or the rights to receive benefits that could be potentially significant to the VIE. This analysis included a review of the purpose and design of the VIE as well as the role that we played in the formation of the entity and how that role could impact our ability to control the VIE. We also review the activities and decisions considered significant to the economic performance of the VIE and assess what power we have in directing those activities and decisions. Finally, we review the agreements in place to determine if there are any guarantees that would affect our maximum exposure to loss.

We have reviewed the circumstances surrounding our investments in our VIEs, which are classified as securities and indebtedness of related parties and consist of non-guaranteed federal LIHTC, limited partnerships or limited liability companies accounted for under the equity method. In addition, we have reviewed the ownership interests in our VIEs and determined that we do not hold direct majority ownership or have other contractual rights (such as kick out rights) that give us effective control over these entities resulting in us having both the power to direct activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. The maximum loss exposure relative to our VIEs is limited to the carrying value and any unfunded commitments that exist for each particular VIE. Based on this analysis, none of our VIEs were required to be consolidated for any reporting periods presented in this Form 10-Q. In adopting the new guidance referred to in Note 1, additional entities were deemed to be VIEs, and are disclosed below for both periods presented.

There were no circumstances that occurred during the reporting period that resulted in any changes in our decision not to consolidate any of our VIEs. We also have not provided additional support or other guarantees that was not previously contractually required (financial or otherwise) to any of the VIEs as of June 30, 2016 or December 31, 2015.



17

Table of Contents

VIE Investments by Category
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
June 30, 2016
 
December 31, 2015
 
Carrying Value
 
Maximum Exposure to Loss
 
Carrying Value (1)
 
Maximum Exposure to Loss (1)
 
(Dollars in thousands)
LIHTC
$
92,811

 
$
98,559

 
$
94,170

 
$
102,626

Investment companies
16,917

 
34,259

 
20,004

 
35,604

Real estate limited partnerships
10,665

 
15,090

 
9,554

 
15,610

Other
639

 
2,440

 
637

 
2,448

Total
$
121,032

 
$
150,348

 
$
124,365

 
$
156,288


(1)
Prior year values have been restated for comparability with the amounts as presented under the new accounting guidance discussed in Note 1.

In addition, we make passive investments in the normal course of business in structured securities issued by VIEs for which we are not the investment manager. These structured securities include all of the residential mortgage-backed securities, commercial mortgage-backed securities and other asset-backed securities included in our fixed maturities. Our maximum exposure to loss on these securities is limited to our carrying value in the investment. We have determined that we are not the primary beneficiary of these structured securities because we do not have the power to direct the activities that most significantly impact the entities' economic performance.

Derivative Instruments

We are not significantly involved in hedging activities and have limited exposure to derivatives. We do not apply hedge accounting to any of our derivative positions and they are held at fair value. Our primary exposure relates to purchased call options, which provide an economic hedge to the embedded derivatives in our index annuity and universal life insurance products. We also have embedded derivatives within our modified coinsurance agreements as well as an interest-only fixed maturity investment.

Derivatives Instruments by Type
 
 
June 30, 2016
 
December 31, 2015
 
(Dollars in thousands)
Assets
 
 
 
Freestanding derivatives:
 
 
 
Call options (reported in other investments)
$
5,638

 
$
2,331

Embedded derivatives:
 
 
 
Modified coinsurance (reported in reinsurance recoverable)
3,514

 
2,636

Interest-only security (reported in fixed maturities)
3,493

 
4,551

Total assets
$
12,645

 
$
9,518

 
 
 
 
Liabilities
 
 
 
Embedded derivatives:
 
 
 
Index annuity and universal life products (reported in liability for future policy benefits)
$
13,100

 
$
9,374

Modified coinsurance agreements (reported in other liabilities)
107

 
56

Total liabilities
$
13,207

 
$
9,430






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Table of Contents

Derivative Income (Loss)
 
 
 
 
 
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(Dollars in thousands)
Change in fair value of free standing derivatives:
 
 
 
 
 
 
 
Call options
$
1,629

 
$
(313
)
 
$
2,289

 
$
(684
)
Change in fair value of embedded derivatives:
 
 
 
 
 
 
 
Modified coinsurance agreements
666

 
(416
)
 
827

 
(206
)
Interest-only security
(710
)
 

 
(465
)
 

Index annuity and universal life products
(1,521
)
 
200

 
(2,689
)
 
217

Call option amortization
(1,334
)
 
(729
)
 
(2,474
)
 
(1,356
)
Call option proceeds
9


875


74


1,953

Total income (loss) from derivatives
$
(1,261
)
 
$
(383
)
 
$
(2,438
)
 
$
(76
)

Derivative income (loss) is reported in net investment income except for the change in fair value of the embedded derivatives on our index annuity and universal life products, which is reported in interest sensitive product benefits.

The call options are supported by securities collateral received of $3.6 million at June 30, 2016, which is held in a separate custodial account. Subject to certain constraints, we are permitted to sell or re-pledge this collateral, but do not have legal rights to the collateral; accordingly, it has not been recorded on our balance sheet. At June 30, 2016, none of the collateral had been sold or re-pledged. All of our counterparties are rated A- or better by a nationally recognized statistical rating organization.


3. Fair Values

The carrying and estimated fair values of our financial instruments are as follows: