XNYS:RGA Reinsurance Group of America Inc Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012

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Table of Contents

 

 

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 March 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-11848

 

 

REINSURANCE GROUP OF AMERICA, INCORPORATED

(Exact name of Registrant as specified in its charter)

 

 

 

MISSOURI   43-1627032

(State or other jurisdiction of

incorporation or organization)

 

(IRS employer

identification number)

1370 Timberlake Manor Parkway

Chesterfield, Missouri 63017

(Address of principal executive offices)

(636) 736-7000

(Registrant’s telephone number, including area code)

 

 

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.

Yes  x    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 (§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  ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
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   ¨    No  x

As of April 30, 2012, 73,712,236 shares of the registrant’s common stock were outstanding.

 

 

 


Table of Contents

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

TABLE OF CONTENTS

 

Item

       Page  
  PART I – FINANCIAL INFORMATION   

1

  Financial Statements   
  Condensed Consolidated Balance Sheets (Unaudited) March 31, 2012 and December 31, 2011      3   
  Condensed Consolidated Statements of Income (Unaudited) Three months ended March 31, 2012 and 2011      4   
  Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three months ended March 31, 2012 and 2011      5   
  Condensed Consolidated Statements of Cash Flows (Unaudited) Three months ended March 31, 2012 and 2011      6   
  Notes to Condensed Consolidated Financial Statements (Unaudited)      7   

2

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      38   

3

  Quantitative and Qualitative Disclosure About Market Risk      62   

4

  Controls and Procedures      62   
  PART II – OTHER INFORMATION   

1

  Legal Proceedings      63   

1A

  Risk Factors      63   

2

  Unregistered Sales of Equity Securities and Use of Proceeds      63   

6

  Exhibits      63   
  Signatures      64   
  Index to Exhibits      65   

 

2


Table of Contents

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

 

     March 31,
2012
    December 31,
2011
 
     (Dollars in thousands, except share data)  

Assets

    

Fixed maturity securities:

    

Available-for-sale at fair value (amortized cost of $14,814,859 and $14,182,880 at March 31, 2012 and December 31, 2011, respectively)

   $ 16,794,057     $ 16,200,950  

Mortgage loans on real estate (net of allowances of $14,650 and $11,793 at March 31, 2012 and December 31, 2011, respectively)

     1,040,733       991,731  

Policy loans

     1,260,070       1,260,400  

Funds withheld at interest

     5,472,532       5,410,424  

Short-term investments

     75,425       88,566  

Other invested assets

     867,507       1,012,541  
  

 

 

   

 

 

 

Total investments

     25,510,324       24,964,612  

Cash and cash equivalents

     873,933       962,870  

Accrued investment income

     173,629       144,334  

Premiums receivable and other reinsurance balances

     1,131,334       1,059,572  

Reinsurance ceded receivables

     597,508       626,194  

Deferred policy acquisition costs

     3,629,424       3,543,925  

Other assets

     369,930       332,466  
  

 

 

   

 

 

 

Total assets

   $ 32,286,082     $ 31,633,973  
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Future policy benefits

   $ 10,413,361     $ 9,903,886  

Interest-sensitive contract liabilities

     8,252,995       8,394,468  

Other policy claims and benefits

     2,984,681       2,841,373  

Other reinsurance balances

     132,389       118,219  

Deferred income taxes

     1,728,765       1,679,834  

Other liabilities

     777,678       810,775  

Long-term debt

     1,414,829       1,414,688  

Collateral finance facility

     652,029       652,032  
  

 

 

   

 

 

 

Total liabilities

     26,356,727       25,815,275  

Commitments and contingent liabilities (See Note 8)

    

Stockholders’ Equity:

    

Preferred stock (par value $.01 per share; 10,000,000 shares authorized; no shares issued or outstanding)

     —          —     

Common stock (par value $.01 per share; 140,000,000 shares authorized; shares issued: 79,137,758 at March 31, 2012 and December 31, 2011)

     791       791  

Additional paid-in-capital

     1,736,184       1,727,774  

Retained earnings

     2,906,310       2,818,429  

Treasury stock, at cost; 5,425,522 and 5,770,024 shares at March 31, 2012 and December 31, 2011, respectively

     (325,732     (346,449

Accumulated other comprehensive income

     1,611,802       1,618,153  
  

 

 

   

 

 

 

Total stockholders’ equity

     5,929,355       5,818,698  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 32,286,082     $ 31,633,973  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements (unaudited).

 

3


Table of Contents

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)

 

     Three months ended March 31,  
     2012     2011  
     (Dollars in thousands, except per share data)  

Revenues:

  

Net premiums

   $ 1,863,482     $ 1,736,130  

Investment income, net of related expenses

     340,940       371,040  

Investment related gains (losses), net:

    

Other-than-temporary impairments on fixed maturity securities

     (7,607     (1,556

Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income

     (7,221     —     

Other investment related gains (losses), net

     58,348       125,176  
  

 

 

   

 

 

 

Total investment related gains (losses), net

     43,520       123,620  

Other revenues

     45,033       51,645  
  

 

 

   

 

 

 

Total revenues

     2,292,975       2,282,435  
  

 

 

   

 

 

 

Benefits and Expenses:

    

Claims and other policy benefits

     1,580,149       1,469,449  

Interest credited

     88,042       106,063  

Policy acquisition costs and other insurance expenses

     307,634       346,247  

Other operating expenses

     110,098       106,150  

Interest expense

     23,322       24,569  

Collateral finance facility expense

     2,967       3,202  
  

 

 

   

 

 

 

Total benefits and expenses

     2,112,212       2,055,680  
  

 

 

   

 

 

 

Income before income taxes

     180,763       226,755  

Provision for income taxes

     57,445       77,835  
  

 

 

   

 

 

 

Net income

   $ 123,318     $ 148,920  
  

 

 

   

 

 

 

Earnings per share:

    

Basic earnings per share

   $ 1.68     $ 2.03  

Diluted earnings per share

   $ 1.67     $ 2.02  

Dividends declared per share

   $ 0.18     $ 0.12  

See accompanying notes to condensed consolidated financial statements (unaudited).

 

4


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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

 

     Three months ended March 31,  
     2012     2011  

Comprehensive income:

    

Net income

   $ 123,318     $ 148,920  

Other comprehensive income:

    

Change in foreign currency translation adjustments

     24,080       24,407  

Change in net unrealized gain on investments

     (35,415     (35,818

Change in other-than-temporary impairment losses on fixed maturity securities

     4,694       —     

Changes in pension and other postretirement plan adjustments

     290       214  
  

 

 

   

 

 

 

Total other comprehensive income

     (6,351     (11,197
  

 

 

   

 

 

 

Total comprehensive income

   $ 116,967     $ 137,723  
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

5


Table of Contents

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

 

     Three months ended March 31,  
     2012     2011  
     (Dollars in thousands)  

Cash Flows from Operating Activities:

    

Net income

   $ 123,318     $ 148,920  

Adjustments to reconcile net income to net cash provided by operating activities:

    

Change in operating assets and liabilities:

    

Accrued investment income

     (28,616     (26,763

Premiums receivable and other reinsurance balances

     (61,722     85,908  

Deferred policy acquisition costs

     (65,583     82,324  

Reinsurance ceded receivable balances

     28,686       (38,230

Future policy benefits, other policy claims and benefits, and other reinsurance balances

     554,354       227,509  

Deferred income taxes

     38,107       20,319  

Other assets and other liabilities, net

     5,944       (25,759

Amortization of net investment premiums, discounts and other

     (35,281     (27,093

Investment related gains, net

     (43,520     (123,620

Excess tax benefits from share-based payment arrangement

     30       (932

Other, net

     38,938       53,065  
  

 

 

   

 

 

 

Net cash provided by operating activities

     554,655       375,648  

Cash Flows from Investing Activities:

    

Sales of fixed maturity securities available-for-sale

     47,096       910,943  

Maturities of fixed maturity securities available-for-sale

     36,437       85,374  

Purchases of fixed maturity securities available-for-sale

     (572,345     (1,087,526

Cash invested in mortgage loans

     (75,081     (28,493

Cash invested in funds withheld at interest

     (33,083     571  

Principal payments on mortgage loans on real estate

     22,081       11,843  

Principal payments on policy loans

     330       6,402  

Change in short-term investments and other invested assets

     65,256       (24,911
  

 

 

   

 

 

 

Net cash used in investing activities

     (509,309     (125,797

Cash Flows from Financing Activities:

    

Dividends to stockholders

     (13,255     (8,832

Repurchase of collateral finance facility securities

     —          (7,586

Net borrowing under credit agreements

     —          56,000  

Proceeds from redemption and remarketing of trust preferred securities

     —          154,588  

Purchases of treasury stock

     (4,118     (335,955

Excess tax benefits from share-based payment arrangement

     (30     932  

Exercise of stock options, net

     216       (5,811

Change in cash collateral for derivative positions

     (100,565     (6,120

Deposits on universal life and other investment type policies and contracts

     37,303       13,724  

Withdrawals on universal life and other investment type policies and contracts

     (59,922     (110,703
  

 

 

   

 

 

 

Net cash used in financing activities

     (140,371     (249,763

Effect of exchange rate changes on cash

     6,088       3,923  
  

 

 

   

 

 

 

Change in cash and cash equivalents

     (88,937     4,011  

Cash and cash equivalents, beginning of period

     962,870       463,661  
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 873,933     $ 467,672  
  

 

 

   

 

 

 

Supplementary information:

    

Cash paid for interest

   $ 24,592     $ 12,846  

Cash paid for income taxes, net of refunds

   $ 15,112     $ 77,441  

See accompanying notes to condensed consolidated financial statements (unaudited).

 

6


Table of Contents

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Organization and Basis of Presentation

Reinsurance Group of America, Incorporated (“RGA”) is an insurance holding company that was formed on December 31, 1992. The accompanying unaudited condensed consolidated financial statements of RGA and its subsidiaries (collectively, the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included. Results for the three months ended March 31, 2012 are not necessarily indicative of the results that may be expected for the year ending December 31, 2012. There were no subsequent events that would require disclosure or adjustments to the accompanying condensed consolidated financial statements through the date the financial statements were issued. These unaudited condensed consolidated financial statements include the accounts of RGA and its subsidiaries and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s 2011 Annual Report on Form 10-K (“2011 Annual Report”) filed with the Securities and Exchange Commission on February 29, 2012.

The Company has adjusted the presentation of certain prior-period information to conform to the current presentation. Such adjustments reflect the retrospective adoption of the amended general accounting principles for Financial Services – Insurance as it relates to accounting for costs associated with acquiring or renewing insurance contracts. The financial statements and notes to the financial statements presented herein have been adjusted to reflect the retrospective adoption of the new accounting principles. See below for additional information. All intercompany accounts and transactions have been eliminated.

In October 2010, the FASB amended the general accounting principles for Financial Services – Insurance as it relates to accounting for costs associated with acquiring or renewing insurance contracts. This amendment clarifies that only those costs that result directly from and are essential to the contract transaction and that would not have been incurred had the contract transaction not occurred can be capitalized. It also defines acquisitions costs as costs that are related directly to the successful acquisitions of new or renewal insurance contracts. The Company adopted the amended general accounting principles on a retrospective basis on January 1, 2012. The Company believes retrospective adoption provides the most comparable and useful financial information for financial statement users. The financial statements and notes to the financial statements presented herein have been adjusted to reflect the retrospective adoption of the new accounting principles.

The following tables present the effects of the retrospective adoption of the new accounting principles to the Company’s previously reported consolidated balance sheet as of December 31, 2011 and condensed consolidated statement of income and condensed consolidated statement of cash flows for the three months ended March 31, 2011 (in thousands, except share amounts):

 

     December 31, 2011  
     As Reported      Adjustments     As Amended  

Assets

       

Deferred policy acquisition costs

   $ 4,013,984      $ (470,059   $ 3,543,925  

Liabilities and Stockholders’ Equity

       

Future policy benefits

     9,903,503        383       9,903,886  

Deferred income taxes

     1,831,869        (152,035     1,679,834  

Stockholders’ Equity:

       

Retained earnings

     3,131,934        (313,505     2,818,429  

Accumulated other comprehensive income

     1,623,055        (4,902     1,618,153  
     Three months ended March 31, 2011  
     As Reported      Adjustments     As Amended  

Benefits and Expenses:

       

Policy acquisition costs and other insurance expenses

   $ 331,153      $ 15,094     $ 346,247  

Income before income taxes

     241,849        (15,094     226,755  

Provision for income taxes

     81,033        (3,198     77,835  
  

 

 

    

 

 

   

 

 

 

Net income

   $ 160,816      $ (11,896   $ 148,920  

 

7


Table of Contents
(Continued)    December 31, 2011  
   As Reported      Adjustments     As Amended  

Earnings per share:

       

Basic earnings per share

   $ 2.20      $ (0.17   $ 2.03  

Diluted earnings per share

   $ 2.18      $ (0.16   $ 2.02  
      Three months ended March 31, 2011  
     As Reported      Adjustments     As Amended  

Cash Flows from Operating Activities:

       

Net Income

   $ 160,816      $ (11,896   $ 148,920  

Change in operating assets and liabilities

       

Deferred policy acquisition costs

     67,230        15,094       82,324  

Deferred income taxes

     23,517        (3,198     20,319  

2. Earnings Per Share

The following table sets forth the computation of basic and diluted earnings per share on net income (in thousands, except per share information):

 

      Three months ended
March 31,
 
     2012      2011  

Earnings:

     

Net income (numerator for basic and diluted calculations)

   $ 123,318      $ 148,920  

Shares:

     

Weighted average outstanding shares (denominator for basic calculation)

     73,575        73,213  

Equivalent shares from outstanding stock options

     468        623  
  

 

 

    

 

 

 

Denominator for diluted calculation

     74,043        73,836  
  

 

 

    

 

 

 

Earnings per share:

     

Basic

   $ 1.68      $ 2.03  

Diluted

   $ 1.67      $ 2.02  

The calculation of common equivalent shares does not include the impact of options having a strike or conversion price that exceeds the average stock price for the earnings period, as the result would be antidilutive. The calculation of common equivalent shares also excludes the impact of outstanding performance contingent shares, as the conditions necessary for their issuance have not been satisfied as of the end of the reporting period. For the three months ended March 31, 2012, approximately 1.4 million stock options and approximately 0.7 million performance contingent shares were excluded from the calculation. For the three months ended March 31, 2011, approximately 0.8 million stock options and approximately 0.8 million performance contingent shares were excluded from the calculation.

3. Accumulated Other Comprehensive Income

The balance of and changes in each component of accumulated other comprehensive income (“AOCI”) for the three months ended March 31, 2012 are as follows (dollars in thousands):

 

      Accumulated Other Comprehensive Income (Loss), Net of Income  Tax  
     Accumulated
Currency
Translation
Adjustments
     Unrealized
Appreciation
of Securities
    Pension and
Postretirement
Benefits
    Total  

Balance, December 31, 2011

   $ 229,795      $ 1,419,318     $ (30,960   $ 1,618,153  

Change in component during the period

     24,080        (30,721     290       (6,351
  

 

 

    

 

 

   

 

 

   

 

 

 

Balance, March 31, 2012

   $ 253,875      $ 1,388,597     $ (30,670   $ 1,611,802  
  

 

 

    

 

 

   

 

 

   

 

 

 

 

8


Table of Contents

4. Investments

The Company had total cash and invested assets of $26.4 billion and $25.9 billion at March 31, 2012 and December 31, 2011, respectively, as illustrated below (dollars in thousands):

 

     March 31, 2012      December 31, 2011  

Fixed maturity securities, available-for-sale

   $ 16,794,057      $ 16,200,950  

Mortgage loans on real estate

     1,040,733        991,731  

Policy loans

     1,260,070        1,260,400  

Funds withheld at interest

     5,472,532        5,410,424  

Short-term investments

     75,425        88,566  

Other invested assets

     867,507        1,012,541  

Cash and cash equivalents

     873,933        962,870  
  

 

 

    

 

 

 

Total cash and invested assets

   $ 26,384,257      $ 25,927,482  
  

 

 

    

 

 

 

All investments held by the Company are monitored for conformance to the qualitative and quantitative limits prescribed by the applicable jurisdiction’s insurance laws and regulations. In addition, the operating companies’ boards of directors periodically review their respective investment portfolios. The Company’s investment strategy is to maintain a predominantly investment-grade, fixed maturity securities portfolio, which will provide adequate liquidity for expected reinsurance obligations and maximize total return through prudent asset management. The Company’s asset/liability duration matching differs between operating segments. Based on Canadian reserve requirements, the Canadian liabilities are matched with long-duration Canadian assets. The duration of the Canadian portfolio exceeds twenty years. The average duration for all portfolios, when consolidated, ranges between eight and ten years.

The Company participates in a securities borrowing program whereby securities, which are not reflected on the Company’s condensed consolidated balance sheets, are borrowed from a third party. The Company is required to maintain a minimum of 100% of the market value of the borrowed securities as collateral. The Company had borrowed securities with an amortized cost and an estimated fair value of $150.0 million as of March 31, 2012 and December 31, 2011. The borrowed securities are used to provide collateral under an affiliated reinsurance transaction.

Investment Income, Net of Related Expenses

Major categories of investment income, net of related expenses, consist of the following (dollars in thousands):

 

      Three months ended
March 31,
 
     2012      2011  

Fixed maturity securities available-for-sale

   $ 191,418      $ 184,561  

Mortgage loans on real estate

     14,965        13,734  

Policy loans

     16,783        16,371  

Funds withheld at interest

     115,014        153,060  

Short-term investments

     988        925  

Other invested assets

     11,322        9,698  
  

 

 

    

 

 

 

Investment revenue

     350,490        378,349  

Investment expense

     9,550        7,309  
  

 

 

    

 

 

 

Investment income, net of related expenses

   $ 340,940      $ 371,040  
  

 

 

    

 

 

 

 

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Investment Related Gains (Losses), Net

Investment related gains (losses), net consist of the following (dollars in thousands):

 

      Three months ended
March 31,
 
     2012     2011  

Fixed maturities and equity securities available for sale:

    

Other-than-temporary impairment losses on fixed maturities

   $ (7,607   $ (1,556

Portion of loss recognized in accumulated other comprehensive income (before taxes)

     (7,221     —     
  

 

 

   

 

 

 

Net other-than-temporary impairment losses on fixed maturities recognized in earnings

     (14,828     (1,556

Impairment losses on equity securities

     (839     —     

Gain on investment activity

     22,312       29,376  

Loss on investment activity

     (7,504     (6,914

Other impairment losses and change in mortgage loan provision

     (5,843     576  

Derivatives and other, net

     50,222       102,138  
  

 

 

   

 

 

 

Net gains

   $ 43,520     $ 123,620  
  

 

 

   

 

 

 

The net other-than-temporary impairment losses on fixed maturity securities recognized in earnings of $14.8 million and $1.6 million in the first three months of 2012 and 2011, respectively, are primarily due to a decline in value of structured securities with exposure to commercial mortgages and corporate bankruptcies. The decrease in derivatives and other is primarily due to a decrease in the fair value of free-standing derivatives.

During the three months ended March 31, 2012 and 2011, the Company sold fixed maturity securities and equity securities with fair values of $248.1 million and $196.6 million at losses of $7.5 million and $6.9 million, respectively. The Company generally does not engage in short-term buying and selling of securities.

Other-Than-Temporary Impairments

As discussed in Note 2 – “Summary of Significant Accounting Policies” of the Company’s 2011 Annual Report, a portion of certain other-than-temporary impairment (“OTTI”) losses on fixed maturity securities are recognized in AOCI. For these securities the net amount recognized in earnings (“credit loss impairments”) represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in AOCI. The following table sets forth the amount of pre-tax credit loss impairments on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in AOCI, and the corresponding changes in such amounts (dollars in thousands):

 

     Three months ended  
   2012     2011  

Balance, beginning of period

   $ 63,947     $ 47,291  

Initial impairments—credit loss OTTI recognized on securities not previously impaired

     1,902       —     

Additional impairments—credit loss OTTI recognized on securities previously impaired

     8,720       658  

Credit loss OTTI previously recognized on securities impaired to fair value during the period

     (11,381     —     

Credit loss OTTI previously recognized on securities which matured, paid down, prepaid or were sold during the period

     (952     —     
  

 

 

   

 

 

 

Balance, end of period

   $ 62,236     $ 47,949  
  

 

 

   

 

 

 

 

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Fixed Maturity and Equity Securities Available-for-Sale

The following tables provide information relating to investments in fixed maturity securities and equity securities by sector as of March 31, 2012 and December 31, 2011 (dollars in thousands):

 

March 31, 2012:    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Estimated
Fair
Value
     % of
Total
    Other-than-
temporary
impairments
in AOCI
 

Available-for-sale:

                

Corporate securities

   $ 7,518,983      $ 671,100      $ 78,629      $ 8,111,454        48.3    $ —     

Canadian and Canadian provincial governments

     2,610,735        1,229,402        797        3,839,340        22.9       —     

Residential mortgage-backed securities

     1,075,073        72,598        9,443        1,138,228        6.8       (710

Asset-backed securities

     448,688        11,390        45,551        414,527        2.5       (4,512

Commercial mortgage-backed securities

     1,302,734        104,586        64,899        1,342,421        8.0       (6,118

U.S. government and agencies

     257,928        22,500        1,335        279,093        1.6       —     

State and political subdivisions

     191,113        27,873        4,982        214,004        1.3       —     

Other foreign government, supranational and foreign government-sponsored enterprises

     1,409,605        49,908        4,523        1,454,990        8.6       —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturity securities

   $ 14,814,859      $ 2,189,357      $ 210,159      $ 16,794,057        100.0    $ (11,340
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Non-redeemable preferred stock

   $ 77,766      $ 4,963      $ 2,706      $ 80,023        81.6   

Other equity securities

     16,046        3,446        1,487        18,005        18.4    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Total equity securities

   $ 93,812      $ 8,409      $ 4,193      $ 98,028        100.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   
December 31, 2011:    Amortized
Cost
     Unrealized
Gains
     Unrealized
Losses
     Estimated
Fair
Value
     % of
Total
    Other-than-
temporary
impairments
in AOCI
 

Available-for-sale:

                

Corporate securities

   $ 6,931,958      $ 654,519      $ 125,371      $ 7,461,106        46.0    $ —     

Canadian and Canadian provincial governments

     2,507,802        1,362,160        29        3,869,933        23.9       —     

Residential mortgage-backed securities

     1,167,265        76,393        16,424        1,227,234        7.6       (1,042

Asset-backed securities

     443,974        11,692        53,675        401,991        2.5       (5,256

Commercial mortgage-backed securities

     1,233,958        87,750        79,489        1,242,219        7.7       (12,225

U.S. government and agencies

     341,087        32,976        61        374,002        2.3       —     

State and political subdivisions

     184,308        24,419        3,341        205,386        1.3       —     

Other foreign government, supranational and foreign government-sponsored enterprises

     1,372,528        50,127        3,576        1,419,079        8.7       —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturity securities

   $ 14,182,880      $ 2,300,036      $ 281,966      $ 16,200,950        100.0    $ (18,523
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Non-redeemable preferred stock

   $ 82,488      $ 4,677      $ 8,982      $ 78,183        68.6   

Other equity securities

     35,352        1,903        1,538        35,717        31.4    
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

Total equity securities

   $ 117,840      $ 6,580      $ 10,520      $ 113,900        100.0   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

The Company enters into various collateral arrangements that require both the pledging and acceptance of fixed maturity securities as collateral, which are excluded from the tables above. The Company pledged fixed maturity securities as collateral to derivative and reinsurance counterparties with an amortized cost of $37.4 million and $29.0 million, and an estimated fair value of $41.3 million and $32.6 million, as of March 31, 2012 and December 31, 2011 respectively, which are included in other invested assets in the condensed consolidated balance sheets.

The Company received fixed maturity securities as collateral from derivative and reinsurance counterparties with an estimated fair value of $30.1 million and $1.0 million, as of March 31, 2012 and December 31, 2011, respectively. Subject to certain constraints, the Company is permitted by contract to sell or re-pledge this collateral; however, as of March 31, 2012 and December 31, 2011, none of the collateral had been sold or re-pledged.

As of March 31, 2012, the Company held securities with a fair value of $1,179.0 million that were issued by the Canadian province of Ontario and $1,083.2 million that were issued by an entity that is guaranteed by the Canadian province of

 

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Quebec, both of which exceeded 10% of condensed consolidated stockholders’ equity. As of December 31, 2011, the Company held securities with a fair value of $1,171.2 million that were issued by the Canadian province of Ontario and $1,107.7 million that were issued by an entity that is guaranteed by the Canadian province of Quebec, both of which exceeded 10% of condensed consolidated stockholders’ equity.

The amortized cost and estimated fair value of fixed maturity securities available-for-sale at March 31, 2012 are shown by contractual maturity in the table below. Actual maturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. At March 31, 2012, the contractual maturities of investments in fixed maturity securities were as follows (dollars in thousands):

 

     Amortized
Cost
     Fair
Value
 

Available-for-sale:

     

Due in one year or less

   $ 179,357      $ 180,864  

Due after one year through five years

     2,659,446        2,770,954  

Due after five year through ten years

     4,094,202        4,447,320  

Due after ten years

     5,055,359        6,499,742  

Asset and mortgage-backed securities

     2,826,495        2,895,177  
  

 

 

    

 

 

 

Total

   $ 14,814,859      $ 16,794,057  
  

 

 

    

 

 

 

The tables below show the major industry types of the Company’s corporate fixed maturity holdings as of March 31, 2012 and December 31, 2011 (dollars in thousands):

 

March 31, 2012:    Amortized Cost      Estimated
Fair Value
     % of Total  

Finance

   $ 2,578,694      $ 2,686,141        33.1 

Industrial

     3,751,858        4,109,403        50.7  

Utility

     1,179,592        1,306,787        16.1  

Other

     8,839        9,123        0.1  
  

 

 

    

 

 

    

 

 

 

Total

   $ 7,518,983      $ 8,111,454        100.0 
  

 

 

    

 

 

    

 

 

 
December 31, 2011:    Amortized Cost      Estimated
Fair Value
     % of Total  

Finance

   $ 2,411,175      $ 2,442,149        32.7 

Industrial

     3,402,099        3,760,187        50.4  

Utility

     1,115,384        1,255,090        16.9  

Other

     3,300        3,680        —     
  

 

 

    

 

 

    

 

 

 

Total

   $ 6,931,958      $ 7,461,106        100.0 
  

 

 

    

 

 

    

 

 

 

The creditworthiness of Greece, Ireland, Italy, Portugal and Spain, commonly referred to as “Europe’s peripheral region,” is under ongoing stress and uncertainty due to high debt levels and economic weakness. The Company did not have exposure to sovereign fixed maturity securities, which includes global government agencies, from Europe’s peripheral region as of March 31, 2012 and December 31, 2011. In addition, the Company did not purchase or sell credit protection, through credit default swaps, referenced to sovereign entities of Europe’s peripheral region. The tables below show the Company’s exposure to sovereign fixed maturity securities originated in countries other than Europe’s peripheral region, included in “Other foreign government, supranational and foreign government-sponsored enterprises,” in Note 4 – “Investments,” as of March 31, 2012 and December 31, 2011 (dollars in thousands):

 

March 31, 2012:    Amortized Cost      Estimated
Fair Value
     % of Total  

Australia

   $ 455,583      $ 462,177        37.9 

Japan

     199,435        203,543        16.7  

United Kingdom

     121,984        132,406        10.8  

South Africa

     59,393        60,381        5.0  

New Zealand

     53,981        53,238        4.4  

Cayman Islands

     48,374        51,807        4.2  

Germany

     42,434        44,326        3.6  

Other

     197,465        212,848        17.4  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,178,649      $ 1,220,726        100.0 
  

 

 

    

 

 

    

 

 

 

 

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Table of Contents
December 31, 2011:    Amortized Cost      Estimated
Fair Value
     % of Total  

Australia

   $ 437,713      $ 446,694        39.1 

Japan

     214,994        219,276        19.2  

United Kingdom

     118,618        130,106        11.4  

Germany

     72,926        75,741        6.6  

New Zealand

     51,547        51,544        4.5  

South Africa

     37,624        38,528        3.4  

South Korea

     30,592        32,025        2.8  

Other

     139,927        148,792        13.0  
  

 

 

    

 

 

    

 

 

 

Total

   $ 1,103,941      $ 1,142,706        100.0 
  

 

 

    

 

 

    

 

 

 

The tables below show the Company’s exposure to non-sovereign fixed maturity securities and equity securities, based on the security’s country of issuance, from Europe’s peripheral region as of March 31, 2012 and December 31, 2011 (dollars in thousands):

 

March 31, 2012:    Amortized Cost      Estimated
Fair
Value
     % of Total  

Financial institutions:

        

Ireland

   $ 4,160      $ 4,569        6.6 

Spain

     25,656        23,715        34.3  
  

 

 

    

 

 

    

 

 

 

Total financial institutions

     29,816        28,284        40.9  
  

 

 

    

 

 

    

 

 

 
        

Other:

        

Ireland

     12,475        13,285        19.3  

Italy

     2,980        3,058        4.4  

Spain

     24,449        24,450        35.4  
  

 

 

    

 

 

    

 

 

 

Total other

     39,904        40,793        59.1  
  

 

 

    

 

 

    

 

 

 

Total

   $ 69,720      $ 69,077        100.0 
  

 

 

    

 

 

    

 

 

 
December 31, 2011:    Amortized Cost      Estimated
Fair
Value
     % of Total  

Financial institutions:

        

Ireland

   $ 4,084      $ 4,397        5.9 

Spain

     25,565        20,378        27.6  
  

 

 

    

 

 

    

 

 

 

Total financial institutions

     29,649        24,775        33.5  
  

 

 

    

 

 

    

 

 

 
        

Other:

        

Ireland

     12,474        13,149        17.8  

Italy

     2,898        2,808        3.8  

Spain

     34,459        33,137        44.9  
  

 

 

    

 

 

    

 

 

 

Total other

     49,831        49,094        66.5  
  

 

 

    

 

 

    

 

 

 

Total

   $ 79,480      $ 73,869        100.0 
  

 

 

    

 

 

    

 

 

 

Unrealized Losses for Fixed Maturity Securities Available-for-Sale

The following table presents the total gross unrealized losses for the 851 and 940 fixed maturity and equity securities as of March 31, 2012 and December 31, 2011, respectively, where the estimated fair value had declined and remained below amortized cost by the indicated amount (dollars in thousands):

 

     March 31, 2012     December 31, 2011  
     Gross
Unrealized
Losses
     % of Total     Gross
Unrealized
Losses
     % of Total  

Less than 20%

   $ 92,037        42.9    $ 131,155        44.8 

20% or more for less than six months

     9,986        4.7       51,503        17.6  

20% or more for six months or greater

     112,329        52.4       109,828        37.6  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ 214,352        100.0    $ 292,486        100.0 
  

 

 

    

 

 

   

 

 

    

 

 

 

As of March 31, 2012 and December 31, 2011, respectively, 58.9% and 65.3% of these gross unrealized losses were associated with investment grade securities. The unrealized losses on these securities decreased primarily due to a decline in interest rates since December 31, 2011.

 

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Table of Contents

The Company’s determination of whether a decline in value is other-than-temporary includes analysis of the underlying credit and the extent and duration of a decline in value. The Company’s credit analysis of an investment includes determining whether the issuer is current on its contractual payments, evaluating whether it is probable that the Company will be able to collect all amounts due according to the contractual terms of the security and analyzing the overall ability of the Company to recover the amortized cost of the investment. The Company continues to consider valuation declines as a potential indicator of credit deterioration. The Company believes that due to fluctuating market conditions and an extended period of economic uncertainty, the extent and duration of a decline in value have become less indicative of when there has been credit deterioration with respect to a fixed maturity security since it may not have an impact on the ability of the issuer to service all scheduled payments and the Company’s evaluation of the recoverability of all contractual cash flows or the ability to recover an amount at least equal to amortized cost. In the Company’s impairment review process, the duration and severity of an unrealized loss position for equity securities are given greater weight and consideration given the lack of contractual cash flows or deferability features. As of March 31, 2012 and December 31, 2011, gross unrealized losses on equity securities greater than 20 percent and 12 months or more totaled $0.5 million.

The following tables present the estimated fair values and gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, for 851 and 940 fixed maturity securities and equity securities that have estimated fair values below amortized cost as of March 31, 2012 and December 31, 2011, respectively (dollars in thousands). These investments are presented by class and grade of security, as well as the length of time the related market value has remained below amortized cost.

 

     Less than 12 months      12 months or greater      Total  
March 31, 2012:    Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
 

Investment grade securities:

                 

Corporate securities

   $ 862,016      $ 21,354      $ 257,018      $ 39,896      $ 1,119,034      $ 61,250  

Canadian and Canadian provincial governments

     28,422        797        —           —           28,422        797  

Residential mortgage-backed securities

     73,291        1,148        49,221        6,875        122,512        8,023  

Asset-backed securities

     90,691        2,241        96,052        24,491        186,743        26,732  

Commercial mortgage-backed securities

     92,710        1,432        52,313        13,549        145,023        14,981  

U.S. government and agencies

     87,486        1,335        —           —           87,486        1,335  

State and political subdivisions

     27,839        3,462        12,020        1,520        39,859        4,982  

Other foreign government, supranational and foreign government-sponsored enterprises

     221,491        2,401        17,336        2,122        238,827        4,523  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment grade securities

     1,483,946        34,170        483,960        88,453        1,967,906        122,623  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-investment grade securities:

                 

Corporate securities

     147,646        9,931        47,308        7,448        194,954        17,379  

Residential mortgage-backed securities

     3,851        167        14,434        1,253        18,285        1,420  

Asset-backed securities

     11        30        25,023        18,789        25,034        18,819  

Commercial mortgage-backed securities

     32,637        1,201        61,562        48,717        94,199        49,918  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-investment grade securities

     184,145        11,329        148,327        76,207        332,472        87,536  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

   $ 1,668,091      $ 45,499      $ 632,287      $ 164,660      $ 2,300,378      $ 210,159  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-redeemable preferred stock

   $ 7,603      $ 484      $ 19,099      $ 2,222      $ 26,702      $ 2,706  

Other equity securities

     20        183        5,537        1,304        5,557        1,487  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

   $ 7,623      $ 667      $ 24,636      $ 3,526      $ 32,259      $ 4,193  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents
     Less than 12 months      12 months or greater      Total  
December 31, 2011:    Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
     Estimated
Fair Value
     Gross
Unrealized
Losses
 

Investment grade securities:

                 

Corporate securities

   $ 790,758      $ 40,180      $ 286,244      $ 63,117      $ 1,077,002      $ 103,297  

Canadian and Canadian provincial governments

     3,094        29        —           —           3,094        29  

Residential mortgage-backed securities

     128,622        3,549        58,388        10,382        187,010        13,931  

Asset-backed securities

     101,263        3,592        93,910        29,036        195,173        32,628  

Commercial mortgage-backed securities

     109,455        3,538        58,979        22,001        168,434        25,539  

U.S. government and agencies

     1,764        61        —           —           1,764        61  

State and political subdivisions

     21,045        1,845        12,273        1,268        33,318        3,113  

Other foreign government, supranational and foreign government-sponsored enterprises

     148,416        1,085        16,588        2,491        165,004        3,576  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total investment grade securities

     1,304,417        53,879        526,382        128,295        1,830,799        182,174  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-investment grade securities:

                 

Corporate securities

     212,795        10,852        47,310        11,222        260,105        22,074  

Residential mortgage-backed securities

     23,199        712        10,459        1,781        33,658        2,493  

Asset-backed securities

     2,363        940        21,275        20,107        23,638        21,047  

Commercial mortgage-backed securities

     34,918        7,220        62,357        46,730        97,275        53,950  

State and political subdivisions

     4,000        228        —           —           4,000        228  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-investment grade securities

     277,275        19,952        141,401        79,840        418,676        99,792  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturity securities

   $ 1,581,692      $ 73,831      $ 667,783      $ 208,135      $ 2,249,475      $ 281,966  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Non-redeemable preferred stock

   $ 19,516      $ 4,478      $ 15,694      $ 4,504      $ 35,210      $ 8,982  

Other equity securities

     1,662        602        5,905        936        7,567        1,538  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total equity securities

   $ 21,178      $ 5,080      $ 21,599      $ 5,440      $ 42,777      $ 10,520  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

As of March 31, 2012, the Company does not intend to sell these fixed maturity securities and does not believe it is more likely than not that it will be required to sell these fixed maturity securities before the recovery of the fair value up to the current amortized cost of the investment, which may be maturity. However, unforeseen facts and circumstances may cause the Company to sell fixed maturity securities in the ordinary course of managing its portfolio to meet certain diversification, credit quality, asset-liability management and liquidity guidelines.

As of March 31, 2012, the Company has the ability and intent to hold the equity securities until the recovery of the fair value up to the current cost of the investment. However, unforeseen facts and circumstances may cause the Company to sell equity securities in the ordinary course of managing its portfolio to meet certain diversification, credit quality and liquidity guidelines.

Unrealized losses on non-investment grade securities are principally related to asset-backed securities, residential mortgage-backed securities and commercial mortgage-backed securities and were the result of wider credit spreads resulting from higher risk premiums since the time of initial purchase, largely due to macroeconomic conditions and credit market deterioration, including the impact of lower real estate valuations. As of March 31, 2012 and December 31, 2011, approximately $68.8 million and $68.6 million, respectively, of gross unrealized losses greater than 12 months was associated with non-investment grade asset and mortgage-backed securities. This class of securities was evaluated based on actual and projected collateral losses relative to the securities’ positions in the respective securitization trusts and security specific expectations of cash flows. This evaluation also takes into consideration credit enhancement, measured in terms of (i) subordination from other classes of securities in the trust that are contractually obligated to absorb losses before the class of security the Company owns, and (ii) the expected impact of other structural features embedded in the securitization trust beneficial to the class of securities the Company owns, such as overcollateralization and excess spread.

 

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Mortgage Loans

Mortgage loans represented approximately 3.9% and 3.8% of the Company’s cash and invested assets as of March 31, 2012 and December 31, 2011, respectively. The Company makes mortgage loans on income producing properties, such as apartments, retail and office buildings, light warehouses and light industrial facilities. Loan-to-value ratios at the time of loan approval are 75% or less.

Information regarding the Company’s credit quality indicators for its recorded investment in mortgage loans, gross of valuation allowances, as of March 31, 2012 and December 31, 2011 are as follows (dollars in thousands):

 

Internal credit risk grade:    March 31, 2012      December 31, 2011  

High investment grade

   $ 295,266      $ 252,333  

Investment grade

     539,872        526,608  

Average

     93,324        105,177  

Watch list

     107,225        91,037  

In or near default

     19,696        28,369  
  

 

 

    

 

 

 

Total

   $ 1,055,383      $ 1,003,524  
  

 

 

    

 

 

 

The age analysis of the Company’s past due recorded investment in mortgage loans, gross of valuation allowances, as of March 31, 2012 and December 31, 2011 are as follows (dollars in thousands):

 

     March 31, 2012      December 31, 2011  

31-60 days past due

   $ 11,937      $ 21,800  

61-90 days past due

     3,634        —     

Greater than 90 days

     17,153        20,316  
  

 

 

    

 

 

 

Total past due

     32,724        42,116  

Current

     1,022,659        961,408  
  

 

 

    

 

 

 

Total

   $ 1,055,383      $ 1,003,524  
  

 

 

    

 

 

 

The following table presents the recorded investment in mortgage loans, by method of evaluation of credit loss, and the related valuation allowances, by type of credit loss, at (dollars in thousands):

 

     March 31, 2012      December 31, 2011  

Mortgage loans:

     

Evaluated individually for credit losses

   $ 56,855      $ 60,904  

Evaluated collectively for credit losses

     998,528        942,620  
  

 

 

    

 

 

 

Mortgage loans, gross of valuation allowances

     1,055,383        1,003,524  
  

 

 

    

 

 

 

Valuation allowances:

     

Specific for credit losses

     9,884        8,188  

Non-specifically identified credit losses

     4,766        3,605  
  

 

 

    

 

 

 

Total valuation allowances

     14,650        11,793  
  

 

 

    

 

 

 

Mortgage loans, net of valuation allowances

   $ 1,040,733      $ 991,731  
  

 

 

    

 

 

 

Information regarding the Company’s loan valuation allowances for mortgage loans for the three months ending March 31, 2012 and 2011 are as follows (dollars in thousands):

 

     Three Months Ended March 31,  
     2012     2011  

Balance, beginning of period

   $ 11,793     $ 6,239  

Charge-offs

     (2,193     —     

Provision (release)

     5,050       (575
  

 

 

   

 

 

 

Balance, end of period

   $ 14,650     $ 5,664  
  

 

 

   

 

 

 

 

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Information regarding the portion of the Company’s mortgage loans that were impaired as of March 31, 2012 and December 31, 2011 are as follows (dollars in thousands):

 

     Unpaid
Principal
Balance
     Recorded
Investment
     Related
Allowance
     Carrying
Value
 

March 31, 2012:

           

Impaired mortgage loans with no valuation allowance recorded

   $ 12,189      $ 11,646      $ —         $ 11,646  

Impaired mortgage loans with valuation allowance recorded

     45,352        45,209        9,884        35,325  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired mortgage loans

   $ 57,541      $ 56,855      $ 9,884      $ 46,971  
  

 

 

    

 

 

    

 

 

    

 

 

 

December 31, 2011:

           

Impaired mortgage loans with no valuation allowance recorded

   $ 32,088      $ 31,496      $ —         $ 31,496  

Impaired mortgage loans with valuation allowance recorded

     29,724        29,408        8,188        21,220  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired mortgage loans

   $ 61,812      $ 60,904      $ 8,188      $ 52,716  
  

 

 

    

 

 

    

 

 

    

 

 

 

The Company’s average investment in impaired mortgage loans and the related interest income are reflected in the table below for the periods indicated (dollars in thousands):

 

     Three Months Ended  
     March 31, 2012      March 31, 2011  
     Average
Investment(1)
     Interest
Income
     Average
Investment(1)
     Interest
Income
 

Impaired mortgage loans with no valuation allowance recorded

   $ 21,571        $ 169      $ 17,751        $ 167  

Impaired mortgage loans with valuation allowance recorded

     37,308          308        18,741          118  
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 58,879        $ 477      $ 36,492        $ 285  
  

 

 

    

 

 

    

 

 

    

 

 

 
           

 

(1) Average recorded investment represents the average loan balances as of the beginning of period and all subsequent quarterly end of period balances.

The Company did not acquire any impaired mortgage loans during the three months ended March 31, 2012 and 2011. The Company had $17.2 million and $20.3 million of mortgage loans, gross of valuation allowances, that were on nonaccrual status at March 31, 2012 and December 31, 2011, respectively.

Other Invested Assets

Other invested assets include equity securities, limited partnership interests, structured loans and derivative contracts. Other invested assets represented approximately 3.3% and 3.9% of the Company’s cash and invested assets as of March 31, 2012 and 2011, respectively. Carrying values of these assets as of March 31, 2012 and December 31, 2011 are as follows (dollars in thousands):

 

     March 31, 2012      December 31, 2011  

Equity securities

   $ 98,028      $ 113,900  

Limited partnerships

     265,879        251,315  

Structured loans

     245,246        281,022  

Derivatives

     168,961        257,050  

Other

     89,393        109,254  
  

 

 

    

 

 

 

Total other invested assets

   $ 867,507      $ 1,012,541  
  

 

 

    

 

 

 

The decrease in derivatives in 2012 is primarily due to a decrease in the carrying value of derivatives (primarily interest rate swaps and equity options) used to economically hedge changes in the fair value of liabilities associated with the reinsurance of variable annuities with guaranteed living benefits.

 

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5. Derivative Instruments

The following table presents the notional amounts and fair value of derivative instruments as of March 31, 2012 and December 31, 2011 (dollars in thousands):

 

     March 31, 2012      December 31, 2011  
     Notional      Carrying Value/Fair Value      Notional      Carrying Value/Fair Value  
     Amount      Assets      Liabilities      Amount      Assets      Liabilities  

Derivatives not designated as hedging instruments:

                 

Interest rate swaps(1)

   $ 2,708,940      $ 117,624      $ 20,454      $ 2,748,317      $ 184,842      $ 18,702  

Financial futures(1)

     274,101        —           —           277,814        —           —     

Foreign currency forwards(1)

     24,400        2,482        —           24,400        4,560        —     

Consumer Price index (“CPI”) swaps(1)

     102,425        1,230        —           101,069        766        —     

Credit default swaps(1)

     649,500        3,245        3,707        649,500        1,313        10,949  

Equity options(1)

     669,188        69,426        —           510,073        90,106        —     

Embedded derivatives in:

                 

Modified coinsurance or funds withheld arrangements(2)

     —           —           370,884        —           —           361,456  

Indexed annuity products(3)

     —           3,514        772,938        —           4,945        751,523  

Variable annuity products(3)

     —           —           130,344        —           —           276,718  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total non-hedging derivatives

     4,428,554        197,521        1,298,327        4,311,173        286,532        1,419,348  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives designated as hedging instruments:

                 

Interest rate swaps(1)

     57,005        39        924        56,250        133        960  

Foreign currency swaps(1)

     621,578        282        33,143        621,578        286        23,996  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total hedging derivatives

     678,583        321        34,067        677,828        419        24,956  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total derivatives

   $ 5,107,137      $ 197,842      $ 1,332,394      $ 4,989,001      $ 286,951      $ 1,444,304  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) Carried on the Company’s condensed consolidated balance sheets in other invested assets or other liabilities, at fair value.
(2) Embedded liability is included on the condensed consolidated balance sheets with the host contract in funds withheld at interest, at fair value.
(3) Embedded liability is included on the condensed consolidated balance sheets with the host contract in interest-sensitive contract liabilities, at fair value. Embedded asset is included on the condensed consolidated balance sheets in reinsurance ceded receivables.

Accounting for Derivative Instruments and Hedging Activities

The Company does not enter into derivative instruments for speculative purposes. As discussed below under “Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging,” the Company uses various derivative instruments for risk management purposes that either do not qualify or have not been qualified for hedge accounting treatment, including derivatives used to economically hedge changes in the fair value of liabilities associated with the reinsurance of variable annuities with guaranteed living benefits. As of March 31, 2012 and December 31, 2011, the Company held interest rate swaps that were designated and qualified as cash flow hedges of interest rate risk. As of March 31, 2012 and December 31, 2011, the Company held foreign currency swaps that were designated and qualified as fair value hedges of a portion of its net investment in its foreign operations. As of March 31, 2012 and December 31, 2011, the Company also had derivative instruments that were not designated as hedging instruments. See Note 2 – “Summary of Significant Accounting Policies” of the Company’s 2011 Annual Report for a detailed discussion of the accounting treatment for derivative instruments, including embedded derivatives. Derivative instruments are carried at fair value and generally require an insignificant amount of cash at inception of the contracts.

Fair Value Hedges

During the fourth quarter of 2011 the Company removed the fair value hedge designation for its interest rate swaps. However, prior to the fourth quarter of 2011 the Company designated and accounted for certain interest rate swaps that convert fixed rate investments to floating rate investments as fair value hedges when they meet the requirements of the general accounting principles for Derivatives and Hedging. The gain or loss on the hedged item attributable to the hedged benchmark interest rate and the offsetting gain or loss on the related interest rate swaps for the three months ended March 31, 2011 were (dollars in thousands):

 

Type of Fair Value Hedge

  

Hedged Item

   Gains (Losses)
Recognized for
Derivatives
     Gains (Losses)
Recognized for
Hedged Items
    Ineffectiveness
Recognized in
Investment Related
Gains (Losses)
 

For the three months ended March 31, 2011:

       

Interest rate swaps

   Fixed rate maturities    $ 223      $ (97   $ 126  

 

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A regression analysis was used, both at the inception of the hedge and on an ongoing basis, to determine whether each derivative used in a hedge transaction is highly effective in offsetting changes in the hedged item. All components of each derivative’s gain or loss were included in the assessment of hedge effectiveness.

Cash Flow Hedges

The Company designates and accounts for certain interest rate swaps, in which the cash flows are denominated in different currencies, commonly referred to as cross-currency swaps, as cash flow hedges when they meet the requirements of the general accounting principles for Derivatives and Hedging.

The following table presents the components of AOCI, before income tax, and the condensed consolidated income statement classification where the gain or loss is recognized related to cash flow hedges for the three months ended March 31, 2012 (dollars in thousands):

 

     2012  

Accumulated other comprehensive income (loss), balance beginning of year

   $ (828

Gains (losses) deferred in other comprehensive income (loss) on the effective portion of cash flow hedges

     323  

Amounts reclassified to investment related gains (losses), net

     —     

Amounts reclassified to investment income

     (357
  

 

 

 

Accumulated other comprehensive income (loss), balance end of period

   $ (862
  

 

 

 

As of March 31, 2012, the before-tax deferred net gains on derivative instruments recorded in AOCI that are expected to be reclassified to earnings during the next twelve months are $0.8 million. This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities that will occur over the next twelve months, at which time the Company will recognize the deferred net gains (losses) as an adjustment to investment income over the term of the investment cash flows. There were no hedged forecasted transactions, other than the receipt or payment of variable interest payments on existing financial instruments, for the three months ended March 31, 2012. The Company had no derivative instruments that were designated and qualified as cash flow hedges for the three months ended March 31, 2011.

The following table presents the effects of derivatives in cash flow hedging relationships on the condensed consolidated statements of income and AOCI for the three months ended March 31, 2012 (dollars in thousands):

 

Derivatives in Cash Flow

Hedging Relationships

   Amount of Gains
(Losses) Deferred in
AOCI on Derivatives
     Amount and Location of Gains
(Losses) Reclassified from AOCI
into Income (Loss)
     Amount and Location of Gains
(Losses) Recognized in Income
(Loss) on Derivatives
 
     (Effective Portion)      (Effective Portion)      (Ineffective Portion and
Amounts Excluded from
Effectiveness Testing)
 
            Investment Related
Gains (Losses)
     Investment
Income
     Investment Related
Gains (Losses)
    Investment
Income
 

Interest rate swaps

   $ 323      $ —         $ 357      $ (24   $ —     

Hedges of Net Investments in Foreign Operations

The Company uses foreign currency swaps to hedge a portion of its net investment in certain foreign operations against adverse movements in exchange rates. The following tables illustrate the Company’s net investments in foreign operations (“NIFO”) hedges for the three months ended March 31, 2012 and 2011 (dollars in thousands):

 

     Derivative Gains (Losses) Deferred in AOCI  
     For the three months ended March 31,  

Type of NIFO Hedge (1) (2)

   2012     2011  

Foreign currency swaps

   $ (10,645   $ (15,104

 

(1) There were no sales or substantial liquidations of net investments in foreign operations that would have required the reclassification of gains or losses from accumulated other comprehensive income (loss) into investment income during the periods presented.
(2) There was no ineffectiveness recognized for the Company’s hedges of net investments in foreign operations.

The cumulative foreign currency translation gain (loss) recorded in AOCI related to these hedges was $(6.6) million and $4.1 million at March 31, 2012 and December 31, 2011, respectively. If a foreign operation was sold or substantially liquidated, the amounts in AOCI would be reclassified to the condensed consolidated statements of income. A pro rata portion would be reclassified upon partial sale of a foreign operation.

 

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Table of Contents

Non-qualifying Derivatives and Derivatives for Purposes Other Than Hedging

The Company uses various other derivative instruments for risk management purposes that either do not qualify or have not been qualified for hedge accounting treatment, including derivatives used to economically hedge changes in the fair value of liabilities associated with the reinsurance of variable annuities with guaranteed living benefits. The gain or loss related to the change in fair value for these derivative instruments is recognized in investment related gains (losses), in the condensed consolidated statements of income, except where otherwise noted. For the three months ended March 31, 2012 and 2011, the Company recognized investment related losses of $93.3 million and $25.9 million, respectively, related to derivatives (not including embedded derivatives) that do not qualify or have not been qualified for hedge accounting.

Interest Rate Swaps

Interest rate swaps are used by the Company primarily to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and liabilities (duration mismatches). With an interest rate swap, the Company agrees with another party to exchange, at specified intervals, the difference between two rates, which can be either fixed-rate or floating-rate interest amounts, tied to an agreed-upon notional principal amount. These transactions are executed pursuant to master agreements that provide for a single net payment or individual gross payments at each due date.

Financial Futures

Exchange-traded equity futures are used primarily to economically hedge liabilities embedded in certain variable annuity products. With exchange-traded equity futures transactions, the Company agrees to purchase or sell a specified number of contracts, the value of which is determined by the relevant stock indices, and to post variation margin on a daily basis in an amount equal to the difference between the daily estimated fair values of those contracts. The Company enters into exchange-traded equity futures with regulated futures commission merchants that are members of the exchange.

Equity Options

Equity index options are used by the Company primarily to hedge minimum guarantees embedded in certain variable annuity products. To hedge against adverse changes in equity indices volatility, the Company buys put options. The contracts are net settled in cash based on differentials in the indices at the time of exercise and the strike price.

CPI Swaps

CPI swaps are used by the Company primarily to economically hedge liabilities embedded in certain insurance products where value is directly affected by changes in a designated benchmark consumer price index. With a CPI swap transaction, the Company agrees with another party to exchange the actual amount of inflation realized over a specified period of time for a fixed amount of inflation determined at inception. These transactions are executed pursuant to master agreements that provide for a single net payment or individual gross payments to be made by the counterparty at each due date. Most of these swaps will require a single payment to be made by one counterparty at the maturity date of the swap.

Foreign Currency Swaps

Foreign currency swaps are used by the Company to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies. With a foreign currency swap transaction, the Company agrees with another party to exchange, at specified intervals, the difference between one currency and another at a forward exchange rate calculated by reference to an agreed upon principal amount. The principal amount of each currency is exchanged at the inception and termination of the currency swap by each party. The Company may also use foreign currency swaps to economically hedge the foreign currency risk associated with certain of its net investments in foreign operations.

Foreign Currency Forwards

Foreign currency forwards are used by the Company to reduce the risk from fluctuations in foreign currency exchange rates associated with its assets and liabilities denominated in foreign currencies. With a foreign currency forward transaction, the Company agrees with another party to deliver a specified amount of an identified currency at a specified future date. The price is agreed upon at the time of the contract and payment for such a contract is made in a different currency at the specified future date.

Credit Default Swaps

The Company sells protection under single name credit default swaps and credit default swap index tranches to diversify its credit risk exposure in certain portfolios and, in combination with purchasing securities, to replicate characteristics of similar investments based on the credit quality and term of the credit default swap. Credit default triggers for indexed reference entities and single name reference entities are defined in the contracts. The Company’s maximum exposure to credit loss equals the notional value for credit default swaps. In the event of default for credit default swaps, the Company is typically required to pay the protection holder the full notional value less a recovery rate determined at auction.

 

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The Company’s maximum amount at risk on credit default swaps, assuming the value of the underlying referenced securities is zero, was $614.0 million at March 31, 2012 and December 31, 2011.

The Company also purchases credit default swaps to reduce its risk against a drop in bond prices due to credit concerns of certain bond issuers. If a credit event, as defined by the contract, occurs, the Company is able to put the bond back to the counterparty at par.

Embedded Derivatives

The Company has certain embedded derivatives which are required to be separated from their host contracts and reported as derivatives. Host contracts include reinsurance treaties structured on a modified coinsurance (“modco”) or funds withheld basis. Changes in fair values of embedded derivatives on modco or funds withheld treaties are net of a decrease in investment related gains (losses), net of $63.5 million and $23.9 million for the three months ended March 31, 2012 and 2011, respectively, associated with the Company’s own credit risk. Changes in fair values of embedded derivatives on variable annuity contracts are net of an increase in investment related gains (losses), net of $37.0 million for the three months ended March 31, 2012 associated with the Company’s own credit risk. Additionally, the Company reinsures equity-indexed annuity and variable annuity contracts with benefits that are considered embedded derivatives, including guaranteed minimum withdrawal benefits, guaranteed minimum accumulation benefits, and guaranteed minimum income benefits. The related gains (losses) and the effect on net income after amortization of deferred acquisition costs (“DAC”) and income taxes for the three months ended March 31, 2012 and 2011 are reflected in the following table (dollars in thousands):

 

     Three months ended
March 31,
 
     2012     2011  

Embedded derivatives in modco or funds withheld arrangements included in investment related gains

   $ (9,428   $ 90,535  

After the associated amortization of DAC and taxes, the related amounts included in net income

     1,933       19,183  

Embedded derivatives in variable annuity contracts included in investment related gains

     146,375       32,654  

After the associated amortization of DAC and taxes, the related amounts included in net income

     15,082       8,801  

Amounts related to embedded derivatives in equity-indexed annuities included in benefits and expenses

     (19,739     (41,271

After the associated amortization of DAC and taxes, the related amounts included in net income

     13,870       (36,650

Non-hedging Derivatives

A summary of the effect of non-hedging derivatives, including embedded derivatives, on the Company’s income statement for the three months ended March 31, 2012 and 2011 is as follows (dollars in thousands):

 

          Gain (Loss) for the Three Months Ended
March 31,
 

Type of Non-hedging Derivative

  

Income Statement Location of Gain (Loss)

   2012     2011  

Interest rate swaps

   Investment related gains (losses), net    $ (47,352   $ (10,730

Financial futures

   Investment related gains (losses), net      (17,409     (11,423

Foreign currency forwards

   Investment related gains (losses), net      (1,608     (855

CPI swaps

   Investment related gains (losses), net      (802     811  

Credit default swaps

   Investment related gains (losses), net      11,813       892  

Equity options

   Investment related gains (losses), net      (37,983     (4,568

Embedded derivatives in:

       

Modco or funds withheld arrangements

   Investment related gains (losses), net      (9,428     90,535  

Indexed annuity products

   Policy acquisition costs and other insurance expenses      (998     8,094  

Indexed annuity products

   Interest credited      (18,741     (49,365

Variable annuity products

   Investment related gains (losses), net      146,375       32,654  
     

 

 

   

 

 

 

Total non-hedging derivatives

      $ 23,867     $ 56,045  
     

 

 

   

 

 

 

Credit Risk

The Company manages its credit risk related to over-the-counter derivatives by entering into transactions with creditworthy counterparties, maintaining collateral arrangements and through the use of master agreements that provide for a single net payment to be made by one counterparty to another at each due date and upon termination. As exchange-traded futures are affected through regulated exchanges, and positions are marked to market on a daily basis, the Company has minimal exposure to credit-related losses in the event of nonperformance by counterparties.

 

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Table of Contents

The Company enters into various collateral arrangements, which require both the posting and accepting of collateral in connection with its derivative instruments. Collateral agreements contain attachment thresholds that may vary depending on the posting party’s ratings. Additionally, a decline in the Company’s or the counterparty’s credit ratings to specified levels could result in potential settlement of the derivative positions under the Company’s agreements with its counterparties. The Company also has exchange-traded futures, which require the maintenance of a margin account.

The Company’s credit exposure related to derivative contracts is generally limited to the fair value at the reporting date plus or minus any collateral posted or held by the Company. Information regarding the Company’s credit exposure related to its over-the-counter derivative contracts and margin account for exchange-traded futures at March 31, 2012 and December 31, 2011 are reflected in the following table (dollars in thousands):

 

     March 31, 2012     December 31, 2011  

Estimated fair value of derivatives in net asset position

   $ 136,100     $ 227,399  

Securities pledged to counterparties as collateral(1)

     35,623       27,052  

Cash pledged from counterparties as collateral(2)

     (140,915     (241,480

Securities pledged from counterparties as collateral(3)

     (30,146     (997
  

 

 

   

 

 

 

Net credit exposure

   $ 662     $ 11,974  
  

 

 

   

 

 

 

Margin account related to exchange-traded futures(2)

   $ 15,742     $ 18,153  
  

 

 

   

 

 

 

 

(1) Consists of U.S. Treasury securities, included in other invested assets.
(2) Included in cash and cash equivalents.
(3) Consists of U.S. Treasury securities.

6. Fair Value of Assets and Liabilities

General accounting principles for Fair Value Measurements and Disclosures define fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. In accordance with these principles, valuation techniques utilized by management for invested assets and embedded derivatives reported at fair value are generally categorized into three types:

Market Approach. Market approach valuation techniques use prices and other relevant information from market transactions involving identical or comparable assets or liabilities. Valuation techniques consistent with the market approach include comparables and matrix pricing. Comparables use market multiples, which might lie in ranges with a different multiple for each comparable. The selection of where within the range the appropriate multiple falls requires judgment, considering both quantitative and qualitative factors specific to the measurement. Matrix pricing is a mathematical technique used principally to value certain securities without relying exclusively on quoted prices for the specific securities but comparing the securities to benchmark or comparable securities.

Income Approach. Income approach valuation techniques convert future amounts, such as cash flows or earnings, to a single discounted amount. These techniques rely on current expectations of future amounts. Examples of income approach valuation techniques include present value techniques, option-pricing models and binomial or lattice models that incorporate present value techniques.

Cost Approach. Cost approach valuation techniques are based upon the amount that, at present, would be required to replace the service capacity of an asset, or the current replacement cost. That is, from the perspective of a market participant (seller), the price that would be received for the asset is determined based on the cost to a market participant (buyer) to acquire or construct a substitute asset of comparable utility.

The three approaches described above are consistent with generally accepted valuation techniques. While all three approaches are not applicable to all assets or liabilities reported at fair value, where appropriate and possible, one or more valuation techniques may be used. The selection of the valuation technique(s) to apply considers the definition of an exit price and the nature of the asset or liability being valued and significant expertise and judgment is required. The Company performs regular analysis and review of the various techniques utilized in determining fair value to ensure that the valuation approaches utilized are appropriate and consistently applied, and that the various assumptions are reasonable. As indicated above, the Company also utilizes information from third parties, such as pricing services and brokers, to assist in determining fair values for certain assets and liabilities; however, management is ultimately responsible for all fair values presented in the Company’s financial statements. The Company performs analysis and review of the information and prices received from third parties to ensure that the prices represent a reasonable estimate of the fair value. This process involves quantitative and qualitative analysis and is overseen by the Company’s investment and accounting personnel. Examples of procedures performed include, but are not limited to, initial and ongoing review of third party pricing services and techniques, review of

 

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pricing trends and monitoring of recent trade information. In addition, the Company utilizes both internal and external cash flow models to analyze the reasonableness of fair values utilizing credit spread and other market assumptions, where appropriate. As a result of the analysis, if the Company determines there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly.

For invested assets reported at fair value, the Company utilizes when available, fair values based on quoted prices in active markets that are regularly and readily obtainable. Generally, these are very liquid investments and the valuation does not require management judgment. When quoted prices in active markets are not available, fair value is based on the market valuation techniques described above, primarily a combination of the market approach, including matrix pricing and the income approach. For corporate and government securities, the assumptions and inputs used by management in applying these techniques include, but are not limited to: using standard market observable inputs which are derived from, or corroborated by, market observable data including market yield curve, duration, call provisions, observable prices and spreads for similar publicly traded or privately traded issues that incorporate the credit quality and industry sector of the issuer. For structured securities that include residential mortgage-backed securities, commercial mortgage-backed securities and asset-backed securities, valuation is based primarily on matrix pricing or other similar techniques using standard market inputs including spreads for actively traded securities, spreads off benchmark yields, expected prepayment speeds and volumes, current and forecasted loss severity, rating, weighted average coupon, weighted average maturity, average delinquency rates, geographic region, debt-service coverage ratios and issuance-specific information including, but not limited to: collateral type, payment terms of the underlying assets, payment priority within the tranche, structure of the security, deal performance and vintage of loans.

When observable inputs are not available, the market standard valuation techniques for determining the estimated fair value of certain types of securities that trade infrequently, and therefore have little or no price transparency, rely on inputs that are significant to the estimated fair value that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs can be based in large part on management judgment or estimation, and cannot be supported by reference to market activity. Even though unobservable, these inputs are based on assumptions deemed appropriate given the circumstances and are believed to be consistent with what other market participants would use when pricing such securities.

The use of different techniques, assumptions and inputs may have a material effect on the estimated fair values of the Company’s securities holdings.

For the quarters ended March 31, 2012 and 2011, the application of market standard valuation techniques applied to similar assets and liabilities has been consistent.

General accounting principles for Fair Value Measurements and Disclosures also establish a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:

 

Level 1 Quoted prices in active markets for identical assets or liabilities. The Company’s Level 1 assets and liabilities include investment securities and derivative contracts that are traded in exchange markets.

 

Level 2 Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or market standard valuation techniques and assumptions with significant inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Such observable inputs include benchmarking prices for similar assets in active, liquid markets, quoted prices in markets that are not active and observable yields and spreads in the market. The Company’s Level 2 assets and liabilities include investment securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose values are determined using market standard valuation techniques. This category primarily includes corporate securities, Canadian and Canadian provincial government securities, and residential and commercial mortgage-backed securities, among others. Level 2 valuations are generally obtained from third party pricing services for identical or comparable assets or liabilities or through the use of valuation methodologies using observable market inputs. Prices from services are validated through analytical reviews and assessment of current market activity.

 

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the related assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using market standard valuation techniques described above. When observable inputs are not available, the market standard techniques for determining the estimated fair value of certain securities that trade infrequently, and therefore have little transparency, rely on inputs that are significant to the estimated fair value and that are not observable in the market or cannot be derived principally from or corroborated by observable market data. These unobservable inputs can be based in large part on management judgment or estimation and cannot be supported by reference to market activity. Even though unobservable, management believes these inputs are based on assumptions

 

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  deemed appropriate given the circumstances and consistent with what other market participants would use when pricing similar assets and liabilities. For the Company’s invested assets, this category generally includes corporate securities (primarily private placements), asset-backed securities (including those with exposure to subprime mortgages), and to a lesser extent, certain residential and commercial mortgage-backed securities, among others. Prices are determined using valuation methodologies such as discounted cash flow models and other similar techniques. Non-binding broker quotes, which are utilized when pricing service information is not available, are reviewed for reasonableness based on the Company’s understanding of the market, and are generally considered Level 3. Under certain circumstances, based on its observations of transactions in active markets, the Company may conclude the prices received from independent third party pricing services or brokers are not reasonable or reflective of market activity. In those instances, the Company would apply internally developed valuation techniques to the related assets or liabilities. Additionally, the Company’s embedded derivatives, all of which are associated with reinsurance treaties, are classified in Level 3 since their values include significant unobservable inputs.

When inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest priority level input that is significant to the fair value measurement in its entirety. For example, a Level 3 fair value measurement may include inputs that are observable (Levels 1 and 2) and unobservable (Level 3). Therefore, gains and losses for such assets and liabilities categorized within Level 3 may include changes in fair value that are attributable to both observable inputs (Levels 1 and 2) and unobservable inputs (Level 3). Assets and liabilities measured at fair value on a recurring basis as of March 31, 2012 and December 31, 2011 are summarized below (dollars in thousands):

 

March 31, 2012:          Fair Value Measurements Using:  
   Total     Level 1      Level 2     Level 3  

Assets:

         

Fixed maturity securities – available-for-sale:

         

Corporate securities

   $ 8,111,454     $ 75,329      $ 7,058,454     $ 977,671  

Canadian and Canadian provincial governments

     3,839,340       —           3,839,340       —     

Residential mortgage-backed securities

     1,138,228       —           1,083,793       54,435  

Asset-backed securities

     414,527       —           268,165       146,362  

Commercial mortgage-backed securities

     1,342,421       —           1,223,743       118,678  

U.S. government and agencies securities

     279,093       166,724        112,369       —     

State and political subdivision securities

     214,004       12,793        195,972       5,239  

Other foreign government supranational and foreign government-sponsored enterprises

     1,454,990       180,114        1,274,876       —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total fixed maturity securities – available-for-sale

     16,794,057       434,960        15,056,712       1,302,385  

Funds withheld at interest – embedded derivatives

     (370,884     —           —          (370,884

Cash equivalents

     349,457       349,457        —          —     

Short-term investments

     19,195       10,909        8,286       —     

Other invested assets:

         

Non-redeemable preferred stock

     80,023       66,024        13,999       —     

Other equity securities

     18,005       3,392        2,786       11,827  

Derivatives:

         

Interest rate swaps

     96,285       —           96,285       —     

Foreign currency forwards

     2,482       —           2,482       —     

CPI swaps

     1,230       —           1,230       —     

Credit default swaps

     (462     —           (462     —     

Equity options

     69,426       —           69,426       —     

Collateral

     41,298       35,623        5,675       —     

Other

     13,143       13,143        —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total other invested assets

     321,430       118,182        191,421       11,827  

Reinsurance ceded receivable – embedded derivatives

     3,514       —           —          3,514  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 17,116,769     $ 913,508      $ 15,256,419     $ 946,842  
  

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

         

Interest sensitive contract liabilities – embedded derivatives

   $ 903,282     $ —         $ —        $ 903,282  

Other liabilities:

         

Derivatives:

         

Foreign currency swaps

     32,861       —           32,861       —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total other liabilities

     32,861       —           32,861       —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 936,143     $ —         $ 32,861     $ 903,282  
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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December 31, 2011:          Fair Value Measurements Using:  
   Total     Level 1      Level 2     Level 3  

Assets:

         

Fixed maturity securities – available-for-sale:

         

Corporate securities

   $ 7,461,106     $ 76,097      $ 6,410,840     $ 974,169  

Canadian and Canadian provincial governments

     3,869,933       —           3,869,933       —     

Residential mortgage-backed securities

     1,227,234       —           1,145,579       81,655  

Asset-backed securities

     401,991       —           208,499       193,492  

Commercial mortgage-backed securities

     1,242,219       —           1,126,243       115,976  

U.S. government and agencies securities

     374,002       300,514        73,488       —     

State and political subdivision securities

     205,386       12,894        182,119       10,373  

Other foreign government, supranational and foreign government-sponsored enterprises

     1,419,079       223,440        1,195,639       —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total fixed maturity securities – available-for-sale

     16,200,950       612,945        14,212,340       1,375,665  

Funds withheld at interest – embedded derivatives

     (361,456     —           —          (361,456

Cash equivalents

     504,522       504,522        —          —     

Short-term investments

     46,671       37,155        9,516       —     

Other invested assets:

         

Non-redeemable preferred stock

     78,183       58,906        19,277       —     

Other equity securities

     35,717       5,308        18,920       11,489  

Derivatives:

         

Interest rate swaps

     168,484       —           168,484       —     

Foreign currency forwards

     4,560       —           4,560       —     

CPI swaps

     766       —           766       —     

Credit default swaps

     (4,003     —           (4,003     —     

Equity options

     87,243       —           87,243       —     

Collateral

     32,622       27,052        5,570       —     

Other

     59,373       59,373        —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total other invested assets

     462,945       150,639        300,817       11,489  

Reinsurance ceded receivable – embedded derivatives

     4,945       —           —          4,945  
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 16,858,577     $ 1,305,261      $ 14,522,673     $ 1,030,643  
  

 

 

   

 

 

    

 

 

   

 

 

 

Liabilities:

         

Interest sensitive contract liabilities – embedded derivatives

   $ 1,028,241     $ —         $ —        $ 1,028,241  

Other liabilities:

         

Derivatives:

         

Interest rate swaps

     3,171       —           3,171       —     

Credit default swaps

     5,633       —           5,633       —     

Equity options

     (2,864     —           (2,864     —     

Foreign currency swaps

     23,710       —           23,710       —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total other liabilities

     29,650       —           29,650       —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total

   $ 1,057,891     $ —         $ 29,650     $ 1,028,241  
  

 

 

   

 

 

    

 

 

   

 

 

 

Management is responsible for monitoring the fair value process, ensuring objective and reliable valuation practices and pricing of financial instruments, and approving changes to valuation methodologies and pricing sources. The Company performs ongoing analysis of the prices received from pricing services to ensure that the prices represent a reasonable estimate of the fair value. The Company conducts other specific activities to monitor controls around pricing, which include comparing a sample of executed prices of securities sold to the fair value estimates, comparing fair value estimates to management’s knowledge of the current market, and ongoing confirmation that third party pricing services use, wherever possible, market-based parameters for valuation. The Company also determines if the inputs used in estimated fair values received from pricing services or brokers are observable by assessing whether these inputs can be corroborated by observable market data. The fair value of embedded derivative liabilities, including those calculated by third parties, are monitored through the use of attribution reports to quantify the effect of underlying sources of fair value change, including capital market inputs based on policyholder account values, interest rates and short-term and long-term implied volatilities, from period to period. Actuarial assumptions are based on experience studies performed internally in combination with available industry information and are reviewed on an annual basis. The methods and assumptions the Company uses to estimate the fair value of assets and liabilities measured at fair value on a recurring bases are summarized below.

Fixed Maturity Securities – The fair values of the Company’s public fixed maturity securities, which include corporate and structured securities, are generally based on prices obtained from independent pricing services. Prices from pricing services are sourced from multiple vendors, and a vendor hierarchy is maintained by asset type based on historical pricing experience and vendor expertise. The Company generally receives prices from multiple pricing services for each security, but ultimately

 

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uses the price from the pricing service highest in the vendor hierarchy based on the respective asset type. To validate reasonability, prices are periodically reviewed by internal asset managers through comparison with directly observed recent market trades and internal estimates of current fair value, developed using market observable inputs and economic indicators. Consistent with the fair value hierarchy described above, securities with validated quotes from pricing services are generally reflected within Level 2, as they are primarily based on observable pricing for similar assets and/or other market observable inputs. If the pricing information received from third party pricing services is not reflective of market activity or other inputs observable in the market, the Company may challenge the price through a formal process with the pricing service.

If the Company ultimately concludes that pricing information received from the independent pricing service is not reflective of market activity, non-binding broker quotes are used, if available. If the Company concludes the values from both pricing services and brokers are not reflective of market activity, it may override the information from the pricing service or broker with an internally developed valuation; however, this occurs infrequently. Internally developed valuations or non-binding broker quotes are also used to determine fair value in circumstances where vendor pricing is not available. These estimates may use significant unobservable inputs, which reflect the Company’s assumptions about the inputs market participants would use in pricing the asset. Circumstances where observable market data are not available may include events such as market illiquidity and credit events related to the security. Pricing service overrides, internally developed valuations and non-binding broker quotes are generally based on significant unobservable inputs and are often reflected as Level 3 in the valuation hierarchy.

The fair values of private placement securities are primarily determined using a discounted cash flow model. In certain cases these models primarily use observable inputs with a discount rate based upon the average of spread surveys collected from private market intermediaries who are active in both primary and secondary transactions, taking into account, among other factors, the credit quality and industry sector of the issuer and the reduced liquidity associated with private placements. Generally, these securities have been reflected within Level 2. For certain private fixed maturities, the discounted cash flow model may also incorporate significant unobservable inputs, which reflect the Company’s own assumptions about the inputs market participants would use in pricing the security. To the extent management determines that such unobservable inputs are not significant to the price of a security, a Level 2 classification is made. Otherwise, a Level 3 classification is used.

Embedded Derivatives – For embedded derivative liabilities associated with the underlying products in reinsurance treaties, primarily equity-indexed and variable annuity treaties, the Company utilizes a market standard technique, which includes an estimate of future equity option purchases and an adjustment for the Company’s own credit risk. The variable annuity embedded derivative calculations are performed by third parties based on methodology and input assumptions provided by the Company. To validate the reasonability of the resulting fair value, the Company’s internal actuaries perform reviews and analytical procedures on the results. The capital market inputs to the model, such as equity indexes, short-term equity volatility and interest rates, are generally observable. Long-term volatility inputs are a significant unobservable input. However, the valuation models also use inputs requiring certain actuarial assumptions such as future interest margins, policyholder behavior, including future equity participation rates, and explicit risk margins related to non-capital market inputs, that are generally not observable and may require use of significant management judgment.

The fair value of embedded derivatives associated with funds withheld reinsurance treaties is determined based upon a total return swap technique with reference to the fair value of the investments held by the ceding company that support the Company’s funds withheld at interest asset with an adjustment for the Company’s own credit risk. The fair value of the underlying assets is generally based on market observable inputs using industry standard valuation techniques. However, the valuation also requires certain significant inputs based on actuarial assumptions, which are generally not observable and accordingly, the valuation is considered Level 3 in the fair value hierarchy.

Company’s Own Credit Risk – The Company uses a structural default risk model to estimate its own credit risk. The input assumptions are a combination of externally derived and published values (default threshold and uncertainty), market inputs (interest rate, Company equity price per share, Company debt per share, Company equity price volatility) and insurance industry data (Loss Given Default), adjusted for market recoverability.

Cash Equivalents and Short-Term Investments – Cash equivalents and short-term investments include money market instruments, commercial paper and other highly liquid debt instruments. Money market instruments are generally valued using unadjusted quoted prices in active markets that are accessible for identical assets and are primarily classified as Level 1. The fair value of certain other short-term investments, such as floating rate notes and bonds with original maturities less then twelve months, are based upon other market observable data and are typically classified as Level 2. Various time deposits carried as cash equivalents or short-term investments are not measured at estimated fair value and therefore are excluded from the tables presented.

Equity Securities – Equity securities consist principally of preferred stock of publicly and privately traded companies. The fair values of most publicly traded equity securities are based on quoted market prices in active markets for identical assets and are classified within Level 1 in the fair value hierarchy. Estimated fair values for most privately traded equity securities

 

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are determined using valuation models that require a substantial level of judgment. In determining the fair value of certain

privately traded equity securities the models may also use unobservable inputs, which reflect the Company’s assumptions about the inputs market participants would use in pricing. The estimated fair value of certain private equity securities are based on net asset value calculations using fund statements. Most privately traded equity securities are classified within Level 3 because the fund statements are considered a significant unobservable input. The fair values of preferred equity securities are based on prices obtained from independent pricing services and these securities are generally classified within Level 2 in the fair value hierarchy.

Derivative Assets and Derivative Liabilities – Level 1 measurement includes assets and liabilities comprised of exchange-traded derivatives. Valuation is based on unadjusted quoted prices in active markets that are readily and regularly available. Level 2 measurement includes all types of derivative instruments utilized by the Company with the exception of exchange-traded derivatives. These derivatives are principally valued using an income approach. Valuations of interest rate contracts, non-option-based, are based on present value techniques, which utilize significant inputs that may include the swap yield curve, LIBOR basis curves, and repurchase rates. Valuations of foreign currency contracts, non-option-based, are based on present value techniques, which utilize significant inputs that may include the swap yield curve, LIBOR basis curves, currency spot rates, and cross currency basis curves. Valuations of credit contracts, non-option-based, are based on present value techniques, which utilize significant inputs that may include the swap yield curve, credit curves, and recovery rates. Valuations of equity market contracts, non-option-based, are based on present value techniques, which utilize significant inputs that may include the swap yield curve, spot equity index levels, and dividend yield curves. Valuations of equity market contracts, option-based, are based on option pricing models, which utilize significant inputs that may include the swap yield curve, spot equity index levels, dividend yield curves, and equity volatility. The Company does not currently have derivatives included in Level 3 measurement.

As of March 31, 2012 and December 31, 2011, respectively, the Company classified approximately 7.8% and 8.5% of its fixed maturity securities in the Level 3 category. These securities primarily consist of private placement corporate securities with inactive trading markets. Additionally, the Company has included asset-backed securities with sub-prime exposure and mortgage-backed securities with below investment grade ratings in the Level 3 category due to market uncertainty associated with these securities and the Company’s utilization of information from third parties for the valuation of these securities.

The significant unobservable inputs used in the fair value measurement of the Company’s corporate, sovereign, government-backed and other political subdivision securities are probability of default, liquidity premium, subordination premium and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumptions used for the liquidity premium, subordination premium and loss severity.

The significant unobservable inputs used in the fair value measurement of the Company’s asset and mortgage-backed securities are prepayment rates, probability of default, liquidity premium and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for the probability of default is accompanied by a directionally similar change in the assumption used for the liquidity premium and loss severity and a directionally opposite change in the assumption used for prepayment rates.

The actuarial assumptions used in the fair value of embedded derivatives which include assumptions related to lapses, withdrawals, and mortality, are based on experience studies performed by the Company in combination with available industry information and are reviewed annually. The significant unobservable inputs used in the fair value measurement of embedded derivatives are assumptions associated with policyholder experience and selected capital market assumptions for equity indexed and variable annuities. The selected capital market assumptions, which include long-term implied volatilities, are based on observable historical information. Changes in interest rates, equity indices, equity volatility, the Company’s own credit risk, and actuarial assumptions regarding policyholder experience may result in significant fluctuations in the value of embedded derivatives.

Fair value measurements associated with funds withheld reinsurance treaties are generally not materially sensitive to changes in unobservable inputs associated with policyholder experience. The primary drivers of change in these fair values are related to movements of credit spreads, which are generally observable. Increases (decreases) in market credit spreads tend to decrease (increase) the fair value of embedded derivatives. Increases (decreases) in the own credit assumption tend to decrease (increase) the magnitude of the fair value of embedded derivatives.

 

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Fair value measurements associated with variable annuity treaties are sensitive to both capital markets inputs and policyholder experience inputs. Increases (decreases) in lapse rates tend to decrease (increase) the value of the embedded derivatives associated with variable annuity treaties. Increases (decreases) in the long-term volatility assumption tend to increase (decrease) the fair value of embedded derivatives. Increases (decreases) in the own credit assumption tend to decrease (increase) the magnitude of the fair value of embedded derivatives.

The following table presents quantitative information about significant unobservable inputs used in Level 3 fair value measurements that are developed by the Company as of March 31, 2012.

 

March 31, 2012:         Valuation   Unobservable   Range  
  Fair Value     Technique(s)   Input   (Weighted Average)  

Assets:

       

State and political subdivision securities

  $ 5,239     Market comparable securities   Liquidity premium     1%   

Corporate securities

    20,101     Market comparable securities   Liquidity premium     1-2%(2%

Private equity securities

    9,852     Net asset value   Fund financial statements     Not Applicable   

Funds withheld at interest- embedded derivatives

    (370,884   Total return swap   Mortality     0-100% (1%
      Lapse     0-35% (4%
      Withdrawal     0-5% (4%
      Own Credit     0-1% (0%
      Crediting rate     2-4% (3%

Reinsurance ceded receivable- embedded derivatives

    3,514     Discounted cash flow   Mortality     0-100% (8%
      Lapse     14-16% (15%

Liabilities:

       

Interest sensitive contract liabilities- embedded derivatives- indexed annuities

    772,939     Discounted cash flow   Mortality     0-100% (1%
      Lapse     0-35% (4%
      Withdrawal     0-5% (4%
      Option budget projection     2-4% (3%

Interest sensitive contract liabilities- embedded derivatives- variable annuities

    130,343     Discounted cash flow   Mortality     0-100% (1%
      Lapse     0-25% (5%
      Withdrawal     0-7% (4%
      Own Credit     0-1% (1%
      Long-term volatility     0-27% (16%

The Company recognizes transfers of financial instruments into and out of levels within the fair value hierarchy at the beginning of the quarter in which the actual event or change in circumstances that caused the transfer occurs. Financial instruments transferred into Level 3 are due to a lack of observable market transactions and price information. Financial instruments are transferred out of Level 3 when circumstances change such that significant inputs can be corroborated with market observable data. This may be due to a significant increase in market activity for the financial instrument, a specific event, one or more significant input(s) becoming observable. Transfers out of Level 3 were primarily the result of the Company using observable pricing information or a third party pricing quotation that appropriately reflects the fair value of those financial instruments, without the need for adjustment based on the Company’s own assumptions regarding the characteristics of a specific financial instrument or the current liquidity in the market. In addition, certain transfers out of Level 3 were also due to increased observations of market transactions and price information for those financial instruments. Transfers from Level 1 to Level 2 are due to the lack of observable market data when pricing these securities, while transfers from Level 2 to Level 1 are due to an increase in the availability of market observable data in an active market. During the three months ended March 31, 2012 and 2011, transfers between Levels 1 and 2 were not material.

The tables below provide a summary of the changes in fair value of Level 3 assets and liabilities for the three months ended March 31, 2012, as well as the portion of gains or losses included in income for the three months ended March 31, 2012 attributable to unrealized gains or losses related to those assets and liabilities still held at March 31, 2012 (dollars in thousands):

 

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For the three months ended March 31, 2012:    Fixed maturity securities - available-for-sale  
   Corporate
securities
    Residential
mortgage-
backed
securities
    Asset-backed
securities
    Commercial
mortgage-
backed
securities
    State
and  political
subdivision
securities
 

Fair value, beginning of period

   $ 974,169     $ 81,655     $ 193,492     $ 115,976     $ 10,373  

Total gains/losses (realized/unrealized)

          

Included in earnings, net:

          

Investment income, net of related expenses

     30       110       249       588       (5

Investment related gains (losses), net

     (585     279       (670     (12,075     (4

Claims & other policy benefits

     —          —          —          —          —     

Interest credited

     —          —          —          —          —     

Policy acquisition costs and other insurance expenses

     —          —          —          —          —     

Included in other comprehensive income

     (682     1,580       6,696       13,521       406  

Purchases(1)

     21,161       244       —          —          —     

Sales(1)

     (9,408     (8,004     —          —          —     

Settlements(1)

     (20,875     (1,800     (3,865     —          (23

Transfers into Level 3

     17,444       —          1,080       10,846       —     

Transfers out of Level 3

     (3,583     (19,629     (50,620     (10,178     (5,508
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fair value, end of period

   $ 977,671     $ 54,435     $ 146,362     $ 118,678     $ 5,239  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period

          

Included in earnings, net:

          

Investment income, net of related expenses

   $ 30     $ 106     $ 249     $ 588     $ (5

Investment related gains (losses), net

     (727     (108     (607     (12,075     —     

Claims & other policy benefits

     —          —          —          —          —     

Interest credited

     —          —          —          —          —     

Policy acquisition costs and other insurance expenses

     —          —          —          —          —     

 

For the three months ended March 31, 2012 (continued):    Funds withheld
at interest-
embedded
derivative
    Other invested
assets- other
equity securities
     Reinsurance
ceded receivable-
embedded
derivative
    Interest sensitive
contract liabilities
embedded
derivative
 

Fair value, beginning of period

   $ (361,456   $ 11,489      $ 4,945     $ (1,028,241

Total gains/losses (realized/unrealized)

         

Included in earnings, net:

         

Investment income, net of related expenses

     —          —           —          —     

Investment related gains (losses), net

     (9,428     —           —          146,375  

Claims & other policy benefits

     —          —           —          2,278  

Interest credited

     —          —           —          (21,193

Policy acquisition costs and other insurance expenses

     —          —           (1,329     —     

Included in other comprehensive income

     —          338        —          —     

Purchases(1)

     —          —           —          (23,590

Sales(1)

     —          —           —          —     

Settlements(1)

     —          —           (102     21,089  

Transfers into Level 3

     —          —           —          —     

Transfers out of Level 3

     —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Fair value, end of period

   $ (370,884   $ 11,827      $ 3,514     $ (903,282
  

 

 

   

 

 

    

 

 

   

 

 

 

Unrealized gains and losses recorded in earnings for the period relating to those Level 3 assets and liabilities that were still held at the end of the period

         

Included in earnings, net:

         

Investment income, net of related expenses

   $ —        $ —         $ —        $ —     

Investment related gains (losses), net

     (9,428     —           —          144,624  

Claims & other policy benefits

     —          —           —          2,037  

Interest credited

     —          —           —          (42,107

Policy acquisition costs and other insurance expenses

     —          —           (1,188     —     

 

(1) The amount reported within purchases, sales and settlements is the purchase price (for purchases) and the sales/settlement proceeds (for sales and settlements) based upon the actual date purchased or sold/settled. Items purchased and sold/settled in the same period are excluded from the rollforward. The Company had no issuances during the period.

The tables below provide a summary of the changes in fair value of Level 3 assets and liabilities for the three months ended March 31, 2011, as well as the portion of gains or losses included in income for the three months ended March 31, 2011

 

29


Table of Contents

attributable to unrealized gains or losses related to those assets and liabilities still held at March 31, 2011 (dollars in thousands):

 

For the three months ended March 31, 2011:    Fixed maturity securities - available-for-sale  
   Corporate
securities
    Residential
mortgage-
backed
securities
    Asset-
backed
securities
    Commercial
mortgage-
backed
securities
 

Fair value, beginning of period

   $ 872,179     $ 183,291     $ 228,558     $ 147,556  

Total gains/losses (realized/unrealized)

        

Included in earnings, net:

        

Investment income, net of related expenses

     88       260       582       558  

Investment related gains (losses), net

     420       (357     844       (489

Claims & other policy benefits

     —          —          —          —     

Interest credited

     —          —          —          —     

Policy acquisition costs and other insurance expenses

     —          —          —          —     

Included in other comprehensive income

     222       7,394       4,231       33,141  

Purchases (1)

     100,202       453       4,872       2,613  

Sales(1)