2013 Q3 10-Q
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 September 30, 2013
  
 
 
  
 
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                  
  
(IRS employer
of incorporation or organization)  
  
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 October 31, 2013, 70,586,106 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
  
  
 
 
 
 
 
  
  
 
 
 
 
  
  
 
 
 
 
  
  
 
 
 
 
  
  
 
 
 
 
  
  
 
 
 
2
  
  
 
 
 
3
  
  
 
 
 
4
  
  
 
 
 
 
  
  
 
 
 
 
1
  
  
 
 
 
1A
  
  
 
 
 
2
  
  
 
 
 
6
  
  
 
 
 
 
  
  
 
 
 
 
  
  

2
Table of Contents

PART I - FINANCIAL INFORMATION


REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
September 30,
2013
 
December 31,
2012
 
 
(Dollars in thousands, except share data)
 
Assets
 
 
 
 
Fixed maturity securities:
 
 
 
 
Available-for-sale at fair value (amortized cost of $19,917,350 and $19,559,432)
 
$
21,289,108

 
$
22,291,614

Mortgage loans on real estate (net of allowances of $7,669 and $11,580)
 
2,488,582

 
2,300,587

Policy loans
 
1,244,878

 
1,278,175

Funds withheld at interest
 
5,739,872

 
5,594,182

Short-term investments
 
44,192

 
288,082

Other invested assets
 
1,116,391

 
1,159,543

Total investments
 
31,923,023

 
32,912,183

Cash and cash equivalents
 
1,423,235

 
1,259,892

Accrued investment income
 
262,330

 
201,344

Premiums receivable and other reinsurance balances
 
1,252,610

 
1,356,087

Reinsurance ceded receivables
 
592,948

 
620,901

Deferred policy acquisition costs
 
3,533,932

 
3,619,274

Other assets
 
538,477

 
390,757

Total assets
 
$
39,526,555

 
$
40,360,438

Liabilities and Stockholders’ Equity
 
 
 
 
Future policy benefits
 
$
11,873,306

 
$
11,372,856

Interest-sensitive contract liabilities
 
12,868,425

 
13,353,502

Other policy claims and benefits
 
3,440,371

 
3,160,250

Other reinsurance balances
 
264,023

 
233,630

Deferred income taxes
 
1,975,819

 
2,120,501

Other liabilities
 
510,079

 
742,249

Long-term debt
 
2,214,170

 
1,815,253

Collateral finance facility
 
484,712

 
652,010

Total liabilities
 
33,630,905

 
33,450,251

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, 79,137,758 shares issued at September 30, 2013 and December 31, 2012
 
791

 
791

Additional paid-in-capital
 
1,778,307

 
1,755,421

Retained earnings
 
3,544,632

 
3,357,255

Treasury stock, at cost - 8,594,734 and 5,210,427 shares
 
(528,081
)
 
(312,182
)
Accumulated other comprehensive income
 
1,100,001

 
2,108,902

Total stockholders’ equity
 
5,895,650

 
6,910,187

Total liabilities and stockholders’ equity
 
$
39,526,555

 
$
40,360,438

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 September 30,
 
Nine months ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Revenues:
 
(Dollars in thousands, except per share data)
Net premiums
 
$
2,026,180

 
$
1,912,746

 
$
6,041,029

 
$
5,726,889

Investment income, net of related expenses
 
369,366

 
396,781

 
1,238,731

 
1,066,055

Investment related gains (losses), net:
 
 
 
 
 
 
 
 
Other-than-temporary impairments on fixed maturity securities
 
(391
)
 
(1,996
)
 
(10,396
)
 
(11,562
)
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income
 
59

 
(559
)
 
(247
)
 
(7,618
)
Other investment related gains (losses), net
 
(76,133
)
 
78,608

 
76,792

 
162,554

Total investment related gains (losses), net
 
(76,465
)
 
76,053

 
66,149

 
143,374

Other revenues
 
70,734

 
63,501

 
235,650

 
181,491

Total revenues
 
2,389,815

 
2,449,081

 
7,581,559

 
7,117,809

 
 
Benefits and Expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
1,714,899

 
1,662,625

 
5,434,383

 
4,868,220

Interest credited
 
59,939

 
130,341

 
303,767

 
285,080

Policy acquisition costs and other insurance expenses
 
268,081

 
318,106

 
995,943

 
961,679

Other operating expenses
 
111,672

 
103,786

 
344,581

 
319,425

Interest expense
 
30,831

 
29,749

 
89,235

 
76,431

Collateral finance facility expense
 
2,698

 
2,995

 
7,886

 
8,840

Total benefits and expenses
 
2,188,120

 
2,247,602

 
7,175,795

 
6,519,675

 
Income before income taxes
 
201,695

 
201,479

 
405,764

 
598,134

Provision for income taxes
 
63,740

 
57,004

 
131,886

 
189,230

Net income
 
$
137,955

 
$
144,475

 
$
273,878

 
$
408,904

Earnings per share:
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
1.95

 
$
1.96

 
$
3.79

 
$
5.55

Diluted earnings per share
 
$
1.93

 
$
1.95

 
$
3.76

 
$
5.52

Dividends declared per share
 
$
0.30

 
$
0.24

 
$
0.78

 
$
0.60

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

4
Table of Contents

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
(Unaudited)
 
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Comprehensive income (loss)
 
 
 
 
 
 
 
 
Net income
 
$
137,955

 
$
144,475

 
$
273,878

 
$
408,904

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Change in foreign currency translation adjustments
 
27,139

 
36,248

 
(75,798
)
 
43,463

Change in net unrealized gains and losses on investments
 
(112,035
)
 
315,501

 
(938,216
)
 
483,242

Change in other-than-temporary impairment losses on fixed maturity securities
 
2,246

 
364

 
2,896

 
4,952

Changes in pension and other postretirement plan adjustments
 
517

 
336

 
2,217

 
1,837

Total other comprehensive income (loss), net of tax
 
(82,133
)
 
352,449

 
(1,008,901
)
 
533,494

Total comprehensive income (loss)
 
$
55,822

 
$
496,924

 
$
(735,023
)
 
$
942,398

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)
 
 
Nine months ended September 30,
 
 
2013
 
2012
 
 
 
(Dollars in thousands)
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
273,878

 
$
408,904

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Change in operating assets and liabilities:
 
 
 
 
Accrued investment income
 
(63,339
)
 
(60,684
)
Premiums receivable and other reinsurance balances
 
81,189

 
(102,447
)
Deferred policy acquisition costs
 
56,286

 
(70,107
)
Reinsurance ceded receivable balances
 
49,286

 
2,240

Future policy benefits, other policy claims and benefits, and other reinsurance balances
 
1,005,756

 
1,406,844

Deferred income taxes
 
276,372

 
(99,200
)
Other assets and other liabilities, net
 
(293,106
)
 
225,749

Amortization of net investment premiums, discounts and other
 
(70,687
)
 
(61,644
)
Investment related gains, net
 
(66,149
)
 
(143,374
)
Gain on repurchase of collateral finance facility securities
 
(46,506
)
 
—

Excess tax benefits from share-based payment arrangement
 
(2,410
)
 
262

Other, net
 
50,460

 
22,533

Net cash provided by operating activities
 
1,251,030

 
1,529,076

Cash Flows from Investing Activities:
 
 
 
 
Sales of fixed maturity securities available-for-sale
 
2,838,099

 
3,970,569

Maturities of fixed maturity securities available-for-sale
 
118,951

 
122,405

Purchases of fixed maturity securities available-for-sale
 
(3,496,639
)
 
(4,660,131
)
Cash invested in mortgage loans
 
(467,429
)
 
(350,823
)
Cash invested in policy loans
 
—

 
(8,032
)
Cash invested in funds withheld at interest
 
(70,753
)
 
(81,602
)
Principal payments on mortgage loans on real estate
 
262,226

 
85,921

Principal payments on policy loans
 
33,314

 
24,934

Purchase of a business, net of cash acquired of $9,709
 
(2,805
)
 
—

Change in short-term investments
 
235,260

 
98,007

Change in other invested assets
 
35,341

 
(227,881
)
Net cash used in investing activities
 
(514,435
)
 
(1,026,633
)
Cash Flows from Financing Activities:
 
 
 
 
Dividends to stockholders
 
(56,465
)
 
(44,220
)
Repurchase and repayment of collateral finance facility securities
 
(119,255
)
 
—

Proceeds from long-term debt issuance
 
398,492

 
400,000

Debt issuance costs
 
(3,400
)
 
(6,255
)
Purchases of treasury stock
 
(269,204
)
 
(6,924
)
Excess tax benefits from share-based payment arrangement
 
2,410

 
(262
)
Exercise of stock options, net
 
9,212

 
4,096

Change in cash collateral for derivatives and other arrangements
 
(68,635
)
 
(62,896
)
Deposits on universal life and other investment type policies and contracts
 
120,250

 
89,458

Withdrawals on universal life and other investment type policies and contracts
 
(550,122
)
 
(249,190
)
Net cash (used in) provided by financing activities
 
(536,717
)
 
123,807

Effect of exchange rate changes on cash
 
(36,535
)
 
14,610

Change in cash and cash equivalents
 
163,343

 
640,860

Cash and cash equivalents, beginning of period
 
1,259,892

 
962,870

Cash and cash equivalents, end of period
 
$
1,423,235

 
$
1,603,730

Supplementary information:
 
 
 
 
Cash paid for interest
 
$
75,003

 
$
76,514

Cash paid for income taxes, net of refunds
 
$
100,429

 
$
81,391

Business purchase information - See Note 12 - "Financing and Other Activities"
 
 
 
 
Non-cash supplementary information - See Note 4 - "Investments"
 
 
 
 
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, these financial statements 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 nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013. 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, all intercompany accounts and transactions have been eliminated. They should be read in conjunction with the Company’s 2012 Annual Report on Form 10-K (“2012 Annual Report”) filed with the Securities and Exchange Commission (“SEC”) on March 1, 2013.
 
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 September 30,
 
Nine months ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Earnings:
 
 
 
 
 
 
 
 
Net income (loss) (numerator for basic and diluted calculations)
 
$
137,955

 
$
144,475

 
$
273,878

 
$
408,904

Shares:
 
 
 
 
 
 
 
 
Weighted average outstanding shares (denominator for basic calculation)
 
70,865

 
73,776

 
72,342

 
73,690

Equivalent shares from outstanding stock options
 
526

 
362

 
498

 
388

Denominator for diluted calculation
 
71,391

 
74,138

 
72,840

 
74,078

Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
1.95

 
$
1.96

 
$
3.79

 
$
5.55

Diluted
 
$
1.93

 
$
1.95

 
$
3.76

 
$
5.52

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 September 30, 2013, no stock options and approximately 0.7 million performance contingent shares were excluded from the calculation. For the three months ended September 30, 2012, approximately 0.7 million stock options and approximately 0.7 million performance contingent shares were excluded from the calculation. Year-to-date amounts for equivalent shares from outstanding stock options and performance contingent shares are the weighted average of the individual quarterly amounts.

7
Table of Contents

3.
Accumulated Other Comprehensive Income
The balance of and changes in each component of accumulated other comprehensive income (loss) (“AOCI”) for the nine months ended September 30, 2013 and 2012 are as follows (dollars in thousands):
 
 
 
Accumulated Other Comprehensive Income (Loss), Net of Income Tax
 
 
Accumulated
Currency
Translation
Adjustments
 
Unrealized
Appreciation
(Depreciation)
of Investments(1)
 
Pension and
Postretirement
Benefits
 
Total
Balance, December 31, 2012
 
$
267,475

 
$
1,877,657

 
$
(36,230
)
 
$
2,108,902

Other comprehensive income (loss) before reclassifications
 
(75,798
)
 
(936,847
)
 
(82
)
 
(1,012,727
)
Amounts reclassified to AOCI
 
—

 
1,527

 
2,299

 
3,826

Net current-period other comprehensive income (loss)
 
(75,798
)
 
(935,320
)
 
2,217

 
(1,008,901
)
Balance, September 30, 2013
 
$
191,677

 
$
942,337

 
$
(34,013
)
 
$
1,100,001

 
 
 
Accumulated Other Comprehensive Income (Loss), Net of Income Tax
 
 
Accumulated
Currency
Translation
Adjustments
 
Unrealized
Appreciation
(Depreciation)
of Investments(1)
 
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
 
43,463

 
488,194

 
1,837

 
533,494

Balance, September 30, 2012
 
$
273,258

 
$
1,907,512

 
$
(29,123
)
 
$
2,151,647

 
(1)
Includes cash flow hedges. See Note 5 - “Derivative Instruments” for additional information on cash flow hedges.
The following table presents the amounts of AOCI reclassifications for the three and nine months ended September 30, 2013 (dollars in thousands):
 
 
Amount Reclassified from AOCI
 
 
Details about AOCI Components
 
Three months ended September 30, 2013
 
Nine months ended September 30, 2013
 
Affected Line Item in Statement of Income         
Unrealized gains and losses on available-for-sale securities
 
$
(12,736
)
 
$
11,122

 
Investment related gains (losses), net
Gains and losses on cash flow hedge - interest rate swap
 
291

 
796

 
Investment income
Deferred policy acquisition costs attributed to unrealized gains and losses(1)
 
(602
)
 
(15,433
)
 
 
 
 
(13,047
)
 
(3,515
)
 
Total before tax
 
 
5,009

 
1,988

 
Tax expense
 
 
$
(8,038
)
 
$
(1,527
)
 
Net of tax
Amortization of unrealized pension and postretirement benefits:
 
 
 
 
 
 
Prior service cost(2)
 
$
(152
)
 
$
(459
)
 
 
Actuarial gains/(losses)(2)
 
(1,087
)
 
(3,078
)
 
 
 
 
(1,239
)
 
(3,537
)
 
Total before tax
 
 
434

 
1,238

 
Tax benefit
 
 
$
(805
)
 
$
(2,299
)
 
Net of tax
 
 
 
 


 
 
Total reclassifications for the period
 
$
(8,843
)
 
$
(3,826
)
 
Net of tax
 
(1)
This AOCI component is included in the computation of the deferred policy acquisition cost. See Note 8 – “Deferred Policy Acquisition Costs” of the 2012 Annual Report for additional details.
(2)
These AOCI components are included in the computation of the net periodic pension cost. See Note 9 – “Employee Benefit Plans” for additional details.

8
Table of Contents

4.
Investments
Fixed Maturity and Equity Securities Available-for-Sale
The following tables provide information relating to investments in fixed maturity and equity securities by sector as of September 30, 2013 and December 31, 2012 (dollars in thousands):
September 30, 2013:
 
Amortized
 
Unrealized
 
Unrealized
 
Estimated Fair
 
% of
 
Other-than-
temporary impairments
 
 
Cost
 
Gains
 
Losses
 
Value
 
Total
 
in AOCI
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
$
11,505,673

 
$
637,691

 
$
208,802

 
$
11,934,562

 
56.1
%
 
$
—

Canadian and Canadian provincial governments
 
2,719,147

 
785,840

 
13,831

 
3,491,156

 
16.4

 
—

Residential mortgage-backed securities
 
922,581

 
44,948

 
15,691

 
951,838

 
4.5

 
(300
)
Asset-backed securities
 
883,495

 
19,264

 
17,481

 
885,278

 
4.1

 
(2,259
)
Commercial mortgage-backed securities
 
1,371,473

 
102,207

 
20,566

 
1,453,114

 
6.8

 
(1,609
)
U.S. government and agencies
 
413,254

 
20,412

 
2,819

 
430,847

 
2.0

 
—

State and political subdivisions
 
288,757

 
22,626

 
13,654

 
297,729

 
1.4

 
—

Other foreign government, supranational and foreign government-sponsored enterprises
 
1,812,970

 
50,246

 
18,632

 
1,844,584

 
8.7

 
—

Total fixed maturity securities
 
$
19,917,350

 
$
1,683,234

 
$
311,476

 
$
21,289,108

 
100.0
%
 
$
(4,168
)
Non-redeemable preferred stock
 
$
80,985

 
$
5,187

 
$
3,333

 
$
82,839

 
56.4
%
 
 
Other equity securities
 
68,123

 
—

 
4,052

 
64,071

 
43.6

 
 
Total equity securities
 
$
149,108

 
$
5,187

 
$
7,385

 
$
146,910

 
100.0
%
 
 
 
December 31, 2012:
 
Amortized
 
Unrealized
 
Unrealized
 
Estimated Fair
 
% of
 
Other-than-
temporary impairments
 
 
Cost
 
Gains
 
Losses
 
Value
 
Total
 
in AOCI
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
$
11,333,431

 
$
1,085,973

 
$
39,333

 
$
12,380,071

 
55.5
%
 
$
—

Canadian and Canadian provincial governments
 
2,676,777

 
1,372,731

 
174

 
4,049,334

 
18.2

 
—

Residential mortgage-backed securities
 
969,267

 
76,520

 
3,723

 
1,042,064

 
4.7

 
(241
)
Asset-backed securities
 
700,455

 
19,898

 
28,798

 
691,555

 
3.1

 
(2,259
)
Commercial mortgage-backed securities
 
1,608,376

 
142,369

 
51,842

 
1,698,903

 
7.6

 
(6,125
)
U.S. government and agencies
 
231,256

 
33,958

 
24

 
265,190

 
1.2

 
—

State and political subdivisions
 
270,086

 
38,058

 
5,646

 
302,498

 
1.4

 
—

Other foreign government, supranational and foreign government-sponsored enterprises
 
1,769,784

 
94,929

 
2,714

 
1,861,999

 
8.3

 
—

Total fixed maturity securities
 
$
19,559,432

 
$
2,864,436

 
$
132,254

 
$
22,291,614

 
100.0
%
 
$
(8,625
)
Non-redeemable preferred stock
 
$
68,469

 
$
6,542

 
$
170

 
$
74,841

 
33.6
%
 
 
Other equity securities
 
148,577

 
416

 
1,134

 
147,859

 
66.4

 
 
Total equity securities
 
$
217,046

 
$
6,958

 
$
1,304

 
$
222,700

 
100.0
%
 
 
The Company enters into various collateral arrangements that require both the pledging and acceptance of fixed maturity securities as collateral. The Company pledged fixed maturity securities as collateral to derivative and reinsurance counterparties with an amortized cost of $53.8 million and $16.9 million, and an estimated fair value of $54.5 million and $17.0 million, as of September 30, 2013 and December 31, 2012 respectively. The pledged fixed maturity securities are included in fixed maturity securities, available-for-sale in the condensed consolidated balance sheets as of September 30, 2013, and are included in other invested assets in the condensed consolidated balance sheets as of December 31, 2012. Securities with an amortized cost of $7,954.6 million and $7,549.0 million, and an estimated fair value of $8,260.6 million and $7,913.8 million, as of September 30, 2013 and December 31, 2012, respectively, were held in trust to satisfy collateral requirements under certain third-party reinsurance treaties.

9
Table of Contents

The Company received fixed maturity securities as collateral from derivative and reinsurance counterparties with an estimated fair value of $92.2 million and $95.6 million, as of September 30, 2013 and December 31, 2012, respectively. The collateral is held in separate custodial accounts and is not recorded on the Company’s condensed consolidated balance sheets. Subject to certain constraints, the Company is permitted by contract to sell or re-pledge this collateral; however, as of September 30, 2013 and December 31, 2012, none of the collateral had been sold or re-pledged.
As of September 30, 2013, the Company held securities with a fair value of $1,238.5 million that were guaranteed or issued by the Canadian province of Ontario and $1,479.4 million that were guaranteed or issued by the Canadian province of Quebec, both of which exceeded 10% of total stockholders’ equity. As of December 31, 2012, the Company held securities with a fair value of $1,400.0 million that were guaranteed or issued by the Canadian province of Ontario and $1,785.0 million that were guaranteed or issued by the Canadian province of Quebec, both of which exceeded 10% of total stockholders’ equity.
The amortized cost and estimated fair value of fixed maturity securities available-for-sale at September 30, 2013 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. Asset and mortgage-backed securities are shown separately in the table below, as they are not due at a single maturity date. At September 30, 2013, 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
 
$
416,152

 
$
421,874

Due after one year through five years
 
3,712,227

 
3,890,251

Due after five years through ten years
 
6,800,712

 
7,027,350

Due after ten years
 
5,810,710

 
6,659,403

Asset and mortgage-backed securities
 
3,177,549

 
3,290,230

Total
 
$
19,917,350

 
$
21,289,108

The tables below show the major industry types of the Company’s corporate fixed maturity holdings as of September 30, 2013 and December 31, 2012 (dollars in thousands):
 
September 30, 2013:
 
 
 
Estimated
 
 
 
 
Amortized Cost    
 
Fair Value
 
% of Total           
Finance
 
$
3,728,120

 
$
3,870,583

 
32.4
%
Industrial
 
5,926,283

 
6,125,796

 
51.3

Utility
 
1,829,273

 
1,916,477

 
16.1

Other
 
21,997

 
21,706

 
0.2

Total
 
$
11,505,673

 
$
11,934,562

 
100.0
%
 
 
 
 
 
 
 
December 31, 2012:
 
 
 
Estimated
 
 
 
 
Amortized Cost
 
Fair Value
 
% of Total
Finance
 
$
3,619,455

 
$
3,900,152

 
31.5
%
Industrial
 
5,881,967

 
6,443,846

 
52.0

Utility
 
1,799,658

 
2,002,611

 
16.2

Other
 
32,351

 
33,462

 
0.3

Total
 
$
11,333,431

 
$
12,380,071

 
100.0
%

10
Table of Contents

Other-Than-Temporary Impairments
As discussed in Note 2 – “Summary of Significant Accounting Policies” of the 2012 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 September 30,
 
 
 
2013
 
2012
Balance, beginning of period
 
$
13,324

 
$
45,903

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

 
—

Additional impairments - credit loss OTTI recognized on securities previously impaired
 
134

 
1,306

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

 
(2,622
)
Credit loss OTTI previously recognized on securities which matured, paid down, prepaid or were sold during the period
 
(1,762
)
 
(20,725
)
Balance, end of period
 
$
11,696

 
$
23,862

 
 
 
 
 
 
 
Nine months ended September 30,
 
 
2013
 
2012
Balance, beginning of period
 
$
16,675

 
$
63,947

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

 
1,962

Additional impairments - credit loss OTTI recognized on securities previously impaired
 
134

 
10,187

Credit loss OTTI previously recognized on securities impaired to fair value during the period
 
(1,449
)
 
(22,291
)
Credit loss OTTI previously recognized on securities which matured, paid down, prepaid or were sold during the period
 
(3,664
)
 
(29,943
)
Balance, end of period
 
$
11,696

 
$
23,862

Purchased Credit Impaired Fixed Maturity Securities Available-for-Sale
Securities acquired with evidence of credit quality deterioration since origination and for which it is probable at the acquisition date that the Company will be unable to collect all contractually required payments are classified as purchased credit impaired securities. For each security, the excess of the cash flows expected to be collected as of the acquisition date over its acquisition date fair value is referred to as the accretable yield and is recognized as net investment income on an effective yield basis. At the date of acquisition, the timing and amount of the cash flows expected to be collected was determined based on a best estimate using key assumptions, such as interest rates, default rates and prepayment speeds. If subsequently, based on current information and events, it is probable that there is a significant increase in cash flows previously expected to be collected or if actual cash flows are significantly greater than cash flows previously expected to be collected, the accretable yield is adjusted prospectively. The excess of the contractually required payments (including interest) as of the acquisition date over the cash flows expected to be collected as of the acquisition date is referred to as the nonaccretable difference, and this amount is not expected to be realized as net investment income. Decreases in cash flows expected to be collected can result in OTTI.
The following tables present information on the Company’s purchased credit impaired securities, which are included in fixed maturity securities available-for-sale (dollars in thousands):
 
 
 
September 30, 2013
 
December 31, 2012      
Outstanding principal and interest balance(1)
 
$
186,379

 
$
108,831

Carrying value, including accrued interest(2)
 
$
135,862

 
$
84,765

 
(1)
Represents the contractually required payments which is the sum of contractual principal, whether or not currently due, and accrued interest.
(2)
Estimated fair value plus accrued interest.

11
Table of Contents

The following table presents information about purchased credit impaired investments acquired during the periods, as of their acquisition dates (dollars in thousands).
 
 
Nine months ended September 30,
 
2013
 
2012
Contractually required payments (including interest)
$
126,869

 
$
50,268

Cash flows expected to be collected(1)
101,205

 
42,316

Fair value of investments acquired
66,880

 
30,853

 
(1)
Represents undiscounted principal and interest cash flow expectations at the date of acquisition.
The following table presents activity for the accretable yield on purchased credit impaired securities for the three and nine months ended September 30, 2013 and 2012 (dollars in thousands):
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2013
 
2012
 
2013
 
2012
Balance, beginning of period
$
66,269

 
$
—

 
$
39,239

 
$
—

Investments purchased
4,374

 
11,463

 
34,325

 
11,463

Accretion
(1,952
)
 
(6
)
 
(5,774
)
 
(6
)
Disposals
—

 
—

 
(832
)
 
—

Reclassification from nonaccretable difference
1,388

 
—

 
3,121

 
—

Balance, end of period
$
70,079

 
$
11,457

 
$
70,079

 
$
11,457

Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale
The following table presents the total gross unrealized losses for the 1,397 and 567 fixed maturity and equity securities as of September 30, 2013 and December 31, 2012, respectively, where the estimated fair value had declined and remained below amortized cost by the indicated amount (dollars in thousands):
 
 
 
September 30, 2013
 
December 31, 2012
 
 
Gross
Unrealized
Losses
 
% of Total    
 
Gross
Unrealized
Losses
 
% of Total    
Less than 20%
 
$
286,594

 
89.9
%
 
$
54,951

 
41.2
%
20% or more for less than six months
 
6,325

 
2.0

 
734

 
0.5

20% or more for six months or greater
 
25,942

 
8.1

 
77,873

 
58.3

Total
 
$
318,861

 
100.0
%
 
$
133,558

 
100.0
%
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. 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.
The following tables present the estimated fair values and gross unrealized losses, including other-than-temporary impairment losses reported in AOCI, for 1,397 and 567 fixed maturity and equity securities that have estimated fair values below amortized cost as of September 30, 2013 and December 31, 2012, respectively (dollars in thousands). These investments are presented by class and grade of security, as well as the length of time the related fair value has remained below amortized cost.
 

12
Table of Contents

 
 
Less than 12 months
 
12 months or greater
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
September 30, 2013:
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
Investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
$
3,158,429

 
$
168,659

 
$
130,027

 
$
20,031

 
$
3,288,456

 
$
188,690

Canadian and Canadian provincial governments
 
140,648

 
12,530

 
6,898

 
1,301

 
147,546

 
13,831

Residential mortgage-backed securities
 
207,602

 
11,909

 
18,997

 
2,257

 
226,599

 
14,166

Asset-backed securities
 
270,863

 
4,602

 
53,786

 
5,571

 
324,649

 
10,173

Commercial mortgage-backed securities
 
188,153

 
6,565

 
22,435

 
5,968

 
210,588

 
12,533

U.S. government and agencies
 
72,032

 
2,658

 
3,958

 
161

 
75,990

 
2,819

State and political subdivisions
 
95,935

 
8,776

 
14,981

 
4,878

 
110,916

 
13,654

Other foreign government, supranational and foreign government-sponsored enterprises
 
644,427

 
17,479

 
10,589

 
1,153

 
655,016

 
18,632

Total investment grade securities
 
4,778,089

 
233,178

 
261,671

 
41,320

 
5,039,760

 
274,498

 
Non-investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
311,613

 
12,155

 
42,024

 
7,957

 
353,637

 
20,112

Residential mortgage-backed securities
 
53,633

 
1,068

 
2,254

 
457

 
55,887

 
1,525

Asset-backed securities
 
29,043

 
467

 
30,901

 
6,841

 
59,944

 
7,308

Commercial mortgage-backed securities
 
971

 
25

 
10,905

 
8,008

 
11,876

 
8,033

Total non-investment grade securities
 
395,260

 
13,715

 
86,084

 
23,263

 
481,344

 
36,978

Total fixed maturity securities
 
$
5,173,349

 
$
246,893

 
$
347,755

 
$
64,583

 
$
5,521,104

 
$
311,476

Non-redeemable preferred stock
 
$
42,338

 
$
3,331

 
$
1

 
$
2

 
$
42,339

 
$
3,333

Other equity securities
 
47,151

 
2,619

 
17,028

 
1,433

 
64,179

 
4,052

Total equity securities
 
$
89,489

 
$
5,950

 
$
17,029

 
$
1,435

 
$
106,518

 
$
7,385

 
 
Less than 12 months
 
12 months or greater
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
December 31, 2012:
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
Investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
$
786,203

 
$
13,276

 
$
108,187

 
$
17,386

 
$
894,390

 
$
30,662

Canadian and Canadian provincial governments
 
12,349

 
174

 
—

 
—

 
12,349

 
174

Residential mortgage-backed securities
 
22,288

 
97

 
19,394

 
3,199

 
41,682

 
3,296

Asset-backed securities
 
59,119

 
449

 
96,179

 
9,508

 
155,298

 
9,957

Commercial mortgage-backed securities
 
89,507

 
797

 
29,181

 
7,974

 
118,688

 
8,771

U.S. government and agencies
 
7,272

 
24

 
—

 
—

 
7,272

 
24

State and political subdivisions
 
20,602

 
1,514

 
11,736

 
4,132

 
32,338

 
5,646

Other foreign government, supranational and foreign government-sponsored enterprises
 
244,817

 
1,953

 
7,435

 
761

 
252,252

 
2,714

Total investment grade securities
 
1,242,157

 
18,284

 
272,112

 
42,960

 
1,514,269

 
61,244

 
Non-investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
181,168

 
3,170

 
39,123

 
5,501

 
220,291

 
8,671

Residential mortgage-backed securities
 
15,199

 
80

 
2,633

 
347

 
17,832

 
427

Asset-backed securities
 
3,421

 
26

 
31,938

 
18,815

 
35,359

 
18,841

Commercial mortgage-backed securities
 
3,317

 
764

 
68,405

 
42,307

 
71,722

 
43,071

Total non-investment grade securities
 
203,105

 
4,040

 
142,099

 
66,970

 
345,204

 
71,010

Total fixed maturity securities
 
$
1,445,262

 
$
22,324

 
$
414,211

 
$
109,930

 
$
1,859,473

 
$
132,254

Non-redeemable preferred stock
 
$
5,577

 
$
52

 
$
5,679

 
$
118

 
$
11,256

 
$
170

Other equity securities
 
85,374

 
1,134

 
—

 
—

 
85,374

 
1,134

Total equity securities
 
$
90,951

 
$
1,186

 
$
5,679

 
$
118

 
$
96,630

 
$
1,304


13
Table of Contents

As of September 30, 2013, 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. As of September 30, 2013, 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 fixed maturity and equity securities in the ordinary course of managing its portfolio to meet certain diversification, credit quality, asset-liability management and liquidity guidelines.
Unrealized losses on non-investment grade securities are principally related to high-yield corporate securities due to interest rate movements during the first nine months of 2013. As of September 30, 2013 and December 31, 2012, approximately $20.1 million and $8.7 million, respectively, of gross unrealized losses were associated with non-investment grade corporate securities. Unrealized losses on non-investment grade securities related to asset and mortgage-backed securities decreased significantly during 2013 driven principally by commercial mortgage-backed securities. As of September 30, 2013 and December 31, 2012, approximately $15.3 million and $61.5 million, respectively, of gross unrealized losses greater than 12 months were associated with non-investment grade asset and mortgage-backed securities. During the first nine months of 2013, commercial mortgage-backed securities benefited from improvement in delinquency rates and the Company sold several non-investment grade commercial mortgage-backed securities.

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 September 30,
 
Nine months ended September 30,
 
 
2013
 
2012
 
2013
 
2012
Fixed maturity securities available-for-sale
 
$
243,938

 
$
221,212

 
$
723,772

 
$
633,110

Mortgage loans on real estate
 
33,013

 
26,938

 
89,618

 
67,258

Policy loans
 
15,743

 
16,519

 
49,103

 
49,637

Funds withheld at interest
 
80,024

 
127,855

 
376,495

 
305,861

Short-term investments
 
374

 
960

 
1,609

 
3,027

Investment receivable
 
—

 
—

 
—

 
—

Other invested assets
 
9,411

 
13,117

 
36,712

 
35,803

Investment revenue
 
382,503

 
406,601

 
1,277,309

 
1,094,696

Investment expense
 
(13,137
)
 
(9,820
)
 
(38,578
)
 
(28,641
)
Investment income, net of related expenses
 
$
369,366

 
$
396,781

 
$
1,238,731

 
$
1,066,055

Investment Related Gains (Losses), Net
Investment related gains (losses), net consist of the following (dollars in thousands):
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2013
 
2012
 
2013
 
2012
Fixed maturities and equity securities available for sale:
 
 
 
 
 
 
 
Other-than-temporary impairment losses on fixed maturities
$
(391
)
 
$
(1,996
)
 
$
(10,396
)
 
$
(11,562
)
Portion of loss recognized in accumulated other comprehensive income (before taxes)
59

 
(559
)
 
(247
)
 
(7,618
)
Net other-than-temporary impairment losses on fixed maturities recognized in earnings
(332
)
 
(2,555
)
 
(10,643
)
 
(19,180
)
Impairment losses on equity securities
—

 
—

 
—

 
(3,025
)
Gain on investment activity
21,560

 
53,173

 
70,085

 
102,078

Loss on investment activity
(30,434
)
 
(6,668
)
 
(48,406
)
 
(23,090
)
Other impairment losses and change in mortgage loan provision
233

 
(10,301
)
 
(1,268
)
 
(14,382
)
Derivatives and other, net
(67,492
)
 
42,404

 
56,381

 
100,973

Total investment related gains (losses), net
$
(76,465
)
 
$
76,053

 
$
66,149

 
$
143,374


14
Table of Contents

The other-than-temporary impairment losses on fixed maturity securities in the third quarter and first nine months of 2013 were primarily due to the decision to sell certain subordinated commercial mortgage-backed securities. The other-than-temporary impairments in the first nine months of 2012 were primarily due to a decline in value of structured securities with exposure to commercial mortgages and general credit deterioration in select corporate and foreign securities. The decrease in derivatives and other in the third quarter was primarily due to a decrease in the fair value of embedded derivatives. The decrease in derivatives and other for the first nine months was primarily due to decreases in the fair value of free-standing interest rate swap derivatives due to the rising interest rate environment.
During the three months ended September 30, 2013 and 2012, the Company sold fixed maturity and equity securities with fair values of $410.4 million and $220.5 million at losses of $30.4 million and $6.7 million, respectively. During the nine months ended September 30, 2013 and 2012, the Company sold fixed maturity and equity securities with fair values of $872.2 million and $622.1 million at losses of $48.4 million and $23.1 million, respectively. The Company generally does not engage in short-term buying and selling of securities.
Securities Borrowing and Other
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 fair value of the borrowed securities as collateral, which consists of rights to reinsurance treaty cash flows. The Company had borrowed securities with an amortized cost of $87.5 million as of September 30, 2013 and December 31, 2012, which was equal to the fair value in both periods. The borrowed securities are used to provide collateral under an affiliated reinsurance transaction.
The Company also participates in a repurchase/reverse repurchase program in which securities, reflected as investments on the Company’s condensed consolidated balance sheets, are pledged to a third party. In return, the Company receives securities from the third party with an estimated fair value equal to a minimum of 100% of the securities pledged. The securities received are not reflected on the Company’s condensed consolidated balance sheets. As of September 30, 2013 the Company had pledged securities with an amortized cost of $292.4 million and an estimated fair value of $307.0 million, and in return the Company received securities with an estimated fair value of $347.5 million. As of December 31, 2012 the Company had pledged securities with an amortized cost of $290.2 million and an estimated fair value of $305.9 million, and in return the Company received securities with an estimated fair value of $342.0 million.

Mortgage Loans on Real Estate
Mortgage loans represented approximately 7.8% and 7.0% of the Company’s total investments as of September 30, 2013 and December 31, 2012. The Company makes mortgage loans on income producing properties, such as apartments, retail and office buildings, and light industrial facilities. Loan-to-value ratios at the time of loan approval are 75% or less. The distribution of mortgage loans, gross of valuation allowances, by property type is as follows as of September 30, 2013 and December 31, 2012 (dollars in thousands):
 
 
 
September 30, 2013
 
December 31, 2012
 
 
Recorded
Investment
 
% of Total
 
Recorded
Investment
 
% of Total
Apartment
 
$
290,678

 
11.7
%
 
$
229,266

 
9.9
%
Retail
 
796,144

 
31.9

 
669,958

 
29.0

Office building
 
854,870

 
34.2

 
825,406

 
35.7

Industrial
 
444,186

 
17.8

 
455,682

 
19.7

Other commercial
 
110,373

 
4.4

 
131,855

 
5.7

Total
 
$
2,496,251

 
100.0
%
 
$
2,312,167

 
100.0
%

15
Table of Contents

As of September 30, 2013 and December 31, 2012, the Company’s mortgage loans, gross of valuation allowances, were distributed throughout the United States as follows (dollars in thousands):
 
 
September 30, 2013
 
December 31, 2012
 
 
Recorded
Investment
 
% of Total
 
Recorded
Investment
 
% of Total
Pacific
 
$
658,054

 
26.4
%
 
$
593,589

 
25.7
%
South Atlantic
 
581,781

 
23.3

 
477,068

 
20.5

Mountain
 
260,794

 
10.4

 
233,174

 
10.1

Middle Atlantic
 
269,602

 
10.8

 
300,475

 
13.0

West North Central
 
181,937

 
7.3

 
168,063

 
7.3

East North Central
 
239,997

 
9.6

 
224,122

 
9.7

West South Central
 
155,061

 
6.2

 
161,451

 
7.0

East South Central
 
67,155

 
2.7

 
62,789

 
2.7

New England
 
81,870

 
3.3

 
91,436

 
4.0

Total
 
$
2,496,251

 
100.0
%
 
$
2,312,167

 
100.0
%
The maturities of the mortgage loans, gross of valuation allowances, as of September 30, 2013 and December 31, 2012 are as follows (dollars in thousands):
 
 
 
September 30, 2013
 
December 31, 2012
 
 
Recorded
Investment
 
% of Total
 
Recorded