2014 Q2 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 June 30, 2014
  
 
 
  
 
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 July 31, 2014, 68,562,030 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
  
  
 
 
 
 
  
PART II – OTHER INFORMATION
  
 
 
 
 
1
  
  
 
 
 
1A
  
  
 
 
 
2
  
  
 
 
 
6
  
  
 
 
 
 
  
  
 
 
 
 
  
  

2
Table of Contents

PART I - FINANCIAL INFORMATION


REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
 
June 30,
2014
 
December 31,
2013
 
 
(Dollars in thousands, except share data)
 
Assets
 
 
 
 
Fixed maturity securities:
 
 
 
 
Available-for-sale at fair value (amortized cost of $22,373,346 and $20,270,734)
 
$
24,480,396

 
$
21,474,136

Mortgage loans on real estate (net of allowances of $9,692 and $10,106)
 
2,555,800

 
2,486,680

Policy loans
 
1,250,635

 
1,244,469

Funds withheld at interest
 
5,940,521

 
5,771,467

Short-term investments
 
45,596

 
139,395

Other invested assets
 
1,128,375

 
1,324,960

Total investments
 
35,401,323

 
32,441,107

Cash and cash equivalents
 
1,378,117

 
923,647

Accrued investment income
 
279,368

 
267,908

Premiums receivable and other reinsurance balances
 
1,559,526

 
1,439,528

Reinsurance ceded receivables
 
614,203

 
594,515

Deferred policy acquisition costs
 
3,368,343

 
3,517,796

Other assets
 
570,171

 
489,972

Total assets
 
$
43,171,051

 
$
39,674,473

Liabilities and Stockholders’ Equity
 
 
 
 
Future policy benefits
 
$
13,785,532

 
$
11,866,776

Interest-sensitive contract liabilities
 
12,686,025

 
12,947,557

Other policy claims and benefits
 
3,996,737

 
3,571,761

Other reinsurance balances
 
258,023

 
275,138

Deferred income taxes
 
2,232,821

 
1,837,577

Other liabilities
 
716,157

 
541,035

Short-term debt
 
110,000

 
—

Long-term debt
 
2,214,705

 
2,214,350

Collateral finance facility
 
482,092

 
484,752

Total liabilities
 
36,482,092

 
33,738,946

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 June 30, 2014 and December 31, 2013
 
791

 
791

Additional paid-in-capital
 
1,783,856

 
1,777,906

Retained earnings
 
3,941,777

 
3,659,938

Treasury stock, at cost - 10,327,655 and 8,369,540 shares
 
(666,125
)
 
(508,715
)
Accumulated other comprehensive income
 
1,628,660

 
1,005,607

Total stockholders’ equity
 
6,688,959

 
5,935,527

Total liabilities and stockholders’ equity
 
$
43,171,051

 
$
39,674,473

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 June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues:
 
(Dollars in thousands, except per share data)
Net premiums
 
$
2,183,160

 
$
2,035,156

 
$
4,283,797

 
$
4,014,849

Investment income, net of related expenses
 
410,607

 
444,234

 
814,982

 
869,365

Investment related gains (losses), net:
 
 
 
 
 
 
 
 
Other-than-temporary impairments on fixed maturity securities
 
(870
)
 
(9,803
)
 
(1,173
)
 
(10,005
)
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income
 
—

 
(306
)
 
—

 
(306
)
Other investment related gains (losses), net
 
119,397

 
58,352

 
204,271

 
152,925

Total investment related gains (losses), net
 
118,527

 
48,243

 
203,098

 
142,614

Other revenues
 
120,726

 
63,009

 
188,316

 
164,916

Total revenues
 
2,833,020

 
2,590,642

 
5,490,193

 
5,191,744

 
 
Benefits and Expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
1,841,885

 
2,030,574

 
3,685,562

 
3,719,484

Interest credited
 
115,962

 
118,345

 
226,556

 
243,828

Policy acquisition costs and other insurance expenses
 
409,374

 
370,505

 
764,247

 
727,862

Other operating expenses
 
127,462

 
113,408

 
238,398

 
232,909

Interest expense
 
35,211

 
29,918

 
70,295

 
58,404

Collateral finance facility expense
 
2,591

 
2,650

 
5,160

 
5,188

Total benefits and expenses
 
2,532,485

 
2,665,400

 
4,990,218

 
4,987,675

 
Income (loss) before income taxes
 
300,535

 
(74,758
)
 
499,975

 
204,069

Provision for income taxes
 
102,239

 
(25,146
)
 
165,015

 
68,146

Net income (loss)
 
$
198,296

 
$
(49,612
)
 
$
334,960

 
$
135,923

Earnings per share:
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
2.87

 
$
(0.69
)
 
$
4.80

 
$
1.86

Diluted earnings per share
 
$
2.84

 
$
(0.69
)
 
$
4.75

 
$
1.85

Dividends declared per share
 
$
0.30

 
$
0.24

 
$
0.60

 
$
0.48

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
(Unaudited)
 
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Comprehensive income (loss)
 
(Dollars in thousands)
Net income (loss)
 
$
198,296

 
$
(49,612
)
 
$
334,960

 
$
135,923

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Change in foreign currency translation adjustments
 
42,643

 
(88,832
)
 
(40
)
 
(102,937
)
Change in net unrealized gains and losses on investments
 
304,997

 
(706,848
)
 
620,381

 
(826,181
)
Change in other-than-temporary impairment losses on fixed maturity securities
 
1,248

 
199

 
1,698

 
650

Changes in pension and other postretirement plan adjustments
 
273

 
875

 
1,014

 
1,700

Total other comprehensive income (loss), net of tax
 
349,161

 
(794,606
)
 
623,053

 
(926,768
)
Total comprehensive income (loss)
 
$
547,457

 
$
(844,218
)
 
$
958,013

 
$
(790,845
)
See accompanying notes to condensed consolidated financial statements (unaudited).

5
Table of Contents

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
 
Six months ended June 30,
 
 
2014
 
2013
 
 
 (Dollars in thousands)
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
334,960

 
$
135,923

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Change in operating assets and liabilities:
 
 
 
 
Accrued investment income
 
(9,588
)
 
(35,457
)
Premiums receivable and other reinsurance balances
 
(104,002
)
 
(5,100
)
Deferred policy acquisition costs
 
165,257

 
104,002

Reinsurance ceded receivable balances
 
(27,310
)
 
64,814

Future policy benefits, other policy claims and benefits, and other reinsurance balances
 
581,812

 
806,172

Deferred income taxes
 
111,735

 
69,071

Other assets and other liabilities, net
 
34,577

 
(165,129
)
Amortization of net investment premiums, discounts and other
 
(51,521
)
 
(43,662
)
Investment related gains, net
 
(203,098
)
 
(142,614
)
Gain on repurchase of collateral finance facility securities
 
—

 
(46,506
)
Excess tax benefits from share-based payment arrangement
 
(1,268
)
 
(2,420
)
Other, net
 
76,256

 
66,027

Net cash provided by operating activities
 
907,810

 
805,121

Cash Flows from Investing Activities:
 
 
 
 
Sales of fixed maturity securities available-for-sale
 
2,756,942

 
1,898,833

Maturities of fixed maturity securities available-for-sale
 
239,279

 
62,734

Purchases of fixed maturity securities available-for-sale
 
(3,302,047
)
 
(2,487,016
)
Cash invested in mortgage loans
 
(266,002
)
 
(244,939
)
Cash invested in policy loans
 
(52,913
)
 
(17
)
Cash invested in funds withheld at interest
 
(39,856
)
 
(60,156
)
Principal payments on mortgage loans on real estate
 
200,601

 
150,098

Principal payments on policy loans
 
46,747

 
32,940

Purchases of property and equipment
 
(43,295
)
 
—

Change in short-term investments
 
93,798

 
241,136

Change in other invested assets
 
271,373

 
(1,591
)
Net cash used in investing activities
 
(95,373
)
 
(407,978
)
Cash Flows from Financing Activities:
 
 
 
 
Dividends to stockholders
 
(41,955
)
 
(35,169
)
Repurchase and repayment of collateral finance facility securities
 
—

 
(112,000
)
Net change in short-term debt
 
110,000

 
120,000

Purchases of treasury stock
 
(179,592
)
 
(234,690
)
Excess tax benefits from share-based payment arrangement
 
1,268

 
2,420

Exercise of stock options, net
 
9,578

 
11,439

Change in cash collateral for derivatives and other arrangements
 
47,561

 
(31,858
)
Deposits on universal life and other investment type policies and contracts
 
51,257

 
39,706

Withdrawals on universal life and other investment type policies and contracts
 
(374,567
)
 
(397,033
)
Net cash used in financing activities
 
(376,450
)
 
(637,185
)
Effect of exchange rate changes on cash
 
18,483

 
(46,231
)
Change in cash and cash equivalents
 
454,470

 
(286,273
)
Cash and cash equivalents, beginning of period
 
923,647

 
1,259,892

Cash and cash equivalents, end of period
 
$
1,378,117

 
$
973,619

Supplementary information:
 
 
 
 
Cash paid for interest
 
$
67,248

 
$
58,387

Cash paid for income taxes, net of refunds
 
$
26,732

 
$
105,401

 
 
 
 
 
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.
Business 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 six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. 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. The Company has reclassified the presentation of certain prior-period information to conform to the current presentation. These statements should be read in conjunction with the Company’s 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on February 27, 2014, as updated by the Company's Current Report on Form 8-K filed with the SEC on May 13, 2014 (the "2013 Annual Report").
Effective January 1, 2014 (and as filed with the SEC in the Current Report on Form 8-K referenced above), the Company realigned certain operations and management responsibilities to better fit within its geographic-based segments. Operations in Mexico and Latin America have been moved from Europe & South Africa to the U.S. segment, which has been renamed U.S. and Latin America. Operations in India have been moved from Europe & South Africa to the Asia Pacific segment. The Europe & South Africa segment has been renamed Europe, Middle East and Africa.
2.
Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share on net income (loss) (in thousands, except per share information):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Earnings:
 
 
 
 
 
 
 
 
Net income (loss) (numerator for basic and diluted calculations)
 
$
198,296

 
$
(49,612
)
 
$
334,960

 
$
135,923

Shares:
 
 
 
 
 
 
 
 
Weighted average outstanding shares (denominator for basic calculation)
 
69,076

 
72,350

 
69,823

 
73,089

Equivalent shares from outstanding stock options
 
642

 
—

 
666

 
484

Denominator for diluted calculation
 
69,718

 
72,350

 
70,489

 
73,573

Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
2.87

 
$
(0.69
)
 
$
4.80

 
$
1.86

Diluted
 
$
2.84

 
$
(0.69
)
 
$
4.75

 
$
1.85

As a result of the net loss for the three months ended June 30, 2013, the Company was required to use basic weighted average common shares outstanding in the calculation of diluted loss per share, since the inclusion of shares for outstanding stock options of 0.4 million would have been antidilutive to the earnings (loss) per share calculations. In the absence of the losses, weighted average common shares outstanding and dilutive potential common shares would have totaled 72.8 million.
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 June 30, 2014, 0.3 million stock options and approximately 0.8 million performance contingent shares were excluded from the calculation. For the six months ended June 30, 2013, no 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 six months ended June 30, 2014 and 2013 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, 2013
 
$
207,083

 
$
820,245

 
$
(21,721
)
 
$
1,005,607

Other comprehensive income (loss) before reclassifications
 
(40
)
 
646,777

 
(6
)
 
646,731

Amounts reclassified to (from) AOCI
 
—

 
(24,698
)
 
1,020

 
(23,678
)
Net current-period other comprehensive income (loss)
 
(40
)
 
622,079

 
1,014

 
623,053

Balance, June 30, 2014
 
$
207,043

 
$
1,442,324

 
$
(20,707
)
 
$
1,628,660

 
 
 
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
 
(102,937
)
 
(819,019
)
 
206

 
(921,750
)
Amounts reclassified to (from) AOCI
 
—

 
(6,512
)
 
1,494

 
(5,018
)
Net current-period other comprehensive income (loss)
 
(102,937
)
 
(825,531
)
 
1,700

 
(926,768
)
Balance, June 30, 2013
 
$
164,538

 
$
1,052,126

 
$
(34,530
)
 
$
1,182,134

 
(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 six months ended June 30, 2014 and 2013 (dollars in thousands):
 
 
Amount Reclassified from AOCI
 
 
 
 
Three months ended June 30,
 
 
Six months ended June 30,
 
 
Details about AOCI Components
 
2014
 
2013
 
 
2014
 
2013
 
Affected Line Item in Statement of Income         
Unrealized gains and losses on available-for-sale securities
 
$
27,142

 
$
13,510

 
 
$
28,331

 
$
23,858

 
Investment related gains (losses), net
Gains and losses on cash flow hedge - interest rate swap
 
321

 
201

 
 
539

 
506

 
Investment income
Deferred policy acquisition costs attributed to unrealized gains and losses(1)
 
4,370

 
(13,283
)
 
 
8,791

 
(14,831
)
 
 
Total
 
31,833

 
428

 
 
37,661

 
9,533

 
 
Provision for income taxes
 
(11,059
)
 
(87
)
 
 
(12,963
)
 
(3,021
)
 
 
Net unrealized gains (losses), net of tax
 
$
20,774

 
$
341

 
 
$
24,698

 
$
6,512

 
 
Amortization of unrealized pension and postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost(2)
 
$
(216
)
 
$
(213
)
 
 
$
(218
)
 
$
(307
)
 
 
Actuarial gains/(losses)(2)
 
(462
)
 
(968
)
 
 
(1,352
)
 
(1,991
)
 
 
Total
 
(678
)
 
(1,181
)
 
 
(1,570
)
 
(2,298
)
 
 
Provision for income taxes
 
238

 
413

 
 
550

 
804

 
 
Amortization of unrealized pension and postretirement benefits, net of tax
 
$
(440
)
 
$
(768
)
 
 
$
(1,020
)
 
$
(1,494
)
 
 
 
 
 
 
 
 
 


 
 
 
 
Total reclassifications, net of tax
 
$
20,334

 
$
(427
)
 
 
$
23,678

 
$
5,018

 
 

(1)
This AOCI component is included in the computation of the deferred policy acquisition cost. See Note 8 – “Deferred Policy Acquisition Costs” of the 2013 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 June 30, 2014 and December 31, 2013 (dollars in thousands):
June 30, 2014:
 
Amortized
 
Unrealized
 
Unrealized
 
Estimated Fair
 
% of
 
Other-than-
temporary impairments
 
 
Cost
 
Gains
 
Losses
 
Value
 
Total
 
in AOCI
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
$
13,280,721

 
$
932,793

 
$
62,103

 
$
14,151,411

 
57.8
%
 
$
—

Canadian and Canadian provincial governments
 
2,786,873

 
964,710

 
3,945

 
3,747,638

 
15.3

 
—

Residential mortgage-backed securities
 
946,431

 
49,676

 
9,968

 
986,139

 
4.1

 
(300
)
Asset-backed securities
 
993,116

 
24,314

 
9,055

 
1,008,375

 
4.1

 
354

Commercial mortgage-backed securities
 
1,380,622

 
103,032

 
9,034

 
1,474,620

 
6.0

 
(1,609
)
U.S. government and agencies
 
429,215

 
20,987

 
1,696

 
448,506

 
1.8

 
—

State and political subdivisions
 
369,515

 
42,553

 
4,581

 
407,487

 
1.7

 
—

Other foreign government, supranational and foreign government-sponsored enterprises
 
2,186,853

 
78,730

 
9,363

 
2,256,220

 
9.2

 
—

Total fixed maturity securities
 
$
22,373,346

 
$
2,216,795

 
$
109,745

 
$
24,480,396

 
100.0
%
 
$
(1,555
)
Non-redeemable preferred stock
 
$
81,240

 
$
7,165

 
$
1,567

 
$
86,838

 
61.7
%
 
 
Other equity securities
 
53,833

 
1,063

 
990

 
53,906

 
38.3

 
 
Total equity securities
 
$
135,073

 
$
8,228

 
$
2,557

 
$
140,744

 
100.0
%
 
 
 
December 31, 2013:
 
Amortized
 
Unrealized
 
Unrealized
 
Estimated Fair
 
% of
 
Other-than-
temporary impairments
 
 
Cost
 
Gains
 
Losses
 
Value
 
Total
 
in AOCI
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
$
11,697,394

 
$
616,147

 
$
202,786

 
$
12,110,755

 
56.4
%
 
$
—

Canadian and Canadian provincial governments
 
2,728,111

 
669,762

 
16,848

 
3,381,025

 
15.7

 
—

Residential mortgage-backed securities
 
970,434

 
38,126

 
18,917

 
989,643

 
4.6

 
(300
)
Asset-backed securities
 
891,751

 
18,893

 
15,812

 
894,832

 
4.2

 
(2,259
)
Commercial mortgage-backed securities
 
1,314,782

 
91,651

 
17,487

 
1,388,946

 
6.5

 
(1,609
)
U.S. government and agencies
 
489,631

 
16,468

 
4,748

 
501,351

 
2.3

 
—

State and political subdivisions
 
313,252

 
21,907

 
14,339

 
320,820

 
1.5

 
—

Other foreign government, supranational and foreign government-sponsored enterprises
 
1,865,379

 
45,347

 
23,962

 
1,886,764

 
8.8

 
—

Total fixed maturity securities
 
$
20,270,734

 
$
1,518,301

 
$
314,899

 
$
21,474,136

 
100.0
%
 
$
(4,168
)
Non-redeemable preferred stock
 
$
81,993

 
$
5,342

 
$
5,481

 
$
81,854

 
20.2
%
 
 
Other equity securities
 
327,479

 
618

 
4,220

 
323,877

 
79.8

 
 
Total equity securities
 
$
409,472

 
$
5,960

 
$
9,701

 
$
405,731

 
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 $70.0 million and $57.2 million, and an estimated fair value of $71.8 million and $58.0 million, as of June 30, 2014 and December 31, 2013 respectively. The pledged fixed maturity securities are included in fixed maturity securities, available-for-sale in the condensed consolidated balance sheets. Securities with an amortized cost of $9,600.7 million and $7,842.9 million, and an estimated fair value of $10,188.1 million and $8,125.4 million, as of June 30, 2014 and December 31, 2013, respectively, were held in trust to satisfy collateral requirements under certain third-party reinsurance treaties.
The Company received fixed maturity securities as collateral from derivative and reinsurance counterparties with an estimated fair value of $111.8 million and $94.1 million, as of June 30, 2014 and December 31, 2013, 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 June 30, 2014 and December 31, 2013, none of the collateral had been sold or re-pledged.

9
Table of Contents

As of June 30, 2014, the Company held securities with a fair value of $1,336.5 million that were guaranteed or issued by the Canadian province of Ontario and $1,553.8 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, 2013, the Company held securities with a fair value of $1,222.3 million that were guaranteed or issued by the Canadian province of Ontario and $1,389.1 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 June 30, 2014 are shown by contractual maturity in the table below (dollars in thousands). 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.

 
 
Amortized
Cost
 
Fair
Value
Available-for-sale:
 
 
 
 
Due in one year or less
 
$
637,052

 
$
644,928

Due after one year through five years
 
4,116,731

 
4,358,370

Due after five years through ten years
 
7,415,405

 
7,871,893

Due after ten years
 
6,883,989

 
8,136,071

Asset and mortgage-backed securities
 
3,320,169

 
3,469,134

Total
 
$
22,373,346

 
$
24,480,396

Corporate Fixed Maturity Securities
The tables below show the major industry types of the Company’s corporate fixed maturity holdings as of June 30, 2014 and December 31, 2013 (dollars in thousands):
 
June 30, 2014:
 
 
 
Estimated
 
 
 
 
Amortized Cost    
 
Fair Value
 
% of Total           
Finance
 
$
4,512,831

 
$
4,788,259

 
33.8
%
Industrial
 
7,240,086

 
7,729,309

 
54.6

Utility
 
1,516,641

 
1,622,357

 
11.5

Other
 
11,163

 
11,486

 
0.1

Total
 
$
13,280,721

 
$
14,151,411

 
100.0
%
 
 
 
 
 
 
 
December 31, 2013:
 
 
 
Estimated
 
 
 
 
Amortized Cost
 
Fair Value
 
% of Total
Finance
 
$
3,838,716

 
$
3,983,623

 
32.9
%
Industrial
 
6,607,100

 
6,824,063

 
56.3

Utility
 
1,240,353

 
1,292,305

 
10.7

Other
 
11,225

 
10,764

 
0.1

Total
 
$
11,697,394

 
$
12,110,755

 
100.0
%

10
Table of Contents

Other-Than-Temporary Impairments - Fixed Maturity and Equity Securities
As discussed in Note 2 – “Summary of Significant Accounting Policies” of the 2013 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 the condensed consolidated statements of income (“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 June 30,
 
 
2014
 
2013
Balance, beginning of period
 
$
11,696

 
$
14,773

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

 
(1,449
)
Credit loss OTTI previously recognized on securities which matured, paid down, prepaid or were sold during the period
 
(4,412
)
 
—

Balance, end of period
 
$
7,284

 
$
13,324

 
 
 
 
 
 
 
Six months ended June 30,
 
 
2014
 
2013
Balance, beginning of period
 
$
11,696

 
$
16,675

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

 
(1,449
)
Credit loss OTTI previously recognized on securities which matured, paid down, prepaid or were sold during the period
 
(4,412
)
 
(1,902
)
Balance, end of period
 
$
7,284

 
$
13,324

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):
 
 
 
June 30, 2014
 
December 31, 2013
Outstanding principal and interest balance(1)
 
$
213,901

 
$
192,644

Carrying value, including accrued interest(2)
 
175,604

 
148,822

 
(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 the acquisition dates (dollars in thousands):
 
 
Six months ended June 30,
 
2014
 
2013
Contractually required payments (including interest)
$
55,671

 
$
109,931

Cash flows expected to be collected(1)
44,799

 
88,422

Fair value of investments acquired
31,544

 
58,471

 
(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 six months ended June 30, 2014 and 2013 (dollars in thousands):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Balance, beginning of period
$
73,367

 
$
59,915

 
$
69,469

 
$
39,239

Investments purchased
5,684

 
7,885

 
13,255

 
29,951

Accretion
(2,357
)
 
(1,879
)
 
(4,496
)
 
(3,822
)
Disposals
—

 
(832
)
 
(379
)
 
(832
)
Reclassification from nonaccretable difference
(13,477
)
 
1,180

 
(14,632
)
 
1,733

Balance, end of period
$
63,217

 
$
66,269

 
$
63,217

 
$
66,269

Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale
The following table presents the total gross unrealized losses for the 939 and 1,396 fixed maturity and equity securities as of June 30, 2014 and December 31, 2013, respectively, where the estimated fair value had declined and remained below amortized cost by the indicated amount (dollars in thousands):
 
 
 
June 30, 2014
 
December 31, 2013
 
 
Gross
Unrealized
Losses
 
% of Total    
 
Gross
Unrealized
Losses
 
% of Total    
Less than 20%
 
$
98,885

 
88.1
%
 
$
296,731

 
91.4
%
20% or more for less than six months
 
2,479

 
2.2

 
6,444

 
2.0

20% or more for six months or greater
 
10,938

 
9.7

 
21,425

 
6.6

Total
 
$
112,302

 
100.0
%
 
$
324,600

 
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 939 and 1,396 fixed maturity and equity securities that have estimated fair values below amortized cost as of June 30, 2014 and December 31, 2013, 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
June 30, 2014:
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
Investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
$
1,624,031

 
$
21,638

 
$
1,062,513

 
$
36,925

 
$
2,686,544

 
$
58,563

Canadian and Canadian provincial governments
 
20,728

 
413

 
74,864

 
3,532

 
95,592

 
3,945

Residential mortgage-backed securities
 
74,009

 
2,365

 
122,444

 
7,337

 
196,453

 
9,702

Asset-backed securities
 
133,606

 
1,137

 
130,015

 
5,083

 
263,621

 
6,220

Commercial mortgage-backed securities
 
28,099

 
206

 
39,222

 
4,191

 
67,321

 
4,397

U.S. government and agencies
 
10,819

 
9

 
75,730

 
1,687

 
86,549

 
1,696

State and political subdivisions
 
13,426

 
600

 
45,879

 
3,981

 
59,305

 
4,581

Other foreign government, supranational and foreign government-sponsored enterprises
 
367,176

 
2,339

 
187,073

 
7,023

 
554,249

 
9,362

Total investment grade securities
 
2,271,894

 
28,707

 
1,737,740

 
69,759

 
4,009,634

 
98,466

 
Non-investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
165,552

 
2,181

 
19,206

 
1,359

 
184,758

 
3,540

Residential mortgage-backed securities
 
16,411

 
137

 
3,576

 
129

 
19,987

 
266

Asset-backed securities
 
11,334

 
183

 
10,747

 
2,652

 
22,081

 
2,835

Commercial mortgage-backed securities
 
—

 
—

 
6,406

 
4,637

 
6,406

 
4,637

Other foreign government, supranational and foreign government-sponsored enterprises
 
2,261

 
1

 
—

 
—

 
2,261

 
1

Total non-investment grade securities
 
195,558

 
2,502

 
39,935

 
8,777

 
235,493

 
11,279

Total fixed maturity securities
 
$
2,467,452

 
$
31,209

 
$
1,777,675

 
$
78,536

 
$
4,245,127

 
$
109,745

Non-redeemable preferred stock
 
$
6,705

 
$
487

 
$
14,902

 
$
1,080

 
$
21,607

 
$
1,567

Other equity securities
 
—

 
—

 
32,463

 
990

 
32,463

 
990

Total equity securities
 
$
6,705

 
$
487

 
$
47,365

 
$
2,070

 
$
54,070

 
$
2,557

 
 
Less than 12 months
 
12 months or greater
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
December 31, 2013:
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
Investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
$
3,141,179

 
$
148,895

 
$
301,303

 
$
40,548

 
$
3,442,482

 
$
189,443

Canadian and Canadian provincial governments
 
188,491

 
14,419

 
12,029

 
2,429

 
200,520

 
16,848

Residential mortgage-backed securities
 
283,967

 
15,900

 
23,068

 
1,688

 
307,035

 
17,588

Asset-backed securities
 
255,656

 
4,916

 
56,668

 
4,983

 
312,324

 
9,899

Commercial mortgage-backed securities
 
219,110

 
3,725

 
20,068

 
5,745

 
239,178

 
9,470

U.S. government and agencies
 
133,697

 
4,469

 
4,406

 
279

 
138,103

 
4,748

State and political subdivisions
 
120,193

 
9,723

 
15,202

 
4,616

 
135,395

 
14,339

Other foreign government, supranational and foreign government-sponsored enterprises
 
665,313

 
21,075

 
36,212

 
2,847

 
701,525

 
23,922

Total investment grade securities
 
5,007,606

 
223,122

 
468,956

 
63,135

 
5,476,562

 
286,257

 
Non-investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
283,603

 
9,451

 
38,256

 
3,892

 
321,859

 
13,343

Residential mortgage-backed securities
 
62,146

 
1,075

 
3,945

 
254

 
66,091

 
1,329

Asset-backed securities
 
28,670

 
415

 
32,392

 
5,498

 
61,062

 
5,913

Commercial mortgage-backed securities
 
15,762

 
81

 
10,980

 
7,936

 
26,742

 
8,017

Other foreign government, supranational and foreign government-sponsored enterprises
 
9,403

 
40

 
—

 
—

 
9,403

 
40

Total non-investment grade securities
 
399,584

 
11,062

 
85,573

 
17,580

 
485,157

 
28,642

Total fixed maturity securities
 
$
5,407,190

 
$
234,184

 
$
554,529


$
80,715

 
$
5,961,719

 
$
314,899

Non-redeemable preferred stock
 
$
51,386

 
$
5,479

 
$
1

 
$
2

 
$
51,387

 
$
5,481

Other equity securities
 
218,834

 
1,748

 
32,550

 
2,472

 
251,384

 
4,220

Total equity securities
 
$
270,220

 
$
7,227

 
$
32,551


$
2,474

 
$
302,771

 
$
9,701


13
Table of Contents

As of June 30, 2014, 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 June 30, 2014, 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 as of June 30, 2014 are primarily related to high-yield corporate securities and commercial mortgage-backed securities. Unrealized losses decreased across all security types as interest rates decreased during the first six months of 2014.

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 June 30,
 
Six months ended June 30,
 
 
2014
 
2013
 
2014
 
2013
Fixed maturity securities available-for-sale
 
$
253,456

 
$
240,590

 
$
497,418

 
$
479,834

Mortgage loans on real estate
 
30,373

 
28,362

 
63,465

 
56,605

Policy loans
 
13,751

 
15,450

 
27,189

 
33,360

Funds withheld at interest
 
108,059

 
159,212

 
220,798

 
296,471

Short-term investments
 
80

 
422

 
1,045

 
1,235

Other invested assets
 
19,021

 
13,379

 
33,522

 
27,301

Investment income
 
424,740

 
457,415

 
843,437

 
894,806

Investment expense
 
(14,133
)
 
(13,181
)
 
(28,455
)
 
(25,441
)
Investment income, net of related expenses
 
$
410,607

 
$
444,234

 
$
814,982

 
$
869,365

Investment Related Gains (Losses), Net
Investment related gains (losses), net consist of the following (dollars in thousands):
 
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Fixed maturities and equity securities available for sale:
 
 
 
 
 
 
 
Other-than-temporary impairment losses on fixed maturities
$
(870
)
 
$
(9,803
)
 
$
(1,173
)
 
$
(10,005
)
Portion of loss recognized in accumulated other comprehensive income (before taxes)
—

 
(306
)
 
—

 
(306
)
Net other-than-temporary impairment losses on fixed maturity securities recognized in earnings
(870
)
 
(10,109
)
 
(1,173
)
 
(10,311
)
Impairment losses on equity securities
—

 
—

 
—

 
—

Gain on investment activity
34,887

 
26,845

 
42,954

 
48,525

Loss on investment activity
(6,877
)
 
(6,760
)
 
(13,460
)
 
(17,972
)
Other impairment losses and change in mortgage loan provision
(5,309
)
 
125

 
(3,645
)
 
(1,501
)
Derivatives and other, net
96,696

 
38,142

 
178,422

 
123,873

Total investment related gains (losses), net
$
118,527

 
$
48,243

 
$
203,098

 
$
142,614

During the three months ended June 30, 2014 and 2013, the Company sold fixed maturity and equity securities with fair values of $222.8 million and $257.6 million at losses of $6.9 million and $6.8 million, respectively. During the six months ended June 30, 2014 and 2013, the Company sold fixed maturity and equity securities with fair values of $457.9 million and $461.9 million at losses of $13.5 million and $18.0 million, respectively. The Company generally does not engage in short-term buying and selling of securities.




14
Table of Contents

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 $187.7 million and $93.0 million, and an estimated fair value of $191.1 million and $93.0 million, as of June 30, 2014 and December 31, 2013, respectively. 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 June 30, 2014 the Company had pledged securities with an amortized cost of $300.7 million and an estimated fair value of $315.2 million, in return the Company received securities with an estimated fair value of $354.9 million. As of December 31, 2013 the Company had pledged securities with an amortized cost of $300.3 million and an estimated fair value of $310.8 million, in return the Company received securities with an estimated fair value of $344.2 million.

Mortgage Loans on Real Estate
Mortgage loans represented approximately 7.2% and 7.7% of the Company’s total investments as of June 30, 2014 and December 31, 2013. 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. The distribution of mortgage loans, gross of valuation allowances, by property type is as follows as of June 30, 2014 and December 31, 2013 (dollars in thousands):
 
 
 
June 30, 2014
 
December 31, 2013
 
 
Recorded
Investment
 
% of Total
 
Recorded
Investment
 
% of Total
Apartment
 
$
358,152

 
14.0
%
 
$
289,394

 
11.6
%
Retail
 
740,374

 
28.9

 
748,731

 
30.0

Office building
 
910,375

 
35.5

 
917,284

 
36.7

Industrial
 
437,605

 
17.0

 
439,890

 
17.6

Other commercial
 
118,986

 
4.6

 
101,487

 
4.1

Total
 
$
2,565,492

 
100.0
%
 
$
2,496,786

 
100.0
%
As of June 30, 2014 and December 31, 2013, the Company’s mortgage loans, gross of valuation allowances, were distributed throughout the United States as follows (dollars in thousands):
 
 
June 30, 2014
 
December 31, 2013
 
 
Recorded
Investment
 
% of Total
 
Recorded
Investment
 
% of Total
Pacific
 
$
700,541

 
27.3
%