2014 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, 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 October 31, 2014, 68,696,255 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)
 
 
September 30,
2014
 
December 31,
2013
 
 
(Dollars in thousands, except share data)
 
Assets
 
 
 
 
Fixed maturity securities:
 
 
 
 
Available-for-sale at fair value (amortized cost of $22,452,941 and $20,270,734)
 
$
24,475,451

 
$
21,474,136

Mortgage loans on real estate (net of allowances of $6,842 and $10,106)
 
2,617,091

 
2,486,680

Policy loans
 
1,249,948

 
1,244,469

Funds withheld at interest
 
5,969,006

 
5,771,467

Short-term investments
 
44,437

 
139,395

Other invested assets
 
1,165,021

 
1,324,960

Total investments
 
35,520,954

 
32,441,107

Cash and cash equivalents
 
1,118,745

 
923,647

Accrued investment income
 
305,880

 
267,908

Premiums receivable and other reinsurance balances
 
1,491,993

 
1,439,528

Reinsurance ceded receivables
 
596,704

 
594,515

Deferred policy acquisition costs
 
3,297,616

 
3,517,796

Other assets
 
578,471

 
489,972

Total assets
 
$
42,910,363

 
$
39,674,473

Liabilities and Stockholders’ Equity
 
 
 
 
Future policy benefits
 
$
13,541,687

 
$
11,866,776

Interest-sensitive contract liabilities
 
12,638,117

 
12,947,557

Other policy claims and benefits
 
3,861,060

 
3,571,761

Other reinsurance balances
 
276,314

 
275,138

Deferred income taxes
 
2,149,076

 
1,837,577

Other liabilities
 
967,303

 
541,035

Long-term debt
 
2,314,693

 
2,214,350

Collateral finance facility
 
482,115

 
484,752

Total liabilities
 
36,230,365

 
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 September 30, 2014 and December 31, 2013
 
791

 
791

Additional paid-in-capital
 
1,784,818

 
1,777,906

Retained earnings
 
4,074,047

 
3,659,938

Treasury stock, at cost - 10,472,116 and 8,369,540 shares
 
(679,265
)
 
(508,715
)
Accumulated other comprehensive income
 
1,499,607

 
1,005,607

Total stockholders’ equity
 
6,679,998

 
5,935,527

Total liabilities and stockholders’ equity
 
$
42,910,363

 
$
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 September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Revenues:
 
(Dollars in thousands, except per share data)
Net premiums
 
$
2,168,285

 
$
2,026,180

 
$
6,452,082

 
$
6,041,029

Investment income, net of related expenses
 
447,106

 
369,366

 
1,262,088

 
1,238,731

Investment related gains (losses), net:
 
 
 
 
 
 
 
 
Other-than-temporary impairments on fixed maturity securities
 
(246
)
 
(391
)
 
(1,419
)
 
(10,396
)
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income
 
—

 
59

 
—

 
(247
)
Other investment related gains (losses), net
 
22,564

 
(76,133
)
 
226,835

 
76,792

Total investment related gains (losses), net
 
22,318

 
(76,465
)
 
225,416

 
66,149

Other revenues
 
78,879

 
70,734

 
267,195

 
235,650

Total revenues
 
2,716,588

 
2,389,815

 
8,206,781

 
7,581,559

Benefits and Expenses:
 
 
 
 
 
 
 
 
Claims and other policy benefits
 
1,855,037

 
1,714,899

 
5,540,599

 
5,434,383

Interest credited
 
120,952

 
59,939

 
347,508

 
303,767

Policy acquisition costs and other insurance expenses
 
336,411

 
268,081

 
1,100,658

 
995,943

Other operating expenses
 
133,737

 
111,672

 
372,135

 
344,581

Interest expense
 
36,065

 
30,831

 
106,360

 
89,235

Collateral finance facility expense
 
2,571

 
2,698

 
7,731

 
7,886

Total benefits and expenses
 
2,484,773

 
2,188,120

 
7,474,991

 
7,175,795

 Income before income taxes
 
231,815

 
201,695

 
731,790

 
405,764

Provision for income taxes
 
73,819

 
63,740

 
238,834

 
131,886

Net income
 
$
157,996

 
$
137,955

 
$
492,956

 
$
273,878

Earnings per share:
 
 
 
 
 
 
 
 
Basic earnings per share
 
$
2.30

 
$
1.95

 
$
7.10

 
$
3.79

Diluted earnings per share
 
$
2.28

 
$
1.93

 
$
7.03

 
$
3.76

Dividends declared per share
 
$
0.33

 
$
0.30

 
$
0.93

 
$
0.78

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 September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Comprehensive income (loss)
 
(Dollars in thousands)
Net income
 
$
157,996

 
$
137,955

 
$
492,956

 
$
273,878

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
 
Change in foreign currency translation adjustments
 
(75,107
)
 
27,139

 
(75,147
)
 
(75,798
)
Change in net unrealized gains and losses on investments
 
(55,615
)
 
(112,035
)
 
566,014

 
(938,216
)
Change in other-than-temporary impairment losses on fixed maturity securities
 
1,248

 
2,246

 
1,698

 
2,896

Changes in pension and other postretirement plan adjustments
 
421

 
517

 
1,435

 
2,217

Total other comprehensive income (loss), net of tax
 
(129,053
)
 
(82,133
)
 
494,000

 
(1,008,901
)
Total comprehensive income (loss)
 
$
28,943

 
$
55,822

 
$
986,956

 
$
(735,023
)
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)
 
 
Nine months ended September 30,
 
 
2014
 
2013
 
 
 (Dollars in thousands)
Cash Flows from Operating Activities:
 
 
 
 
Net income
 
$
492,956

 
$
273,878

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
Change in operating assets and liabilities:
 
 
 
 
Accrued investment income
 
(41,658
)
 
(63,339
)
Premiums receivable and other reinsurance balances
 
(74,089
)
 
81,189

Deferred policy acquisition costs
 
185,107

 
56,286

Reinsurance ceded receivable balances
 
9,961

 
49,286

Future policy benefits, other policy claims and benefits, and other reinsurance balances
 
736,169

 
1,005,756

Deferred income taxes
 
43,670

 
276,372

Other assets and other liabilities, net
 
134,471

 
(293,106
)
Amortization of net investment premiums, discounts and other
 
(80,188
)
 
(70,687
)
Investment related gains, net
 
(225,416
)
 
(66,149
)
Gain on repurchase of collateral finance facility securities
 
—

 
(46,506
)
Excess tax benefits from share-based payment arrangement
 
3,088

 
(2,410
)
Other, net
 
54,105

 
50,460

Net cash provided by operating activities
 
1,238,176

 
1,251,030

Cash Flows from Investing Activities:
 
 
 
 
Sales of fixed maturity securities available-for-sale
 
3,370,036

 
2,838,099

Maturities of fixed maturity securities available-for-sale
 
353,554

 
118,951

Purchases of fixed maturity securities available-for-sale
 
(4,414,097
)
 
(3,496,639
)
Cash invested in mortgage loans on real estate
 
(480,906
)
 
(467,429
)
Cash invested in policy loans
 
(52,914
)
 
—

Cash invested in funds withheld at interest
 
(67,024
)
 
(70,753
)
Principal payments on mortgage loans on real estate
 
341,989

 
262,226

Principal payments on policy loans
 
47,435

 
33,314

Purchase of a business, net of cash acquired of $9,709
 
—

 
(2,805
)
Purchase of property and equipment
 
(74,342
)
 
—

Cash received under securities repurchase agreements
 
100,000

 
—

Change in short-term investments
 
93,116

 
235,260

Change in other invested assets
 
266,389

 
35,341

Net cash used in investing activities
 
(516,764
)
 
(514,435
)
Cash Flows from Financing Activities:
 
 
 
 
Dividends to stockholders
 
(64,587
)
 
(56,465
)
Repurchase and repayment of collateral finance facility securities
 
—

 
(119,255
)
Net change in short-term debt
 
—

 
—

Proceeds from long-term debt issuance
 
100,000

 
398,492

Debt issuance costs
 
—

 
(3,400
)
Principal payments of long-term debt
 
(192
)
 
—

Purchases of treasury stock
 
(201,032
)
 
(269,204
)
Excess tax benefits from share-based payment arrangement
 
(3,088
)
 
2,410

Exercise of stock options, net
 
17,010

 
9,212

Change in cash collateral for derivatives and other arrangements
 
83,283

 
(68,635
)
Deposits on universal life and other investment type policies and contracts
 
84,036

 
120,250

Withdrawals on universal life and other investment type policies and contracts
 
(525,217
)
 
(550,122
)
Net cash used in financing activities
 
(509,787
)
 
(536,717
)
Effect of exchange rate changes on cash
 
(16,527
)
 
(36,535
)
Change in cash and cash equivalents
 
195,098

 
163,343

Cash and cash equivalents, beginning of period
 
923,647

 
1,259,892

Cash and cash equivalents, end of period
 
$
1,118,745

 
$
1,423,235

Supplementary information:
 
 
 
 
Cash paid for interest
 
$
93,698

 
$
75,003

Cash paid for income taxes, net of refunds
 
$
37,833

 
$
100,429

 
 
 
 
 
Business purchase information - see Note 14 - "Financing and Other Activities"
Non-cash supplementary information - see "Investments Transferred to the Company" in 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 condensed consolidated 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, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. There were no subsequent events, other than as disclosed in Note 16 - "Subsequent Event", 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 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 condensed consolidated 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 (in thousands, except per share information):
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Earnings:
 
 
 
 
 
 
 
 
Net income (numerator for basic and diluted calculations)
 
$
157,996

 
$
137,955

 
$
492,956

 
$
273,878

Shares:
 
 
 
 
 
 
 
 
Weighted average outstanding shares (denominator for basic calculation)
 
68,643

 
70,865

 
69,426

 
72,342

Equivalent shares from outstanding stock options
 
692

 
526

 
675

 
498

Denominator for diluted calculation
 
69,335

 
71,391

 
70,101

 
72,840

Earnings per share:
 
 
 
 
 
 
 
 
Basic
 
$
2.30

 
$
1.95

 
$
7.10

 
$
3.79

Diluted
 
$
2.28

 
$
1.93

 
$
7.03

 
$
3.76

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, 2014, no stock options and approximately 0.8 million performance contingent shares were excluded from the calculation. For the three months ended September 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 nine months ended September 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
 
(75,147
)
 
591,373

 
(277
)
 
515,949

Amounts reclassified to (from) AOCI
 
—

 
(23,661
)
 
1,712

 
(21,949
)
Net current-period other comprehensive income (loss)
 
(75,147
)
 
567,712

 
1,435

 
494,000

Balance, September 30, 2014
 
$
131,936

 
$
1,387,957

 
$
(20,286
)
 
$
1,499,607

 
 
 
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 (from) 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

 
(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, 2014 and 2013 (dollars in thousands):
 
 
Amount Reclassified from AOCI
 
 
 
 
Three months ended September 30,
 
 
Nine months ended September 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
 
$
2,218

 
$
(12,736
)
 
 
$
30,549

 
$
11,122

 
Investment related gains (losses), net
Gains and losses on cash flow hedge - interest rate swap
 
393

 
291

 
 
932

 
796

 
Investment income
Deferred policy acquisition costs attributed to unrealized gains and losses(1)
 
(4,237
)
 
(602
)
 
 
4,554

 
(15,433
)
 
 
Total
 
(1,626
)
 
(13,047
)
 
 
36,035

 
(3,515
)
 
 
Provision for income taxes
 
588

 
5,009

 
 
(12,374
)
 
1,988

 
 
Net unrealized gains (losses), net of tax
 
$
(1,038
)
 
$
(8,038
)
 
 
$
23,661

 
$
(1,527
)
 
 
Amortization of unrealized pension and postretirement benefits:
 
 
 
 
 
 
 
 
 
 
 
Prior service cost(2)
 
$
(214
)
 
$
(152
)
 
 
$
(432
)
 
$
(459
)
 
 
Actuarial gains/(losses)(2)
 
(850
)
 
(1,087
)
 
 
(2,202
)
 
(3,078
)
 
 
Total
 
(1,064
)
 
(1,239
)
 
 
(2,634
)
 
(3,537
)
 
 
Provision for income taxes
 
372

 
434

 
 
922

 
1,238

 
 
Amortization of unrealized pension and postretirement benefits, net of tax
 
$
(692
)
 
$
(805
)
 
 
$
(1,712
)
 
$
(2,299
)
 
 
 
 
 
 
 
 
 


 
 
 
 
Total reclassifications, net of tax
 
$
(1,730
)
 
$
(8,843
)
 
 
$
21,949

 
$
(3,826
)
 
 

(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 10 – “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, 2014 and December 31, 2013 (dollars in thousands):
September 30, 2014:
 
Amortized
 
Unrealized
 
Unrealized
 
Estimated Fair
 
% of
 
Other-than-
temporary impairments
 
 
Cost
 
Gains
 
Losses
 
Value
 
Total
 
in AOCI
Available-for-sale:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
$
13,413,102

 
$
849,695

 
$
72,341

 
$
14,190,456

 
58.0
%
 
$
—

Canadian and Canadian provincial governments
 
2,726,064

 
989,925

 
1,651

 
3,714,338

 
15.2

 
—

Residential mortgage-backed securities
 
964,436

 
46,453

 
10,172

 
1,000,717

 
4.1

 
(300
)
Asset-backed securities
 
993,028

 
22,054

 
9,034

 
1,006,048

 
4.1

 
354

Commercial mortgage-backed securities
 
1,404,648

 
85,609

 
8,435

 
1,481,822

 
6.0

 
(1,609
)
U.S. government and agencies
 
462,675

 
19,063

 
1,752

 
479,986

 
1.9

 
—

State and political subdivisions
 
369,631

 
45,211

 
4,778

 
410,064

 
1.7

 
—

Other foreign government, supranational and foreign government-sponsored enterprises
 
2,119,357

 
82,424

 
9,761

 
2,192,020

 
9.0

 
—

Total fixed maturity securities
 
$
22,452,941

 
$
2,140,434

 
$
117,924

 
$
24,475,451

 
100.0
%
 
$
(1,555
)
Non-redeemable preferred stock
 
$
82,236

 
$
7,051

 
$
1,698

 
$
87,589

 
54.1
%
 
 
Other equity securities
 
74,726

 
866

 
1,230

 
74,362

 
45.9

 
 
Total equity securities
 
$
156,962

 
$
7,917

 
$
2,928

 
$
161,951

 
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 with derivative and reinsurance counterparties. Pledged fixed maturity securities are included in fixed maturity securities, available-for-sale in the condensed consolidated balance sheets. Fixed maturity securities received as collateral are held in separate custodial accounts and are 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 collateral it receives; however, as of September 30, 2014 and December 31, 2013, none of the collateral received had been sold or re-pledged. The Company also holds securities in trust to satisfy collateral requirements under certain third-party reinsurance treaties. The following table includes fixed maturity securities pledged and received as collateral, and assets in trust held to satisfy collateral requirements under certain third-party reinsurance treaties as of September 30, 2014 and December 31, 2013 (dollars in millions):


9
Table of Contents

 
September 30, 2014
 
December 31, 2013
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Fixed maturity securities pledged as collateral
$
72

 
$
74

 
57

 
58

Fixed maturity securities received as collateral
n/a

 
126

 
n/a

 
94

Securities held in trust
9,350

 
9,917

 
7,843

 
8,125

The Company monitors its concentrations of financial instruments on an on-going basis, and mitigates credit risk by maintaining a diversified investment portfolio which limits exposure to any one issuer. The Company’s exposure to concentrations of credit risk of single issuers greater than 10% of the Company’s stockholders’ equity as of September 30, 2014 and December 31, 2013 is as follows (dollars in millions).
 
September 30, 2014
 
December 31, 2013
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Fixed maturity securities guaranteed or issued by:
 
 
 
 
 
 
 
Canadian province of Ontario
$
996

 
$
1,312

 
$
1,023

 
$
1,222

Canadian province of Quebec
1,030

 
1,521

 
1,041

 
1,389

The amortized cost and estimated fair value of fixed maturity securities available-for-sale at September 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
 
$
593,119

 
$
599,642

Due after one year through five years
 
4,100,619

 
4,325,143

Due after five years through ten years
 
7,604,908

 
7,972,837

Due after ten years
 
6,792,183

 
8,089,242

Asset and mortgage-backed securities
 
3,362,112

 
3,488,587

Total
 
$
22,452,941

 
$
24,475,451

Corporate Fixed Maturity Securities
The tables below show the major industry types of the Company’s corporate fixed maturity holdings as of September 30, 2014 and December 31, 2013 (dollars in thousands):
 
September 30, 2014:
 
 
 
Estimated
 
 
 
 
Amortized Cost    
 
Fair Value
 
% of Total           
Finance
 
$
4,592,728

 
$
4,827,880

 
34.0
%
Industrial
 
7,310,121

 
7,740,313

 
54.6

Utility
 
1,510,253

 
1,622,263

 
11.4

Total
 
$
13,413,102

 
$
14,190,456

 
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 September 30,
 
 
2014
 
2013
Balance, beginning of period
 
$
7,284

 
$
13,324

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

 
134

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

 
—

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

 
(1,762
)
Balance, end of period
 
$
7,284

 
$
11,696

 
 
 
 
 
 
 
Nine months ended September 30,
 
 
2014
 
2013
Balance, beginning of period
 
$
11,696

 
$
16,675

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

 
134

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
)
 
(3,664
)
Balance, end of period
 
$
7,284

 
$
11,696

Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale
The following table presents the total gross unrealized losses for the 1,030 and 1,396 fixed maturity and equity securities as of September 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):
 
 
 
September 30, 2014
 
December 31, 2013
 
 
Gross
Unrealized
Losses
 
% of Total    
 
Gross
Unrealized
Losses
 
% of Total    
Less than 20%
 
$
110,657

 
91.5
%
 
$
296,731

 
91.4
%
20% or more for less than six months
 
683

 
0.6

 
6,444

 
2.0

20% or more for six months or greater
 
9,512

 
7.9

 
21,425

 
6.6

Total
 
$
120,852

 
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 1,030 and 1,396 fixed maturity and equity securities that have estimated fair values below amortized cost as of September 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.
 

11
Table of Contents

 
 
Less than 12 months
 
12 months or greater
 
Total
 
 
 
 
Gross
 
 
 
Gross
 
 
 
Gross
September 30, 2014:
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
Estimated
 
Unrealized
 
 
Fair Value
 
Losses
 
Fair Value
 
Losses
 
Fair Value
 
Losses
Investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
$
1,381,925

 
$
20,285

 
$
787,728

 
$
41,002

 
$
2,169,653

 
$
61,287

Canadian and Canadian provincial governments
 
53,864

 
427

 
27,870

 
1,224

 
81,734

 
1,651

Residential mortgage-backed securities
 
91,041

 
1,139

 
148,006

 
8,672

 
239,047

 
9,811

Asset-backed securities
 
234,958

 
2,074

 
121,589

 
4,656

 
356,547

 
6,730

Commercial mortgage-backed securities
 
103,327

 
922

 
40,865

 
2,950

 
144,192

 
3,872

U.S. government and agencies
 
40,941

 
70

 
71,551

 
1,682

 
112,492

 
1,752

State and political subdivisions
 
40,692

 
124

 
45,205

 
4,654

 
85,897

 
4,778

Other foreign government, supranational and foreign government-sponsored enterprises
 
147,718

 
3,160

 
156,858

 
5,746

 
304,576

 
8,906

Total investment grade securities
 
2,094,466

 
28,201

 
1,399,672

 
70,586

 
3,494,138

 
98,787

 
Non-investment grade securities:
 
 
 
 
 
 
 
 
 
 
 
 
Corporate securities
 
428,285

 
8,710

 
31,577

 
2,344

 
459,862

 
11,054

Residential mortgage-backed securities
 
19,548

 
206

 
3,477

 
155

 
23,025

 
361

Asset-backed securities
 
9,642

 
161

 
9,514

 
2,143

 
19,156

 
2,304

Commercial mortgage-backed securities
 
—

 
—

 
6,446

 
4,563

 
6,446

 
4,563

Other foreign government, supranational and foreign government-sponsored enterprises
 
15,973

 
855

 
—

 
—

 
15,973

 
855

Total non-investment grade securities
 
473,448

 
9,932

 
51,014

 
9,205

 
524,462

 
19,137

Total fixed maturity securities
 
$
2,567,914

 
$
38,133

 
$
1,450,686

 
$
79,791

 
$
4,018,600

 
$
117,924

Non-redeemable preferred stock
 
$
3,765

 
$
287

 
$
17,149

 
$
1,411

 
$
20,914

 
$
1,698

Other equity securities
 
24,552

 
90

 
28,561

 
1,140

 
53,113

 
1,230

Total equity securities
 
$
28,317

 
$
377

 
$
45,710

 
$
2,551

 
$
74,027

 
$
2,928

 
 
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


12
Table of Contents

As of September 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 September 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 September 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 nine 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 September 30,
 
Nine months ended September 30,
 
 
2014
 
2013
 
2014
 
2013
Fixed maturity securities available-for-sale
 
$
269,346

 
$
243,938

 
$
766,764

 
$
723,772

Mortgage loans on real estate
 
39,070

 
33,013

 
102,535

 
89,618

Policy loans
 
13,825

 
15,743

 
41,014

 
49,103

Funds withheld at interest
 
124,685

 
80,024

 
345,484

 
376,495

Short-term investments
 
462

 
374

 
1,507

 
1,609

Other invested assets
 
15,416

 
9,411

 
48,937

 
36,712

Investment income
 
462,804

 
382,503

 
1,306,241

 
1,277,309

Investment expense
 
(15,698
)
 
(13,137
)
 
(44,153
)
 
(38,578
)
Investment income, net of related expenses
 
$
447,106

 
$
369,366

 
$
1,262,088

 
$
1,238,731

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,
 
2014
 
2013
 
2014
 
2013
Fixed maturities and equity securities available for sale:
 
 
 
 
 
 
 
Other-than-temporary impairment losses on fixed maturity securities recognized in earnings
$
(246
)
 
$
(332
)
 
$
(1,419
)
 
$
(10,643
)
Impairment losses on equity securities
—

 
—

 
—

 
—

Gain on investment activity
8,819

 
21,560

 
51,773

 
70,085

Loss on investment activity
(6,355
)
 
(30,434
)
 
(19,815
)
 
(48,406
)
Other impairment losses and change in mortgage loan provision
(2,041
)
 
233

 
(5,686
)
 
(1,268
)
Derivatives and other, net
22,141

 
(67,492
)
 
200,563

 
56,381

Total investment related gains (losses), net
$
22,318

 
$
(76,465
)
 
$
225,416

 
$
66,149

During the three months ended September 30, 2014 and 2013, the Company sold fixed maturity and equity securities with fair values of $225.6 million and $410.4 million at losses of $6.4 million and $30.4 million, respectively. During the nine months ended September 30, 2014 and 2013, the Company sold fixed maturity and equity securities with fair values of $683.5 million and $872.2 million at losses of $19.8 million and $48.4 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 borrowed securities are used to provide collateral under an affiliated reinsurance transaction. 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 also participates in a 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 cash from the third party, which is

13
Table of Contents

reflected as a payable to the third party, included in other liabilities on the condensed consolidated balance sheets. The Company is required to maintain a minimum collateral balance with a fair value of 105% of the cash received.
Additionally, the Company 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.
The following table includes the amount of borrowed securities, repurchased securities pledged and repurchased/reverse repurchased securities pledged and received as of September 30, 2014 and December 31, 2013 (dollars in millions).
 
September 30, 2014
 
December 31, 2013
 
Amortized
Cost
 
Estimated
Fair Value
 
Amortized
Cost
 
Estimated
Fair Value
Borrowed securities
$
204

 
$
211

 
$
93

 
$
93

Repurchase program securities pledged
90

 
104

 
—

 
—

Repurchase program/reverse repurchase program:
 
 
 
 
 
 
 
Securities pledged
298

 
310

 
300

 
311

Securities received
n/a

 
341

 
n/a

 
344


Mortgage Loans on Real Estate
Mortgage loans represented approximately 7.4% and 7.7% of the Company’s total investments as of September 30, 2014 and December 31, 2013. The Company makes mortgage loans on income producing properties that are geographically diversified throughout the U.S. with the largest concentration being in California, which accounted for 19.6% and 23.3% of mortgage loans on real estate as of September 30, 2014 and December 31, 2013, respectively. 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, 2014 and December 31, 2013 (dollars in thousands):
 
 
 
September 30, 2014
 
December 31, 2013
 
 
Recorded
Investment
 
% of Total
 
Recorded
Investment
 
% of Total
Apartment
 
$
371,209

 
14.1
%
 
$
289,394

 
11.6
%
Retail
 
792,978

 
30.2

 
748,731

 
30.0

Office building
 
859,402

 
32.8

 
917,284

 
36.7

Industrial
 
457,945

 
17.5

 
439,890

 
17.6

Other commercial
 
142,399

 
5.4

 
101,487

 
4.1

Total
 
$
2,623,933

 
100.0
%
 
$
2,496,786

 
100.0
%
The maturities of the mortgage loans, gross of valuation allowances, as of September 30, 2014 and December 31, 2013 are as follows (dollars in thousands):
 
 
 
September 30, 2014
 
December 31, 2013
 
 
Recorded
Investment
 
% of Total
 
Recorded
Investment
 
% of Total
Due within five years
 
$
874,003

 
33.3
%
 
$
987,109

 
39.5
%
Due after five years through ten years
 
1,155,740

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