Edgar Filing: REINSURANCE GROUP OF AMERICA INC

2015 Q1 10-Q

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)
x		OF THE SECURITIES EXCHANGE ACT OF 1934
		For the quarterly period ended March 31, 2015
		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)

16600 Swingley Ridge Road

Chesterfield, Missouri 63017

(Address of principal executive offices)

(636) 736-7000

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer X Accelerated filer Non-accelerated filer Smaller reporting company

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No X

As of April 30, 2015, 66,196,280 shares of the registrant’s common stock were outstanding.

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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

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Item		Page

	PART I – FINANCIAL INFORMATION

1	Financial Statements

	Condensed Consolidated Balance Sheets (Unaudited) March 31, 2015 and December 31, 2014	3

	Condensed Consolidated Statements of Income (Unaudited) Three months ended March 31, 2015 and 2014	4

	Condensed Consolidated Statements of Comprehensive Income (Unaudited) Three months ended March 31, 2015 and 2014	5

	Condensed Consolidated Statements of Cash Flows (Unaudited) Three months ended March 31, 2015 and 2014	6

	Notes to Condensed Consolidated Financial Statements (Unaudited)	7

2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	45

3	Quantitative and Qualitative Disclosure About Market Risk	76

4	Controls and Procedures	76

	PART II – OTHER INFORMATION

1	Legal Proceedings	77

1A	Risk Factors	77

2	Unregistered Sales of Equity Securities and Use of Proceeds	77

5	Other Information	77

6	Exhibits	77

	Signatures	78

	Index to Exhibits	79

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PART I - FINANCIAL INFORMATION

REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)



	March 31, 2015			December 31, 2014
	(Dollars in thousands, except share data)
Assets
Fixed maturity securities:
Available-for-sale at fair value (amortized cost of $22,933,716 and $23,105,597)	$	25,801,223		$	25,480,972
Mortgage loans on real estate (net of allowances of $6,130 and $6,471)	2,913,486			2,712,238
Policy loans	1,284,085			1,284,284
Funds withheld at interest	5,841,554			5,922,561
Short-term investments	89,136			97,694
Other invested assets	1,243,033			1,198,319
Total investments	37,172,517			36,696,068
Cash and cash equivalents	1,083,179			1,645,669
Accrued investment income	283,665			261,096
Premiums receivable and other reinsurance balances	1,509,810			1,527,729
Reinsurance ceded receivables	665,797			578,206
Deferred policy acquisition costs	3,286,348			3,342,575
Other assets	689,952			628,268
Total assets	$	44,691,268		$	44,679,611
Liabilities and Stockholders’ Equity
Future policy benefits	$	14,152,780		$	14,476,637
Interest-sensitive contract liabilities	12,508,201			12,591,497
Other policy claims and benefits	3,822,699			3,824,069
Other reinsurance balances	320,950			306,915
Deferred income taxes	2,529,733			2,365,817
Other liabilities	1,118,645			994,230
Long-term debt	2,313,884			2,314,293
Collateral finance and securitization notes	774,351			782,701
Total liabilities	37,541,243			37,656,159
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 March 31, 2015 and December 31, 2014	791			791
Additional paid-in-capital	1,802,774			1,798,279
Retained earnings	4,339,028			4,239,647
Treasury stock, at cost - 12,699,199 and 10,364,797 shares	(876,804		)	(672,394		)
Accumulated other comprehensive income	1,884,236			1,657,129
Total stockholders’ equity	7,150,025			7,023,452
Total liabilities and stockholders’ equity	$	44,691,268		$	44,679,611

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

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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(Unaudited)



	Three months ended March 31,
	2015			2014
Revenues:	(Dollars in thousands, except per share data)
Net premiums	$	2,023,852		$	2,100,637
Investment income, net of related expenses	426,891			404,375
Investment related gains (losses), net:
Other-than-temporary impairments on fixed maturity securities	(2,527		)	(303		)
Other-than-temporary impairments on fixed maturity securities transferred to (from) accumulated other comprehensive income	—			—
Other investment related gains (losses), net	10,110			84,874
Total investment related gains (losses), net	7,583			84,571
Other revenues	62,287			67,590
Total revenues	2,520,613			2,657,173
Benefits and Expenses:
Claims and other policy benefits	1,775,451			1,843,677
Interest credited	120,678			110,594
Policy acquisition costs and other insurance expenses	277,043			354,873
Other operating expenses	121,618			110,936
Interest expense	35,627			35,084
Collateral finance and securitization expense	6,071			2,569
Total benefits and expenses	2,336,488			2,457,733
Income before income taxes	184,125			199,440
Provision for income taxes	59,011			62,776
Net income	$	125,114		$	136,664
Earnings per share:
Basic earnings per share	$	1.84		$	1.94
Diluted earnings per share	$	1.81		$	1.92
Dividends declared per share	$	0.33		$	0.30

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

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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)



	Three months ended March 31,
	2015			2014
Comprehensive income	(Dollars in thousands)
Net income	$	125,114		$	136,664
Other comprehensive income, net of tax:
Change in foreign currency translation adjustments	(117,771		)	(42,683		)
Change in net unrealized gains and losses on investments	343,924			315,384
Change in other-than-temporary impairment losses on fixed maturity securities	—			450
Changes in pension and other postretirement plan adjustments	954			741
Total other comprehensive income, net of tax	227,107			273,892
Total comprehensive income	$	352,221		$	410,556

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

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REINSURANCE GROUP OF AMERICA, INCORPORATED AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)



	Three months ended March 31,
	2015			2014
	(Dollars in thousands)
Cash Flows from Operating Activities:
Net income	$	125,114		$	136,664
Adjustments to reconcile net income to net cash provided by operating activities:
Change in operating assets and liabilities:
Accrued investment income	(28,443		)	34,480
Premiums receivable and other reinsurance balances	(19,816		)	(15,627		)
Deferred policy acquisition costs	2,380			64,559
Reinsurance ceded receivable balances	(64,299		)	4,254
Future policy benefits, other policy claims and benefits, and other reinsurance balances	251,570			392,876
Deferred income taxes	13,144			41,472
Other assets and other liabilities, net	5,973			(29,340		)
Amortization of net investment premiums, discounts and other	(21,666		)	(25,357		)
Investment related gains, net	(7,583		)	(84,571		)
Excess tax benefits from share-based payment arrangement	—			(668		)
Other, net	59,837			22,486
Net cash provided by operating activities	316,211			541,228
Cash Flows from Investing Activities:
Sales of fixed maturity securities available-for-sale	639,676			584,491
Maturities of fixed maturity securities available-for-sale	94,994			111,854
Principal payments on mortgage loans on real estate	69,322			105,622
Principal payments on policy loans	200			485
Purchases of fixed maturity securities available-for-sale	(1,000,335		)	(917,715		)
Cash invested in mortgage loans on real estate	(272,287		)	(135,802		)
Cash invested in policy loans	(1		)	(52,913		)
Cash invested in funds withheld at interest	(32,196		)	(21,466		)
Purchases of property and equipment	(21,504		)	—
Change in short-term investments	4,325			20,740
Change in other invested assets	14,092			160,427
Net cash used in investing activities	(503,714		)	(144,277		)
Cash Flows from Financing Activities:
Dividends to stockholders	(22,669		)	(21,244		)
Repayment of collateral finance and securitization notes	(7,367		)	—
Net change in short-term debt	—			50,000
Debt issuance costs	(1,184		)	—
Principal payments of long-term debt	(586		)	—
Purchases of treasury stock	(214,665		)	(86,837		)
Excess tax benefits from share-based payment arrangement	—			668
Exercise of stock options, net	5,759			6,364
Change in cash collateral for derivative positions and other arrangements	31,109			29,680
Deposits on universal life and other investment type policies and contracts	66,329			36,257
Withdrawals on universal life and other investment type policies and contracts	(196,623		)	(215,660		)
Net cash used in financing activities	(339,897		)	(200,772		)
Effect of exchange rate changes on cash	(35,090		)	7,306
Change in cash and cash equivalents	(562,490		)	203,485
Cash and cash equivalents, beginning of period	1,645,669			923,647
Cash and cash equivalents, end of period	$	1,083,179		$	1,127,132
Supplemental disclosures of cash flow information:
Net cash paid (received) for:
Cash paid for interest	$	29,849		$	25,434
Cash paid (received) for income taxes, net of refunds	$	(58,864	)	$	8,611
Non-cash transactions:
Transfer of invested assets	$	118		$	—
Accrual for capitalized assets	$	4,514		$	—

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

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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, including normal recurring adjustments necessary for a fair presentation have been included. Results for the three months ended March 31, 2015 are not necessarily indicative of the results that may be expected for the year ending December 31, 2015. There were no subsequent events, other than as disclosed in Note 15 - "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. These condensed consolidated statements should be read in conjunction with the Company’s 2014 Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 2, 2015 (the "2014 Annual Report").

Effective January 1, 2015, the Company further refined its reporting of the Canada; Europe, Middle East and Africa; and Asia Pacific segments into traditional and non-traditional businesses to reflect the expanded product offerings within its geographic-based segments. The prior period presentation has been adjusted to conform to the new segment reporting structure. See Part II, Item 5 - Other Information of this report for comparable figures by quarter for 2014 and 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 March 31,
	2015		2014
Earnings:
Net income (numerator for basic and diluted calculations)	$	125,114	$	136,664
Shares:
Weighted average outstanding shares (denominator for basic calculation)	68,141		70,574
Equivalent shares from outstanding stock options	801		690
Denominator for diluted calculation	68,942		71,264
Earnings per share:
Basic	$	1.84	$	1.94
Diluted	$	1.81	$	1.92

The calculation of common equivalent shares does not include the impact of options having a strike or conversion price that exceeds the average stock price for the earnings period, as the result would be antidilutive. The calculation of common equivalent shares also excludes the impact of outstanding performance contingent shares, as the conditions necessary for their issuance have not been satisfied as of the end of the reporting period. For the three months ended March 31, 2015, approximately 0.3 million stock options and approximately 0.7 million performance contingent shares were excluded from the calculation. For the three months ended March 31, 2014, approximately 0.3 million stock options and approximately 0.9 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.

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3.	Accumulated Other Comprehensive Income

The balance of and changes in each component of accumulated other comprehensive income (loss) (“AOCI”) for the three months ended March 31, 2015 and 2014 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, 2014	$	81,847		$	1,624,773		$	(49,491	)	$	1,657,129
Other comprehensive income (loss) before reclassifications	(103,285		)	494,294			617			391,626
Deferred income tax benefit (expense)	(14,486		)	(142,978		)	(175		)	(157,639		)
Other comprehensive income (loss) before reclassifications, net of income tax	(117,771		)	351,316			442			233,987
Amounts reclassified to (from) AOCI	—			(8,252		)	787			(7,465		)
Deferred income tax benefit (expense)	—			860			(275		)	585
Amounts reclassified to (from) AOCI, net of income tax	—			(7,392		)	512			(6,880		)
Balance, March 31, 2015	$	(35,924	)	$	1,968,697		$	(48,537	)	$	1,884,236



	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	(45,428		)	469,975			225			424,772
Deferred income tax benefit (expense)	2,745			(150,217		)	(64		)	(147,536		)
Other comprehensive income (loss) before reclassifications, net of income tax	(42,683		)	319,758			161			277,236
Amounts reclassified to (from) AOCI	—			(5,828		)	892			(4,936		)
Deferred income tax benefit (expense)	—			1,904			(312		)	1,592
Amounts reclassified to (from) AOCI, net of income tax	—			(3,924		)	580			(3,344		)
Balance, March 31, 2014	$	164,400		$	1,136,079		$	(20,980	)	$	1,279,499


(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 months ended March 31, 2015 and 2014 (dollars in thousands):



	Amount Reclassified from AOCI
	Three months ended March 31,
Details about AOCI Components	2015			2014			Affected Line Item in Statement of Income
Unrealized gains and losses on available-for-sale securities	$	3,079		$	1,189		Investment related gains (losses), net
Gains and losses on cash flow hedge - interest rate swap	840			218			Investment income
Deferred policy acquisition costs attributed to unrealized gains and losses⁽¹⁾	4,333			4,421
Total	8,252			5,828
Provision for income taxes	(860		)	(1,904		)
Net unrealized gains (losses), net of tax	$	7,392		$	3,924
Amortization of unrealized pension and postretirement benefits:
Prior service cost⁽²⁾	$	(83	)	$	(2	)
Actuarial gains/(losses)⁽²⁾	(704		)	(890		)
Total	(787		)	(892		)
Provision for income taxes	275			312
Amortization of unrealized pension and postretirement benefits, net of tax	$	(512	)	$	(580	)

Total reclassifications, net of tax	$	6,880		$	3,344


(1)	This AOCI component is included in the computation of the deferred policy acquisition cost. See Note 8 – “Deferred Policy Acquisition Costs” of the 2014 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.

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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 March 31, 2015 and December 31, 2014 (dollars in thousands):



March 31, 2015:	Amortized		Unrealized		Unrealized		Estimated Fair		% of		Other-than- temporary impairments
	Cost		Gains		Losses		Value		Total		in AOCI
Available-for-sale:
Corporate securities	$	14,084,589	$	1,159,377	$	64,831	$	15,179,135	58.8	%	$	—
Canadian and Canadian provincial governments	2,477,703		1,416,036		—		3,893,739		15.1		—
Residential mortgage-backed securities	1,072,415		60,491		5,232		1,127,674		4.4		(300		)
Asset-backed securities	1,082,883		23,322		8,093		1,098,112		4.3		354
Commercial mortgage-backed securities	1,448,372		93,304		7,402		1,534,274		5.9		(1,609		)
U.S. government and agencies	444,529		28,879		—		473,408		1.8		—
State and political subdivisions	378,403		54,496		3,128		429,771		1.7		—
Other foreign government, supranational and foreign government-sponsored enterprises	1,944,822		129,615		9,327		2,065,110		8.0		—
Total fixed maturity securities	$	22,933,716	$	2,965,520	$	98,013	$	25,801,223	100.0	%	$	(1,555	)
Non-redeemable preferred stock	$	90,643	$	5,136	$	1,405	$	94,374	70.1	%
Other equity securities	39,395		894		44		40,245		29.9
Total equity securities	$	130,038	$	6,030	$	1,449	$	134,619	100.0	%



December 31, 2014:	Amortized		Unrealized		Unrealized		Estimated Fair		% of		Other-than- temporary impairments
	Cost		Gains		Losses		Value		Total		in AOCI
Available-for-sale:
Corporate securities	$	14,010,604	$	965,523	$	90,544	$	14,885,583	58.4	%	$	—
Canadian and Canadian provincial governments	2,668,852		1,196,420		7		3,865,265		15.2		—
Residential mortgage-backed securities	991,867		52,640		6,611		1,037,896		4.1		(300		)
Asset-backed securities	1,059,660		20,301		10,375		1,069,586		4.2		354
Commercial mortgage-backed securities	1,453,657		87,593		8,659		1,532,591		6.0		(1,609		)
U.S. government and agencies	501,352		25,014		515		525,851		2.0		—
State and political subdivisions	378,457		51,117		3,498		426,076		1.7		—
Other foreign government, supranational and foreign government-sponsored enterprises	2,041,148		110,065		13,089		2,138,124		8.4		—
Total fixed maturity securities	$	23,105,597	$	2,508,673	$	133,298	$	25,480,972	100.0	%	$	(1,555	)
Non-redeemable preferred stock	$	93,540	$	7,350	$	1,527	$	99,363	78.3	%
Other equity securities	26,994		597		94		27,497		21.7
Total equity securities	$	120,534	$	7,947	$	1,621	$	126,860	100.0	%

The Company enters into various collateral arrangements that require both the pledging and acceptance of fixed maturity securities as collateral with derivative, repurchase agreement 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 March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014 (dollars in thousands):

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	March 31, 2015				December 31, 2014
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Fixed maturity securities pledged as collateral	$	148,411	$	160,448	$	127,229	$	134,863
Fixed maturity securities received as collateral	n/a		128,643		n/a		117,227
Securities held in trust	9,719,868		10,628,413		10,197,489		10,922,947

The Company monitors its concentrations of financial instruments on an ongoing 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 March 31, 2015 and December 31, 2014 is as follows (dollars in thousands).



	March 31, 2015				December 31, 2014
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Fixed maturity securities guaranteed or issued by:
Canadian province of Ontario	$	901,634	$	1,351,722	$	979,908	$	1,359,339
Canadian province of Quebec	934,860		1,628,425		1,006,315		1,599,673

The amortized cost and estimated fair value of fixed maturity securities available-for-sale at March 31, 2015 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		Estimated Fair Value
Available-for-sale:
Due in one year or less	$	594,886	$	600,953
Due after one year through five years	4,504,020		4,771,660
Due after five years through ten years	7,388,162		7,862,501
Due after ten years	6,842,978		8,806,049
Asset and mortgage-backed securities	3,603,670		3,760,060
Total	$	22,933,716	$	25,801,223

Corporate Fixed Maturity Securities

The tables below show the major industry types of the Company’s corporate fixed maturity holdings as of March 31, 2015 and December 31, 2014 (dollars in thousands):



March 31, 2015:			Estimated
	Amortized Cost		Fair Value		% of Total
Finance	$	4,842,257	$	5,186,461	34.2	%
Industrial	7,699,936		8,270,678		54.4
Utility	1,542,396		1,721,996		11.4
Total	$	14,084,589	$	15,179,135	100.0	%

December 31, 2014:			Estimated
	Amortized Cost		Fair Value		% of Total
Finance	$	4,789,568	$	5,066,408	34.0	%
Industrial	7,639,330		8,086,067		54.3
Utility	1,581,706		1,733,108		11.7
Total	$	14,010,604	$	14,885,583	100.0	%

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Other-Than-Temporary Impairments - Fixed Maturity and Equity Securities

As discussed in Note 2 – “Summary of Significant Accounting Policies” of the 2014 Annual Report, a portion of certain other-than-temporary impairment (“OTTI”) losses on fixed maturity securities is 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 amount of pre-tax credit loss impairments on fixed maturity securities held by the Company, for which a portion of the OTTI loss was recognized in AOCI, was $7.3 million and $11.7 million as of March 31, 2015 and 2014, respectively. There were no changes in these amounts from their respective prior-year ending balances.

Unrealized Losses for Fixed Maturity and Equity Securities Available-for-Sale

The following table presents the total gross unrealized losses for the 687 and 932 fixed maturity and equity securities as of March 31, 2015 and December 31, 2014, respectively, where the estimated fair value had declined and remained below amortized cost by the indicated amount (dollars in thousands):



	March 31, 2015				December 31, 2014
	Gross Unrealized Losses		% of Total		Gross Unrealized Losses		% of Total
Less than 20%	$	72,598	73.0	%	$	111,965	83.0	%
20% or more for less than six months	15,318		15.4		13,698		10.1
20% or more for six months or greater	11,546		11.6		9,256		6.9
Total	$	99,462	100.0	%	$	134,919	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 687 and 932 fixed maturity and equity securities that have estimated fair values below amortized cost as of March 31, 2015 and December 31, 2014, 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.

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	Less than 12 months				12 months or greater				Total
			Gross				Gross				Gross
March 31, 2015:	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Investment grade securities:
Corporate securities	$	805,091	$	18,419	$	227,150	$	15,576	$	1,032,241	$	33,995
Residential mortgage-backed securities	100,937		1,507		62,201		3,228		163,138		4,735
Asset-backed securities	285,839		2,774		99,896		3,381		385,735		6,155
Commercial mortgage-backed securities	49,304		162		20,733		1,590		70,037		1,752
State and political subdivisions	—		—		13,647		3,128		13,647		3,128
Other foreign government, supranational and foreign government-sponsored enterprises	109,347		5,560		36,737		1,494		146,084		7,054
Total investment grade securities	1,350,518		28,422		460,364		28,397		1,810,882		56,819
Below investment grade securities:
Corporate securities	357,118		28,279		25,560		2,557		382,678		30,836
Residential mortgage-backed securities	10,308		83		12,033		414		22,341		497
Asset-backed securities	14,478		231		6,715		1,707		21,193		1,938
Commercial mortgage-backed securities	6,739		240		5,522		5,410		12,261		5,650
Other foreign government, supranational and foreign government-sponsored enterprises	15,375		2,145		2,910		128		18,285		2,273
Total below investment grade securities	404,018		30,978		52,740		10,216		456,758		41,194
Total fixed maturity securities	$	1,754,536	$	59,400	$	513,104	$	38,613	$	2,267,640	$	98,013
Non-redeemable preferred stock	$	20,885	$	501	$	6,649	$	904	$	27,534	$	1,405
Other equity securities	8,597		44		—		—		8,597		44
Total equity securities	$	29,482	$	545	$	6,649	$	904	$	36,131	$	1,449



	Less than 12 months				12 months or greater				Total
			Gross				Gross				Gross
December 31, 2014:	Estimated		Unrealized		Estimated		Unrealized		Estimated		Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
Investment grade securities:
Corporate securities	$	1,225,767	$	27,784	$	614,294	$	30,040	$	1,840,061	$	57,824
Canadian and Canadian provincial governments	—		—		1,235		7		1,235		7
Residential mortgage-backed securities	78,864		846		135,414		5,247		214,278		6,093
Asset-backed securities	332,785		4,021		109,411		4,289		442,196		8,310
Commercial mortgage-backed securities	78,632		564		28,375		2,461		107,007		3,025
U.S. government and agencies	81,317		89		32,959		426		114,276		515
State and political subdivisions	13,780		17		18,998		3,438		32,778		3,455
Other foreign government, supranational and foreign government-sponsored enterprises	156,725		7,007		76,111		2,946		232,836		9,953
Total investment grade securities	1,967,870		40,328		1,016,797		48,854		2,984,667		89,182
Below investment grade securities:
Corporate securities	415,886		29,316		32,567		3,404		448,453		32,720
Residential mortgage-backed securities	22,836		293		6,284		225		29,120		518
Asset-backed securities	12,448		274		7,108		1,791		19,556		2,065
Commercial mortgage-backed securities	3,288		249		5,580		5,385		8,868		5,634
State and political subdivisions	964		43		—		—		964		43
Other foreign government, supranational and foreign government-sponsored enterprises	13,986		3,136		—		—		13,986		3,136
Total below investment grade securities	469,408		33,311		51,539		10,805		520,947		44,116
Total fixed maturity securities	$	2,437,278	$	73,639	$	1,068,336	$	59,659	$	3,505,614	$	133,298
Non-redeemable preferred stock	$	11,619	$	235	$	19,100	$	1,292	$	30,719	$	1,527
Other equity securities	—		—		3,545		94		3,545		94
Total equity securities	$	11,619	$	235	$	22,645	$	1,386	$	34,264	$	1,621

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The Company neither has an intention to sell nor does it expect to be required to sell the securities outlined in the table above, as of the dates indicated. 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 and liquidity guidelines.

Unrealized losses on below investment grade securities as of March 31, 2015 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 three months of 2015.

Investment Income, Net of Related Expenses

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



	Three months ended March 31,
	2015			2014
Fixed maturity securities available-for-sale	$	269,768		$	243,962
Mortgage loans on real estate	34,772			33,092
Policy loans	14,040			13,438
Funds withheld at interest	112,260			112,739
Short-term investments	695			965
Other invested assets	12,027			14,501
Investment income	443,562			418,697
Investment expense	(16,671		)	(14,322		)
Investment income, net of related expenses	$	426,891		$	404,375

Investment Related Gains (Losses), Net

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



	Three months ended March 31,
	2015			2014
Fixed maturity and equity securities available for sale:
Other-than-temporary impairment losses on fixed maturity securities recognized in earnings	$	(2,527	)	$	(303	)
Gain on investment activity	19,201			8,067
Loss on investment activity	(13,596		)	(6,583		)
Other impairment losses and change in mortgage loan provision	(4,168		)	1,664
Derivatives and other, net	8,673			81,726
Total investment related gains (losses), net	$	7,583		$	84,571

The decrease in investment related gains for derivatives and other is primarily due to changes in the fair value of embedded derivatives associated with modified coinsurance and funds withheld treaties. The gains recognized in the first quarter of 2014 reflect tightening credit spreads during the quarter.

During the three months ended March 31, 2015 and 2014, the Company sold fixed maturity and equity securities with fair values of $199.6 million and $235.1 million at losses of $13.6 million and $6.6 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 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. The gross balance of the repurchase agreement payable was $101.7 million and $101.4 million as of March 31, 2015 and December 31, 2014, respectively.

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This was fully collateralized by securities with a fair value of $108.3 million and $107.2 million, which were not offset by the payable, resulting in a net exposure of $6.6 million and $5.8 million as of March 31, 2015 and December 31, 2014, respectively.

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 March 31, 2015 and December 31, 2014 (dollars in thousands).



	March 31, 2015				December 31, 2014
	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Borrowed securities	$	193,840	$	207,476	$	201,050	$	212,946
Repurchase program securities pledged	91,875		108,268		92,446		107,158
Repurchase program/reverse repurchase program:
Securities pledged	298,625		317,368		298,466		314,160
Securities received	n/a		346,560		n/a		338,929

Mortgage Loans on Real Estate

Mortgage loans represented approximately 7.8% and 7.4% of the Company’s total investments as of March 31, 2015 and December 31, 2014. 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 represented 20.3% and 18.7% of mortgage loans on real estate as of March 31, 2015 and December 31, 2014, 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 March 31, 2015 and December 31, 2014 (dollars in thousands):



	March 31, 2015				December 31, 2014
Property type:	Recorded Investment		% of Total		Recorded Investment		% of Total
Office building	$	937,939	32.2	%	$	851,749	31.3	%
Retail	890,080		30.5		802,466		29.6
Industrial	474,310		16.2		466,583		17.2
Apartment	404,174		13.8		376,430		13.8
Other commercial	213,113		7.3		221,481		8.1
Total	$	2,919,616	100.0	%	$	2,718,709	100.0	%

The maturities of the mortgage loans, gross of valuation allowances, as of March 31, 2015 and December 31, 2014 are as follows (dollars in thousands):



	March 31, 2015				December 31, 2014
	Recorded Investment		% of Total		Recorded Investment		% of Total
Due within five years	$	923,234	31.6	%	$	860,362	31.6	%
Due after five years through ten years	1,263,984		43.3		1,165,530		42.9
Due after ten years	732,398		25.1		692,817		25.5
Total	$	2,919,616	100.0	%	$	2,718,709	100.0	%

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Information regarding the Company’s credit quality indicators, as determined by the Company's internal evaluation methodology for its recorded investment in mortgage loans, gross of valuation allowances, as of March 31, 2015 and December 31, 2014 is as follows (dollars in thousands):



	March 31, 2015				December 31, 2014
Internal credit quality grade:	Recorded Investment		% of Total		Recorded Investment		% of Total
High investment grade	$	1,404,166	48.0	%	$	1,326,199	48.8	%
Investment grade	1,377,802		47.2		1,235,046		45.4
Average	98,531		3.4		118,152		4.4
Watch list	22,161		0.8		22,285		0.8
In or near default	16,956		0.6		17,027		0.6
Total	$	2,919,616	100.0	%	$	2,718,709	100.0	%

None of the payments due to the Company on its recorded investment in mortgage loans were delinquent as of March 31, 2015 and December 31, 2014.

The following table presents the recorded investment in mortgage loans, by method of measuring impairment, and the related valuation allowances as of March 31, 2015 and December 31, 2014 (dollars in thousands):



	March 31, 2015		December 31, 2014
Mortgage loans:
Individually measured for impairment	$	16,956	$	17,027
Collectively measured for impairment	2,902,660		2,701,682
Mortgage loans, gross of valuation allowances	2,919,616		2,718,709
Valuation allowances:
Individually measured for impairment	713		816
Collectively measured for impairment	5,417		5,655
Total valuation allowances	6,130		6,471
Mortgage loans, net of valuation allowances	$	2,913,486	$	2,712,238

Information regarding the Company’s loan valuation allowances for mortgage loans for the three months ended March 31, 2015 and 2014 is as follows (dollars in thousands):



	Three months ended March 31,
	2015			2014
Balance, beginning of period	$	6,471		$	10,106
Charge-offs, net of recoveries	—			24
Provision (release)	(341		)	(1,664		)
Balance, end of period	$	6,130		$	8,466

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Information regarding the portion of the Company’s mortgage loans that were impaired as of March 31, 2015 and December 31, 2014 is as follows (dollars in thousands):



	Unpaid Principal Balance		Recorded Investment		Related Allowance		Carrying Value
March 31, 2015:
Impaired mortgage loans with no valuation allowance recorded	$	7,296	$	6,693	$	—	$	6,693
Impaired mortgage loans with valuation allowance recorded	10,227		10,263		713		9,550
Total impaired mortgage loans	$	17,523	$	16,956	$	713	$	16,243
December 31, 2014:
Impaired mortgage loans with no valuation allowance recorded	$	7,314	$	6,711	$	—	$	6,711
Impaired mortgage loans with valuation allowance recorded	10,279		10,316		816		9,500
Total impaired mortgage loans	$	17,593	$	17,027	$	816	$	16,211

The Company’s average investment in impaired mortgage loans and the related interest income are reflected in the table below for the periods indicated (dollars in thousands):
	Three months ended March 31,
	2015				2014
	Average Recorded Investment⁽¹⁾		Interest Income		Average Recorded Investment⁽¹⁾		Interest Income
Impaired mortgage loans with no valuation allowance recorded	$	10,290	$	106	$	14,539	$	318
Impaired mortgage loans with valuation allowance recorded	6,702		155		20,554		193
Total impaired mortgage loans	$	16,992	$	261	$	35,093	$	511

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

The Company did not acquire any impaired mortgage loans during the three months ended March 31, 2015 and 2014. The Company had no mortgage loans that were on a nonaccrual status at March 31, 2015 and December 31, 2014.

Policy Loans

Policy loans comprised approximately 3.5% of the Company’s total investments as of both March 31, 2015 and December 31, 2014, substantially all of which are associated with one client. These policy loans present no credit risk because the amount of the loan cannot exceed the obligation due to the ceding company upon the death of the insured or surrender of the underlying policy. The provisions of the treaties in force and the underlying policies determine the policy loan interest rates. As policy loans represent premature distributions of policy liabilities, they have the effect of reducing future disintermediation risk. In addition, the Company earns a spread between the interest rate earned on policy loans and the interest rate credited to corresponding liabilities.

Funds Withheld at Interest

Funds withheld at interest comprised approximately 15.7% and 16.1% of the Company’s total investments as of March 31, 2015 and December 31, 2014, respectively. Of the $5.8 billion funds withheld at interest balance, net of embedded derivatives, as of March 31, 2015, $4.2 billion of the balance is associated with one client. For reinsurance agreements written on a modified coinsurance basis and certain agreements written on a coinsurance funds withheld basis, assets equal to the net statutory reserves are withheld and legally owned and managed by the ceding company and are reflected as funds withheld at interest on the Company’s condensed consolidated balance sheets. In the event of a ceding company’s insolvency, the Company would need to assert a claim on the assets supporting its reserve liabilities. However, the risk of loss to the Company is mitigated by its ability to offset amounts it owes the ceding company for claims or allowances with amounts owed to the Company from the ceding company.

Other Invested Assets

Other invested assets include equity securities, limited partnership interests, joint ventures (other than operating joint ventures), structured loans, derivative contracts, fair value option ("FVO") contractholder-directed unit-linked investments, Federal Home Loan Bank of Des Moines ("FHLB") common stock (included in other in the table below), real estate held-for-investment (included in other in the table below), and equity release mortgages (included in other in the table below). The fair value option was elected for contractholder-directed investments supporting unit-linked variable annuity type liabilities which do not qualify for presentation and reporting as separate accounts. Other invested assets represented approximately 3.3% of the Company’s total investments as of both March 31, 2015 and December 31, 2014. Carrying values of these assets as of March 31, 2015 and December 31, 2014 are as follows (dollars in thousands):

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	March 31, 2015		December 31, 2014
Equity securities	$	134,619	$	126,860
Limited partnerships and real estate joint ventures	450,842		446,604
Structured loans	148,377		164,309
Derivatives	265,020		216,966
FVO contractholder-directed unit-linked investments	136,597		140,344
Other	107,578