SEC Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2016
OR
o 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number : 001-31911
American Equity Investment Life Holding Company
(Exact name of registrant as specified in its charter)
Iowa
 
42-1447959
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
6000 Westown Parkway
West Des Moines, Iowa 50266
(Address of principal executive offices, including zip code)
(515) 221-0002
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 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 o
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 o
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 o
Non-accelerated filer o
 
Smaller reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
APPLICABLE TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:
As of May 4, 2016, there were 82,283,325 shares of the registrant's common stock, $1 par value, outstanding.


TABLE OF CONTENTS
 
Page
 
 
 
 
 
 



Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
 
March 31, 2016
 
December 31, 2015
 
(Unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities:
 
 
 
Available for sale, at fair value (amortized cost: 2016 - $36,696,786; 2015 - $35,823,710)
$
38,410,000

 
$
36,421,839

Held for investment, at amortized cost (fair value: 2016 - $67,672; 2015 - $65,377)
76,672

 
76,622

Equity securities, available for sale, at fair value (cost: 2016 - $7,517; 2015 - $7,515)
7,813

 
7,828

Mortgage loans on real estate
2,471,435

 
2,435,257

Derivative instruments
387,469

 
337,256

Other investments
290,556

 
291,530

Total investments
41,643,945

 
39,570,332

 
 
 
 
Cash and cash equivalents
707,177

 
397,749

Coinsurance deposits
3,586,871

 
3,187,470

Accrued investment income
393,333

 
362,104

Deferred policy acquisition costs
2,667,185

 
2,905,136

Deferred sales inducements
2,047,763

 
2,232,148

Deferred income taxes
101,098

 
232,683

Income taxes recoverable
9,026

 
29,599

Other assets
106,538

 
112,171

Total assets
$
51,262,936

 
$
49,029,392

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Liabilities:
 
 
 
Policy benefit reserves
$
47,456,425

 
$
45,495,431

Other policy funds and contract claims
314,068

 
324,850

Notes payable
393,482

 
393,227

Subordinated debentures
241,550

 
241,452

Other liabilities
623,095

 
629,897

Total liabilities
49,028,620

 
47,084,857

 
 
 
 
Stockholders' equity:
 
 
 
Preferred stock, par value $1 per share, 2,000,000 shares authorized,
  2016 and 2015 - no shares issued and outstanding
—

 
—

Common stock, par value $1 per share, 200,000,000 shares authorized; issued and outstanding:
   2016 - 82,155,327 shares (excluding 3,198,805 treasury shares);
   2015 - 81,354,079 shares (excluding 3,448,750 treasury shares)
82,155

 
81,354

Additional paid-in capital
635,732

 
630,367

Accumulated other comprehensive income
530,119

 
201,663

Retained earnings
986,310

 
1,031,151

Total stockholders' equity
2,234,316

 
1,944,535

Total liabilities and stockholders' equity
$
51,262,936

 
$
49,029,392

See accompanying notes to unaudited consolidated financial statements.

2
Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share data)
(Unaudited)

 
Three Months Ended
March 31,
 
2016
 
2015
Revenues:
 
 
 
Premiums and other considerations
$
7,345

 
$
6,997

Annuity product charges
36,505

 
28,682

Net investment income
450,826

 
399,669

Change in fair value of derivatives
(74,065
)
 
(31,100
)
Net realized gains (losses) on investments, excluding other than temporary impairment ("OTTI") losses
2,687

 
4,879

OTTI losses on investments:
 
 
 
Total OTTI losses
(6,018
)
 
(132
)
Portion of OTTI losses recognized in (from) other comprehensive income
324

 
—

Net OTTI losses recognized in operations
(5,694
)
 
(132
)
Total revenues
417,604

 
408,995

 
 
 
 
Benefits and expenses:
 
 
 
Insurance policy benefits and change in future policy benefits
9,109

 
9,220

Interest sensitive and index product benefits
97,671

 
282,825

Amortization of deferred sales inducements
27,479

 
10,953

Change in fair value of embedded derivatives
265,857

 
51,213

Interest expense on notes payable
6,880

 
7,339

Interest expense on subordinated debentures
3,168

 
3,016

Amortization of deferred policy acquisition costs
49,713

 
14,286

Other operating costs and expenses
26,830

 
21,122

Total benefits and expenses
486,707

 
399,974

Income (loss) before income taxes
(69,103
)
 
9,021

Income tax expense (benefit)
(24,262
)
 
3,118

Net income (loss)
$
(44,841
)
 
$
5,903

 
 
 
 
Earnings (loss) per common share
$
(0.55
)
 
$
0.08

Earnings (loss) per common share - assuming dilution
$
(0.55
)
 
$
0.07

Weighted average common shares outstanding (in thousands):
 
 
 
Earnings (loss) per common share
82,129

 
77,042

Earnings (loss) per common share - assuming dilution
82,961

 
79,118

See accompanying notes to unaudited consolidated financial statements.

3
Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in thousands)
(Unaudited)

 
Three Months Ended
March 31,
 
2016
 
2015
 
 
 
 
Net income (loss)
$
(44,841
)
 
$
5,903

Other comprehensive income:
 
 
 
Change in net unrealized investment gains/losses (1)
505,348

 
264,113

Noncredit component of OTTI losses (1)
(147
)
 
—

Reclassification of unrealized investment gains/losses to net income (loss) (1)
116

 
1,019

Other comprehensive income before income tax
505,317

 
265,132

Income tax effect related to other comprehensive income
(176,861
)
 
(92,795
)
Other comprehensive income
328,456

 
172,337

Comprehensive income
$
283,615

 
$
178,240

(1)
Net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs.
See accompanying notes to unaudited consolidated financial statements.

4
Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Dollars in thousands, except share data)
(Unaudited)

 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
Stockholders'
Equity
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2015
$
81,354

 
$
630,367

 
$
201,663

 
$
1,031,151

 
$
1,944,535

Net loss for period
—

 
—

 
—

 
(44,841
)
 
(44,841
)
Other comprehensive income
—

 
—

 
328,456

 
—

 
328,456

Share-based compensation, including excess income tax benefits
—

 
2,674

 
—

 
—

 
2,674

Issuance of 721,349 shares of common stock under compensation plans, including excess income tax benefits
721

 
2,771

 
—

 
—

 
3,492

Issuance of 79,899 shares of common stock to settle warrants that have reached their expiration
80

 
(80
)
 
—

 
—

 
—

Balance at March 31, 2016
$
82,155

 
$
635,732

 
$
530,119

 
$
986,310

 
$
2,234,316

 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2014
$
76,062

 
$
513,218

 
$
721,401

 
$
829,195

 
$
2,139,876

Net income for period
—

 
—

 
—

 
5,903

 
5,903

Other comprehensive income
—

 
—

 
172,337

 
—

 
172,337

Share-based compensation, including excess income tax benefits
—

 
4,515

 
—

 
—

 
4,515

Issuance of 618,880 shares of common stock under compensation plans, including excess income tax benefits
619

 
3,470

 
—

 
—

 
4,089

Balance at March 31, 2015
$
76,681

 
$
521,203

 
$
893,738

 
$
835,098

 
$
2,326,720

See accompanying notes to unaudited consolidated financial statements.

5
Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(Unaudited)

 
Three Months Ended
March 31,
 
2016
 
2015
Operating activities
 
 
 
Net income (loss)
$
(44,841
)
 
$
5,903

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
 
 
 
Interest sensitive and index product benefits
97,671

 
282,825

Amortization of deferred sales inducements
27,479

 
10,953

Annuity product charges
(36,505
)
 
(28,682
)
Change in fair value of embedded derivatives
265,857

 
51,213

Increase in traditional life and accident and health insurance reserves
(858
)
 
(868
)
Policy acquisition costs deferred
(156,934
)
 
(121,822
)
Amortization of deferred policy acquisition costs
49,713

 
14,286

Provision for depreciation and other amortization
875

 
1,267

Amortization of discounts and premiums on investments
(3,103
)
 
(1,428
)
Realized gains/losses on investments and net OTTI losses recognized in operations
3,007

 
(4,747
)
Change in fair value of derivatives
73,657

 
30,636

Deferred income taxes
(45,276
)
 
(22,541
)
Share-based compensation
2,234

 
1,687

Change in accrued investment income
(31,229
)
 
(31,682
)
Change in income taxes recoverable/payable
20,573

 
22,542

Change in other assets
(1,164
)
 
(918
)
Change in other policy funds and contract claims
(12,544
)
 
(14,171
)
Change in collateral held for derivatives
(26,754
)
 
(326,248
)
Change in other liabilities
(38,041
)
 
(7,113
)
Other
(2,205
)
 
(1,307
)
Net cash provided by (used in) operating activities
141,612

 
(140,215
)
 
 
 
 
Investing activities
 
 
 
Sales, maturities, or repayments of investments:
 
 
 
Fixed maturity securities - available for sale
581,647

 
276,734

Mortgage loans on real estate
84,248

 
109,846

Derivative instruments
6,747

 
214,667

Other investments
4,274

 
7,218

Acquisition of investments:
 
 
 
Fixed maturity securities - available for sale
(1,383,082
)
 
(1,434,934
)
Mortgage loans on real estate
(118,009
)
 
(104,793
)
Derivative instruments
(130,608
)
 
(124,948
)
Other investments
(1,046
)
 
(3,385
)
Purchases of property, furniture and equipment
(244
)
 
(295
)
Net cash used in investing activities
(956,073
)
 
(1,059,890
)

6
Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)

 
Three Months Ended
March 31,
 
2016
 
2015
Financing activities
 
 
 
Receipts credited to annuity and single premium universal life policyholder account balances
$
2,089,739

 
$
1,307,792

Coinsurance deposits
(378,412
)
 
(33,061
)
Return of annuity policyholder account balances
(581,260
)
 
(492,242
)
Proceeds from amounts due under repurchase agreements
—

 
15,075

Excess tax benefits realized from share-based compensation plans
440

 
2,828

Proceeds from issuance of common stock
3,740

 
4,089

Change in checks in excess of cash balance
(10,358
)
 
(12,126
)
Net cash provided by financing activities
1,123,889

 
792,355

Increase (decrease) in cash and cash equivalents
309,428

 
(407,750
)
Cash and cash equivalents at beginning of period
397,749

 
701,514

Cash and cash equivalents at end of period
$
707,177

 
$
293,764

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid during period for:
 
 
 
Interest expense
$
16,278

 
$
16,580

Income taxes
200

 
114

Non-cash operating activity:
 
 
 
Deferral of sales inducements
107,673

 
93,591

Non-cash financing activities:
 
 
 
Common stock issued to settle warrants that have expired
80

 
—

See accompanying notes to unaudited consolidated financial statements.




 

7
Table of Contents

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2016
(Unaudited)


1. Significant Accounting Policies
Consolidation and Basis of Presentation
The accompanying consolidated financial statements of American Equity Investment Life Holding Company (“we”, “us” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. The consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly our financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for the three month period ended March 31, 2016 are not necessarily indicative of the results that may be expected for the year ended December 31, 2016. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements requires the use of management estimates. For further information related to a description of areas of judgment and estimates and other information necessary to understand our financial position and results of operations, refer to the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2015.
Adopted Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Subsequently, in August 2015, the FASB issued an ASU that states that the Securities and Exchange Commission staff would not object to an entity deferring and presenting debt issuance costs related to line-of-credit arrangements as an asset and expensing those costs ratably over the term of the line of credit arrangement. These ASU's became effective for us on January 1, 2016, and retroactive application is required. They did not have a material impact on our consolidated financial statements.
New Accounting Pronouncements
In January 2016, the FASB issued an ASU that, among other aspects of recognition, measurement, presentation and disclosure of financial instruments, primarily requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This ASU will be effective for us on January 1, 2018, and we have not determined the effect it will have on our consolidated financial statements.
In February 2016, the FASB issued an ASU that will require recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU affects accounting and disclosure more dramatically for lessees as accounting for lessors is mainly unchanged. This ASU will be effective for us on January 1, 2019, with early adoption permitted, and we have not determined the effect it will have on our consolidated financial statements.
In March 2016, the FASB issued an ASU related to the accounting for share-based payment transactions. The aspects of accounting guidance affected by this ASU are income taxes, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU will be effective for us on January 1, 2017, with early adoption permitted, and we have not determined the effect it will have on our consolidated financial statements.

8
Table of Contents

2. Fair Values of Financial Instruments
The following sets forth a comparison of the carrying amounts and fair values of our financial instruments:
 
March 31, 2016
 
December 31, 2015
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale
$
38,410,000

 
$
38,410,000

 
$
36,421,839

 
$
36,421,839

Held for investment
76,672

 
67,672

 
76,622

 
65,377

Equity securities, available for sale
7,813

 
7,813

 
7,828

 
7,828

Mortgage loans on real estate
2,471,435

 
2,504,371

 
2,435,257

 
2,471,864

Derivative instruments
387,469

 
387,469

 
337,256

 
337,256

Other investments
285,200

 
288,303

 
285,044

 
290,075

Cash and cash equivalents
707,177

 
707,177

 
397,749

 
397,749

Coinsurance deposits
3,586,871

 
3,220,784

 
3,187,470

 
2,860,882

Interest rate caps
740

 
740

 
1,410

 
1,410

Counterparty collateral
85,477

 
85,477

 
82,312

 
82,312

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Policy benefit reserves
47,113,312

 
39,941,007

 
45,151,460

 
38,435,515

Single premium immediate annuity (SPIA) benefit reserves
313,559

 
325,251

 
324,264

 
336,066

Notes payable
393,482

 
411,252

 
393,227

 
417,752

Subordinated debentures
241,550

 
212,638

 
241,452

 
216,933

Interest rate swap
5,375

 
5,375

 
3,139

 
3,139

Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The objective of a fair value measurement is to determine that price for each financial instrument at each measurement date. We meet this objective using various methods of valuation that include market, income and cost approaches.
We categorize our financial instruments into three levels of fair value hierarchy based on the priority of inputs used in determining fair value. The hierarchy defines the highest priority inputs (Level 1) as quoted prices in active markets for identical assets or liabilities. The lowest priority inputs (Level 3) are our own assumptions about what a market participant would use in determining fair value such as estimated future cash flows. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. We categorize financial assets and liabilities recorded at fair value in the consolidated balance sheets as follows:
Level 1—
Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not adjust the quoted price for these financial instruments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.
Level 2—
Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial instruments in markets that are not active; and models and other valuation methodologies using inputs other than quoted prices that are observable.
Level 3—
Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in Level 3 are securities for which no market activity or data exists and for which we used discounted expected future cash flows with our own assumptions about what a market participant would use in determining fair value.
Transfers of securities among the levels occur at times and depend on the type of inputs used to determine fair value of each security. There were no transfers between levels during any period presented.

9
Table of Contents

Our assets and liabilities which are measured at fair value on a recurring basis as of March 31, 2016 and December 31, 2015 are presented below based on the fair value hierarchy levels:
 
Total
Fair Value
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(Dollars in thousands)
March 31, 2016
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
473,402

 
$
441,625

 
$
31,777

 
$
—

United States Government sponsored agencies
1,566,287

 
—

 
1,566,287

 
—

United States municipalities, states and territories
3,883,737

 
—

 
3,883,737

 
—

Foreign government obligations
221,861

 
—

 
221,861

 
—

Corporate securities
25,168,468

 
9

 
25,168,459

 
—

Residential mortgage backed securities
1,432,353

 
—

 
1,432,353

 
—

Commercial mortgage backed securities
4,503,261

 
—

 
4,503,261

 
—

Other asset backed securities
1,160,631

 
—

 
1,160,631

 
—

Equity securities, available for sale: finance, insurance and real estate
7,813

 
—

 
7,813

 
—

Derivative instruments
387,469

 
—

 
387,469

 
—

Cash and cash equivalents
707,177

 
707,177

 
—

 
—

Interest rate caps
740

 
—

 
740

 
—

Counterparty collateral
85,477

 
—

 
85,477

 
—

 
$
39,598,676

 
$
1,148,811

 
$
38,449,865

 
$
—

Liabilities
 
 
 
 
 
 
 
Interest rate swap
$
5,375

 
$
—

 
$
5,375

 
$
—

Fixed index annuities - embedded derivatives
6,254,466

 
—

 
—

 
6,254,466

 
$
6,259,841

 
$
—

 
$
5,375

 
$
6,254,466

 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
471,256

 
$
438,598

 
$
32,658

 
$
—

United States Government sponsored agencies
1,398,611

 
—

 
1,398,611

 
—

United States municipalities, states and territories
3,755,367

 
—

 
3,755,367

 
—

Foreign government obligations
212,565

 
—

 
212,565

 
—

Corporate securities
23,802,394

 
121

 
23,802,273

 
—

Residential mortgage backed securities
1,462,072

 
—

 
1,462,072

 
—

Commercial mortgage backed securities
4,174,396

 
—

 
4,174,396

 
—

Other asset backed securities
1,145,178

 
—

 
1,145,178

 
—

Equity securities, available for sale: finance, insurance and real estate
7,828

 
—

 
7,828

 
—

Derivative instruments
337,256

 
—

 
337,256

 
—

Cash and cash equivalents
397,749

 
397,749

 
—

 
—

Interest rate caps
1,410

 
—

 
1,410

 
—

Counterparty collateral
82,312

 
—

 
82,312

 
—

 
$
37,248,394

 
$
836,468

 
$
36,411,926

 
$
—

Liabilities
 
 
 
 
 
 
 
Interest rate swap
$
3,139

 
$
—

 
$
3,139

 
$
—

Fixed index annuities - embedded derivatives
5,983,622

 
—

 
—

 
5,983,622

 
$
5,986,761

 
$
—

 
$
3,139

 
$
5,983,622


10
Table of Contents

The following methods and assumptions were used in estimating the fair values of financial instruments during the periods presented in these consolidated financial statements.
Fixed maturity securities and equity securities
The fair values of fixed maturity securities and equity securities in an active and orderly market are determined by utilizing independent pricing services. The independent pricing services incorporate a variety of observable market data in their valuation techniques, including:
•
reported trading prices,
•
benchmark yields,
•
broker-dealer quotes,
•
benchmark securities,
•
bids and offers,
•
credit ratings,
•
relative credit information, and
•
other reference data.
The independent pricing services also take into account perceived market movements and sector news, as well as a security's terms and conditions, including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary.
The independent pricing services provide quoted market prices when available. Quoted prices are not always available due to market inactivity. When quoted market prices are not available, the third parties use yield data and other factors relating to instruments or securities with similar characteristics to determine fair value for securities that are not actively traded. We generally obtain one value from our primary external pricing service. In situations where a price is not available from this service, we may obtain further quotes or prices from additional parties as needed. In addition, for our callable United States Government sponsored agencies, we obtain multiple broker quotes and take the average of the broker prices received. Market indices of similar rated asset class spreads are considered for valuations and broker indications of similar securities are compared. Inputs used by the broker include market information, such as yield data and other factors relating to instruments or securities with similar characteristics. Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes on which one may execute the disposition of the assets.
We validate external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the pricing services, analytical reviews and performance analysis of the prices against trends, and maintenance of a securities watch list. Additionally, as needed we utilize discounted cash flow models or perform independent valuations on a case-by-case basis using inputs and assumptions similar to those used by the pricing services. Although we do identify differences from time to time as a result of these validation procedures, we did not make any significant adjustments as of March 31, 2016 and December 31, 2015.
Mortgage loans on real estate
Mortgage loans on real estate are not measured at fair value on a recurring basis. The fair values of mortgage loans on real estate are calculated using discounted expected cash flows using current competitive market interest rates currently being offered for similar loans. The fair values of impaired mortgage loans on real estate that we have considered to be collateral dependent are based on the fair value of the real estate collateral (based on appraised values) less estimated costs to sell. The inputs utilized to determine fair value of all mortgage loans are unobservable market data (competitive market interest rates and appraised property values); therefore, fair value of mortgage loans falls into Level 3 in the fair value hierarchy.
Derivative instruments
The fair values of derivative instruments, primarily call options, are based upon the amount of cash that we will receive to settle each derivative instrument on the reporting date. These amounts are determined by our investment team using industry accepted valuation models and are adjusted for the nonperformance risk of each counterparty net of any collateral held. Inputs include market volatility and risk free interest rates and are used in income valuation techniques in arriving at a fair value for each option contract. The nonperformance risk for each counterparty is based upon its credit default swap rate. We have no performance obligations related to the call options purchased to fund our fixed index annuity policy liabilities.
Other investments
None of the financial instruments included in other investments are measured at fair value on a recurring basis. Financial instruments included in other investments are policy loans, equity method investments and company owned life insurance (COLI). We have not attempted to determine the fair values associated with our policy loans, as we believe any differences between carrying value and the fair values afforded these instruments are immaterial to our consolidated financial position and, accordingly, the cost to provide such disclosure does not justify the benefit to be derived. The fair value of our equity method investments qualify as Level 3 fair values and were determined by calculating the present value of future cash flows discounted by a risk free rate, a risk spread and a liquidity discount. The risk spread and liquidity discount are rates determined by our investment professionals and are unobservable market inputs. The fair value of our COLI approximates the cash surrender value of the policies and whose fair values fall within Level 2 of the fair value hierarchy.

11
Table of Contents

Cash and cash equivalents
Amounts reported in the consolidated balance sheets for these instruments are reported at their historical cost which approximates fair value due to the nature of the assets assigned to this category.
Interest rate swap and caps
The fair values of our pay fixed/receive variable interest rate swap and our interest rate caps are obtained from third parties and are determined by discounting expected future cash flows using projected LIBOR rates for the term of the swap and caps.
Counterparty collateral
Amounts reported in other assets on the consolidated balance sheets for these instruments are reported at their historical cost which approximates fair value due to the nature of the assets assigned to this category.
Policy benefit reserves, coinsurance deposits and SPIA benefit reserves
The fair values of the liabilities under contracts not involving significant mortality or morbidity risks (principally deferred annuities), are stated at the cost we would incur to extinguish the liability (i.e., the cash surrender value) as these contracts are generally issued without an annuitization date. The coinsurance deposits related to the annuity benefit reserves have fair values determined in a similar fashion. For period-certain annuity benefit contracts, the fair value is determined by discounting the benefits at the interest rates currently in effect for newly purchased immediate annuity contracts. We are not required to and have not estimated the fair value of the liabilities under contracts that involve significant mortality or morbidity risks, as these liabilities fall within the definition of insurance contracts that are exceptions from financial instruments that require disclosures of fair value. Policy benefit reserves, coinsurance deposits and SPIA benefit reserves are not measured at fair value on a recurring basis. All of the fair values presented within these categories fall within Level 3 of the fair value hierarchy as most of the inputs are unobservable market data.
Notes payable
The fair values of our senior unsecured notes are based upon pricing matrices developed by a third party pricing service when quoted market prices are not available and are categorized as Level 2 within the fair value hierarchy. Notes payable are not remeasured at fair value on a recurring basis.
Subordinated debentures
Fair values for subordinated debentures are estimated using discounted cash flow calculations based principally on observable inputs including our incremental borrowing rates, which reflect our credit rating, for similar types of borrowings with maturities consistent with those remaining for the debt being valued. These fair values are categorized as Level 2 within the fair value hierarchy. Subordinated debentures are not measured at fair value on a recurring basis.
Fixed index annuities - embedded derivatives
We estimate the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each valuation date by (i) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and (ii) discounting the excess of the projected contract value amounts at the applicable risk free interest rates adjusted for our nonperformance risk related to those liabilities. The projections of policy contract values are based on our best estimate assumptions for future policy growth and future policy decrements. Our best estimate assumptions for future policy growth include assumptions for the expected index credit on the next policy anniversary date which are derived from the fair values of the underlying call options purchased to fund such index credits and the expected costs of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.
Within this determination we have the following significant unobservable inputs: 1) the expected cost of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary and 2) our best estimates for future policy decrements, primarily lapse, partial withdrawal and mortality rates. As of March 31, 2016 and December 31, 2015, we utilized an estimate of 3.10% and 3.10%, respectively, for the expected cost of annual call options, which are based on estimated account value growth and a historical review of our actual option costs.

12
Table of Contents

Our best estimate assumptions for lapse, partial withdrawal and mortality rates are based on our actual experience and our outlook as to future expectations for such assumptions. These assumptions, which are consistent with the assumptions used in calculating deferred policy acquisition costs and deferred sales inducements, are reviewed on a quarterly basis and are revised as our experience develops and/or as future expectations change. Our mortality rate assumptions are based on 65% of the 1983 Basic Annuity Mortality Tables. The following table presents average lapse rate and partial withdrawal rate assumptions, by contract duration, used in estimating the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each reporting date:
 
 
Average Lapse Rates
 
Average Partial Withdrawal Rates
Contract Duration (Years)
 
Three Months Ended
March 31, 2016
 
Year Ended December 31, 2015
 
Three Months Ended
March 31, 2016
 
Year Ended December 31, 2015
1 - 5
 
1.77%
 
1.58%
 
3.29%
 
3.08%
6 - 10
 
6.60%
 
8.55%
 
3.30%
 
3.55%
11 - 15
 
11.24%
 
12.01%
 
3.31%
 
3.59%
16 - 20
 
12.03%
 
12.99%
 
3.17%
 
3.22%
20+
 
11.68%
 
12.54%
 
3.17%
 
3.22%
Lapse rates are generally expected to increase as surrender charge percentages decrease. Lapse expectations reflect a significant increase in the year in which the surrender charge period on a contract ends.
The following tables provide a reconciliation of the beginning and ending balances for our Level 3 assets and liabilities, which are measured at fair value on a recurring basis using significant unobservable inputs for the three months ended March 31, 2016 and 2015:
 
Three Months Ended
March 31,
 
2016
 
2015
 
(Dollars in thousands)
Available for sale securities
 
 
 
Beginning balance
$
—

 
$
375

Principal returned
—

 
(12
)
Amortization of premium/accretion of discount
—

 
(57
)
Total gains (losses) (realized/unrealized):
 
 
 
Included in other comprehensive income
—

 
36

Included in operations
—

 
—

Ending balance
$
—

 
$
342

The Level 3 assets included in the table above are not material to our financial position, results of operations or cash flows, and it is management's opinion that the sensitivity of the inputs used in determining the fair value of these assets is not material as well.
 
Three Months Ended
March 31,
 
2016
 
2015
 
(Dollars in thousands)
Fixed index annuities - embedded derivatives
 
 
 
Beginning balance
$
5,983,622

 
$
5,574,653

Premiums less benefits
91,129

 
360,395

Change in fair value, net
179,715

 
(69,877
)
Ending balance
$
6,254,466

 
$
5,865,171

Change in fair value, net for each period in our embedded derivatives are included in change in fair value of embedded derivatives in the unaudited consolidated statements of operations.
Certain derivatives embedded in our fixed index annuity contracts are our most significant financial instrument measured at fair value that are categorized as Level 3 in the fair value hierarchy. The contractual obligations for future annual index credits within our fixed index annuity contracts are treated as a "series of embedded derivatives" over the expected life of the applicable contracts. We estimate the fair value of these embedded derivatives at each valuation date by the method described above under fixed index annuities - embedded derivatives. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.

13
Table of Contents

The most sensitive assumption in determining policy liabilities for fixed index annuities is the rates used to discount the excess projected contract values. As indicated above, the discount rate reflects our nonperformance risk. If the discount rates used to discount the excess projected contract values at March 31, 2016, were to increase by 100 basis points, the fair value of the embedded derivatives would decrease by $441.0 million recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be a corresponding decrease of $262.6 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as an increase in amortization of deferred policy acquisition costs and deferred sales inducements. A decrease by 100 basis points in the discount rate used to discount the excess projected contract values would increase the fair value of the embedded derivatives by $494.3 million recorded through operations as an increase in the change in fair value of embedded derivatives and there would be a corresponding increase of $287.4 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as a decrease in amortization of deferred policy acquisition costs and deferred sales inducements.
3. Investments
At March 31, 2016 and December 31, 2015, the amortized cost and fair value of fixed maturity securities and equity securities were as follows:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(Dollars in thousands)
March 31, 2016
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
469,957

 
$
3,505

 
$
(60
)
 
$
473,402

United States Government sponsored agencies
1,519,674

 
46,980

 
(367
)
 
1,566,287

United States municipalities, states and territories
3,448,482

 
437,336

 
(2,081
)
 
3,883,737

Foreign government obligations
210,964

 
18,429

 
(7,532
)
 
221,861

Corporate securities
24,113,794

 
1,490,814

 
(436,140
)
 
25,168,468

Residential mortgage backed securities
1,313,775

 
120,977

 
(2,399
)
 
1,432,353

Commercial mortgage backed securities
4,472,852

 
102,466

 
(72,057
)
 
4,503,261

Other asset backed securities
1,147,288

 
34,010

 
(20,667
)
 
1,160,631

 
$
36,696,786

 
$
2,254,517

 
$
(541,303
)
 
$
38,410,000

Held for investment:
 
 
 
 
 
 
 
Corporate security
$
76,672

 
$
—

 
$
(9,000
)
 
$
67,672

 
 
 
 
 
 
 
 
Equity securities, available for sale:
 
 
 
 
 
 
 
Finance, insurance, and real estate
$
7,517

 
$
296

 
$
—

 
$
7,813

 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
470,567

 
$
988

 
$
(299
)
 
$
471,256

United States Government sponsored agencies
1,386,219

 
26,801

 
(14,409
)
 
1,398,611

United States municipalities, states and territories
3,422,667

 
341,328

 
(8,628
)
 
3,755,367

Foreign government obligations
210,953

 
12,547

 
(10,935
)
 
212,565

Corporate securities
23,597,530

 
887,288

 
(682,424
)
 
23,802,394

Residential mortgage backed securities
1,366,985

 
98,576

 
(3,489
)
 
1,462,072

Commercial mortgage backed securities
4,238,265

 
41,412

 
(105,281
)
 
4,174,396

Other asset backed securities
1,130,524

 
34,534

 
(19,880
)
 
1,145,178

 
$
35,823,710

 
$
1,443,474

 
$
(845,345
)
 
$
36,421,839

Held for investment:
 
 
 
 
 
 
 
Corporate security
$
76,622

 
$
—

 
$
(11,245
)
 
$
65,377

 
 
 
 
 
 
 
 
Equity securities, available for sale:
 
 
 
 
 
 
 
Finance, insurance, and real estate
$
7,515

 
$
313

 
$
—

 
$
7,828

At March 31, 2016, 32% of our fixed income securities have call features, of which 0.2% ($75.1 million) were subject to call redemption and another 1.2% ($448.0 million) will become subject to call redemption during the next twelve months. Approximately 71% of our fixed income securities that have call features are not callable until within six months of their stated maturities.

14
Table of Contents

The amortized cost and fair value of fixed maturity securities at March 31, 2016, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of our mortgage and other asset backed securities provide for periodic payments throughout their lives and are shown below as separate lines.
 
Available for sale
 
Held for investment
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
(Dollars in thousands)
Due in one year or less
$
166,640

 
$
170,202

 
$
—

 
$
—

Due after one year through five years
2,643,302

 
2,774,423

 
—

 
—

Due after five years through ten years
10,835,215

 
11,043,464

 
—

 
—

Due after ten years through twenty years
8,715,797

 
9,407,493

 
—

 
—

Due after twenty years
7,401,917

 
7,918,173

 
76,672

 
67,672

 
29,762,871

 
31,313,755

 
76,672

 
67,672

Residential mortgage backed securities
1,313,775

 
1,432,353

 
—

 
—

Commercial mortgage backed securities
4,472,852

 
4,503,261

 
—

 
—

Other asset backed securities
1,147,288

 
1,160,631

 
—

 
—

 
$
36,696,786

 
$
38,410,000

 
$
76,672

 
$
67,672

Net unrealized gains on available for sale fixed maturity securities and equity securities reported as a separate component of stockholders' equity were comprised of the following:
 
March 31, 2016
 
December 31, 2015
 
(Dollars in thousands)
Net unrealized gains on available for sale fixed maturity securities and equity securities
$
1,713,510

 
$
598,442

Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements
(932,610
)
 
(322,859
)
Deferred income tax valuation allowance reversal
22,534

 
22,534

Deferred income tax expense
(273,315
)
 
(96,454
)
Net unrealized gains reported as accumulated other comprehensive income
$
530,119

 
$
201,663

The National Association of Insurance Commissioners (“NAIC”) assigns designations to fixed maturity securities. These designations range from Class 1 (highest quality) to Class 6 (lowest quality). In general, securities are assigned a designation based upon the ratings they are given by the Nationally Recognized Statistical Rating Organizations (“NRSRO’s”). The NAIC designations are utilized by insurers in preparing their annual statutory statements. NAIC Class 1 and 2 designations are considered “investment grade” while NAIC Class 3 through 6 designations are considered “non-investment grade.” Based on the NAIC designations, we had 97% and 98% of our fixed maturity portfolio rated investment grade at March 31, 2016 and December 31, 2015, respectively.
The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:
 
 
March 31, 2016
 
December 31, 2015
NAIC
Designation
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
(Dollars in thousands)
1
 
$
23,648,794

 
$
25,264,168

 
$
23,363,259

 
$
24,207,801

2
 
11,955,752

 
12,223,107

 
11,709,730

 
11,589,325

3
 
1,023,746

 
894,557

 
758,531

 
643,293

4
 
128,238

 
86,816

 
60,480

 
44,312

5
 
2,100

 
1,537

 
—

 
—

6
 
14,828

 
7,487

 
8,332

 
2,485

 
 
$
36,773,458

 
$
38,477,672

 
$
35,900,332

 
$
36,487,216


15
Table of Contents

The following table shows our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 730 and 1,246 securities, respectively) have been in a continuous unrealized loss position, at March 31, 2016 and December 31, 2015:
 
Less than 12 months
 
12 months or more
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
(Dollars in thousands)
March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
United States Government full faith and credit
$
6,803

 
$
(60
)
 
$
—

 
$
—

 
$
6,803

 
$
(60
)
United States Government sponsored agencies
89,633

 
(367
)
 
—

 
—

 
89,633

 
(367
)
United States municipalities, states and territories
72,441

 
(946
)
 
21,519

 
(1,135
)
 
93,960

 
(2,081
)
Foreign government obligations
19,523

 
(116
)
 
17,200

 
(7,416
)
 
36,723

 
(7,532
)
Corporate securities:
 
 
 
 
 
 
 
 
 
 
 
Finance, insurance and real estate
763,808

 
(25,577
)
 
205,317

 
(18,958
)
 
969,125

 
(44,535
)
Manufacturing, construction and mining
1,597,989

 
(120,533
)
 
616,441

 
(140,715
)
 
2,214,430

 
(261,248
)
Utilities and related sectors
969,160

 
(57,648
)
 
294,026

 
(38,246
)
 
1,263,186

 
(95,894
)
Wholesale/retail trade
231,211

 
(6,500
)
 
54,985

 
(6,543
)
 
286,196

 
(13,043
)
Services, media and other
429,239

 
(12,617
)
 
120,737

 
(8,803
)
 
549,976

 
(21,420
)
Residential mortgage backed securities
61,677

 
(2,372
)
 
1,307

 
(27
)
 
62,984

 
(2,399
)
Commercial mortgage backed securities
1,613,984

 
(64,626
)
 
93,864

 
(7,431
)
 
1,707,848

 
(72,057
)
Other asset backed securities
424,447

 
(11,702
)
 
51,617

 
(8,965
)
 
476,064

 
(20,667
)
 
$
6,279,915

 
$
(303,064
)
 
$
1,477,013

 
$
(238,239
)
 
$
7,756,928

 
$
(541,303
)
Held for investment:
 
 
 
 
 
 
 
 
 
 
 
Corporate security:
 
 
 
 
 
 
 
 
 
 
 
Insurance
$
67,672

 
$
(9,000
)
 
$
—

 
$
—

 
$
67,672

 
$
(9,000
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
United States Government full faith and credit
$
37,730

 
$
(299
)
 
$
—

 
$
—

 
$
37,730

 
$
(299
)
United States Government sponsored agencies
957,053

 
(14,409
)
 
—

 
—

 
957,053

 
(14,409
)
United States municipalities, states and territories
261,823

 
(8,474
)
 
2,846

 
(154
)
 
264,669

 
(8,628
)
Foreign government obligations
42,966

 
(1,762
)
 
15,463

 
(9,173
)
 
58,429

 
(10,935
)
Corporate securities:
 
 
 
 
 
 
 
 
 
 
 
Finance, insurance and real estate
2,077,223

 
(59,607
)
 
49,912

 
(14,855
)
 
2,127,135

 
(74,462
)
Manufacturing, construction and mining
3,517,967

 
(246,456
)
 
376,229

 
(131,003
)
 
3,894,196

 
(377,459
)
Utilities and related sectors
2,240,652

 
(138,940
)
 
97,184

 
(22,565
)
 
2,337,836

 
(161,505
)
Wholesale/retail trade
473,050

 
(17,863
)
 
38,682

 
(8,125
)
 
511,732

 
(25,988
)
Services, media and other
1,037,011

 
(39,937
)
 
32,050

 
(3,073
)
 
1,069,061

 
(43,010
)
Residential mortgage backed securities
162,770

 
(2,958
)
 
6,438

 
(531
)
 
169,208

 
(3,489
)
Commercial mortgage backed securities
2,679,510

 
(105,002
)
 
11,495

 
(279
)
 
2,691,005

 
(105,281
)
Other asset backed securities
457,055

 
(10,581
)
 
46,657

 
(9,299
)
 
503,712

 
(19,880
)
 
$
13,944,810

 
$
(646,288
)
 
$
676,956

 
$
(199,057
)
 
$
14,621,766

 
$
(845,345
)
Held for investment:
 
 
 
 
 
 
 
 
 
 
 
Corporate security:
 
 
 
 
 
 
 
 
 
 
 
Insurance
$
65,377

 
$
(11,245
)
 
$
—

 
$
—

 
$
65,377

 
$
(11,245
)
Based on the results of our process for evaluating available for sale securities in unrealized loss positions for other than temporary impairments, which is discussed in detail later in this footnote, we have determined that the unrealized losses on the securities in the preceding table are temporary. The unrealized losses at March 31, 2016 are principally related to timing of the purchases of these securities, which carry less yield than those available at March 31, 2016. In addition, a general widening of credit spreads has occurred in risk asset classes due to economic uncertainty and concerns of prolonged economic weakness.

16
Table of Contents

The commodity related sectors had a high concentration of gross unrealized losses in our corporate fixed income securities portfolio as of March 31, 2016 and December 31, 2015. Commodity prices, specifically oil, gas and base metals, declined significantly in late 2015, but prices have risen in 2016 to levels that appear sustainable and should support prices and NRSRO ratings longer term. The value of oil has been significantly depressed as the amount of supply from new production has exceeded demand. In addition, iron ore and other key industrial metals have depressed prices as investors perceive the economic slowdown in Asia Pacific will curb demand as supply remains high. The companies in the metal and mining sectors experienced the largest decline in values of their debt in late 2015. In the above table, oil and metals and mining exposure is reflected within the foreign government; manufacturing, construction and mining; and utilities and related sectors. Within these sectors, we continue to monitor the impact to our investment portfolio for those companies that may be adversely affected, both directly and indirectly. Even though the energy holdings and a majority of the metals and mining holdings have seen significant improvements in values as oil and iron ore prices have increased, they could continue to see price volatility and possible downgrades in credit ratings. If oil and commodity prices fall lower and remain at depressed levels for an extended period of time or decline further, certain issuers and investments may come under further stress. At this time, we believe the unrealized losses are temporary due to the fact that the price decline is driven by an over-supply of oil in the energy sector, which we feel is unsustainable long term. Our exposure is in companies that we believe have more financial flexibility and significant operational scale to manage through the downturn. In addition, price declines in the metal and mining sector have been heavily influenced by excess production and softer demand. Companies in the mining sector are more susceptible to rating downgrades and we believe companies will be under continued financial strain if prices decline again. We believe company issuers in our portfolio will be able to meet their debt service obligations.
Approximately 67% and 84% of the unrealized losses on fixed maturity securities shown in the above table for March 31, 2016 and December 31, 2015, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC designations. All of the fixed maturity securities with unrealized losses are current with respect to the payment of principal and interest.
Changes in net unrealized gains on investments for the three months ended March 31, 2016 and 2015 are as follows:
 
Three Months Ended
March 31,
 
2016
 
2015
 
(Dollars in thousands)
Fixed maturity securities held for investment carried at amortized cost
$
2,245

 
$
7,099

Investments carried at fair value:
 
 
 
Fixed maturity securities, available for sale
$
1,115,085

 
$
520,166

Equity securities, available for sale
(17
)
 
42

 
1,115,068

 
520,208

Adjustment for effect on other balance sheet accounts:
 
 
 
Deferred policy acquisition costs and deferred sales inducements
(609,751
)
 
(255,076
)
Deferred income tax asset/liability
(176,861
)
 
(92,795
)
 
(786,612
)
 
(347,871
)
Change in net unrealized gains on investments carried at fair value
$
328,456

 
$
172,337

Proceeds from sales of available for sale securities for the three months ended March 31, 2016 and 2015 were $59.4 million and $169.4 million, respectively. Scheduled principal repayments, calls and tenders for available for sale securities for the three months ended March 31, 2016 and 2015 were $522.3 million and $107.3 million, respectively.

17
Table of Contents

Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Net realized gains (losses) on investments, excluding net OTTI losses for the three months ended March 31, 2016 and 2015, are as follows:
 
Three Months Ended
March 31,
 
2016
 
2015
 
(Dollars in thousands)
Available for sale fixed maturity securities:
 
 
 
Gross realized gains
$
1,487

 
$
2,288

Gross realized losses
(1,231
)
 
(289
)
 
256

 
1,999

Other investments:
 
 
 
Gain on sale of real estate
131

 
838

Loss on sale of real estate
(92
)
 
(382
)
Impairment losses on real estate
—

 
(629
)
 
39

 
(173
)
Mortgage loans on real estate:
 
 
 
Decrease (increase) in allowance for credit losses
(948
)
 
1,798

Recovery of specific allowance
3,340

 
1,255

 
2,392

 
3,053

 
$
2,687

 
$
4,879

Losses on available for sale fixed maturity securities were realized primarily due to strategies to reposition the fixed maturity security portfolio that result in improved net investment income, risk or duration profiles as they pertain to our asset liability management.
We review and analyze all investments on an ongoing basis for changes in market interest rates and credit deterioration. This review process includes analyzing our ability to recover the amortized cost basis of each investment that has a fair value that is materially lower than its amortized cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for other than temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties.
We have a policy and process to identify securities that could potentially have impairments that are other than temporary. This process involves monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:
•
the length of time and the extent to which the fair value has been less than amortized cost or cost;
•
whether the issuer is current on all payments and all contractual payments have been made as agreed;
•
the remaining payment terms and the financial condition and near-term prospects of the issuer;
•
the lack of ability to refinance due to liquidity problems in the credit market;
•
the fair value of any underlying collateral;
•
the existence of any credit protection available;
•
our intent to sell and whether it is more likely than not we would be required to sell prior to recovery for debt securities;
•
our assessment in the case of equity securities including perpetual preferred stocks with credit deterioration that the security cannot recover to cost in a reasonable period of time;
•
our intent and ability to retain equity securities for a period of time sufficient to allow for recovery;
•
consideration of rating agency actions; and
•
changes in estimated cash flows of mortgage and asset backed securities.
We determine whether other than temporary impairment losses should be recognized for debt and equity securities by assessing all facts and circumstances surrounding each security. Where the decline in fair value of debt securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we do not consider these investments to be other than temporarily impaired because we do not intend to sell these investments and it is not more likely than not we will be required to sell these investments before a recovery of amortized cost, which may be maturity. For equity securities, we recognize an impairment charge in the period in which we do not have the intent and ability to hold the securities until recovery of cost or we determine that the security will not recover to book value within a reasonable period of time. We determine what constitutes a reasonable period of time on a security-by-security basis by considering all the evidence available to us, including the magnitude of any unrealized loss and its duration.
Other than temporary impairment losses on equity securities are recognized in operations. If we intend to sell a debt security or if it is more likely than not that we will be required to sell a debt security before recovery of its amortized cost basis, other than temporary impairment has occurred and the difference between amortized cost and fair value will be recognized as a loss in operations.

18
Table of Contents

If we do not intend to sell and it is not more likely than not we will be required to sell the debt security but also do not expect to recover the entire amortized cost basis of the security, an impairment loss would be recognized in operations in the amount of the expected credit loss. We determine the amount of expected credit loss by calculating the present value of the cash flows expected to be collected discounted at each security's acquisition yield based on our consideration of whether the security was of high credit quality at the time of acquisition. The difference between the present value of expected future cash flows and the amortized cost basis of the security is the amount of credit loss recognized in operations. The remaining amount of the other than temporary impairment is recognized in other comprehensive income (loss).
The determination of the credit loss component of a mortgage or asset backed security is based on a number of factors. The primary consideration in this evaluation process is the issuer's ability to meet current and future interest and principal payments as contractually stated at time of purchase. Our review of these securities includes an analysis of the cash flow modeling under various default scenarios considering independent third party benchmarks, the seniority of the specific tranche within the structure of the security, the composition of the collateral and the actual default, loss severity and prepayment experience exhibited. With the input of third party assumptions for default projections, loss severity and prepayment expectations, we evaluate the cash flow projections to determine whether the security is performing in accordance with its contractual obligation.
We utilize the models from a leading structured product software specialist serving institutional investors. These models incorporate each security's seniority and cash flow structure. In circumstances where the analysis implies a potential for principal loss at some point in the future, we use the "best estimate" cash flow projection discounted at the security's effective yield at acquisition to determine the amount of our potential credit loss associated with this security. The discounted expected future cash flows equates to our expected recovery value. Any shortfall of the expected recovery when compared to the amortized cost of the security will be recorded as the credit loss component of other than temporary impairment.
The cash flow modeling is performed on a security-by-security basis and incorporates actual cash flows on the residential mortgage backed securities through the current period, as well as the projection of remaining cash flows using a number of assumptions including default rates, prepayment rates and loss severity rates. The default curves we use are tailored to the Prime or Alt-A residential mortgage backed securities that we own, which assume lower default rates and loss severity for Prime securities versus Alt-A securities. These default curves are scaled higher or lower depending on factors such as current underlying mortgage loan performance, rating agency loss projections, loan to value ratios, geographic diversity, as well as other appropriate considerations.
The following table presents the range of significant assumptions used to determine the credit loss component of other than temporary impairments we have recognized on residential mortgage backed securities for the three months ended March 31, 2016 and 2015, which are all senior level tranches within the structure of the securities:
 
 
 
 
Discount Rate
 
Default Rate
 
Loss Severity
Sector
 
Vintage
 
Min
 
Max
 
Min
 
Max
 
Min
 
Max
Three months ended March 31, 2016
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prime
 
2006
 
7.3
%
 
7.3
%
 
13
%
 
13
%
 
50
%
 
50
%
 
 
2007
 
6.2
%
 
6.4
%
 
18
%
 
31
%
 
50
%
 
55
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three months ended March 31, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Prime
 
2006
 
6.5
%
 
6.5
%
 
14
%
 
14
%
 
40
%
 
40
%
The determination of the credit loss component of a corporate bond (including redeemable preferred stocks) is based on the underlying financial performance of the issuer and their ability to meet their contractual obligations. Considerations in our evaluation include, but are not limited to, credit rating changes, financial statement and ratio analysis, changes in management, significant changes in credit spreads, breaches of financial covenants and a review of the economic outlook for the industry and markets in which they trade. In circumstances where an issuer appears unlikely to meet its future obligation, or the security's price decline is deemed other than temporary, an estimate of credit loss is determined. Credit loss is calculated using default probabilities as derived from the credit default swaps markets in conjunction with recovery rates derived from independent third party analysis or a best estimate of credit loss. This credit loss rate is then incorporated into a present value calculation based on an expected principal loss in the future discounted at the yield at the date of purchase and compared to amortized cost to determine the amount of credit loss associated with the security.
In addition, for debt securities which we do not intend to sell and it is not more likely than not we will be required to sell, but our intent changes due to changes or events that could not have been reasonably anticipated, an other than temporary impairment charge is recognized in net income and amortized cost is written down to fair value. Once an impairment charge has been recorded, we then continue to review the other than temporarily impaired securities for appropriate valuation on an ongoing basis. Unrealized losses may be recognized in future periods through a charge to earnings, should we later conclude that the decline in fair value below amortized cost is other than temporary pursuant to our accounting policy described above. The use of different methodologies and assumptions to determine the fair value of investments and the timing and amount of impairments may have a material effect on the amounts presented in our consolidated financial statements.

19
Table of Contents

The following table summarizes other than temporary impairments for the three months ended March 31, 2016 and 2015, by asset type:
 
Number
of
Securities
 
Total OTTI
Losses
 
Portion of OTTI
Losses
Recognized
in (from) Other
Comprehensive
Income
 
Net OTTI
Losses
Recognized in
Operations
 
 
 
(Dollars in thousands)
Three months ended March 31, 2016
 
 
 
 
 
 
 
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
Corporate securities:
 
 
 
 
 
 
 
Energy
2
 
$
(642
)
 
$
—

 
$
(642
)
Telecommunications
1
 
(4,462
)
 
562

 
(3,900
)
Utilities
1
 
(136
)
 
—

 
(136
)
Residential mortgage backed securities
4
 
—

 
(238
)
 
(238
)
Commercial mortgage backed securities
3
 
(778
)
 
—

 
(778
)
 
11
 
$
(6,018
)
 
$
324

 
$
(5,694
)
 
 
 
 
 
 
 
 
Three months ended March 31, 2015
 
 
 
 
 
 
 
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
Residential mortgage backed securities
1
 
$
(132
)
 
$
—

 
$
(132
)
The cumulative portion of other than temporary impairments determined to be credit losses which have been recognized in operations for debt securities are summarized as follows:
 
Three Months Ended
March 31,
 
2016
 
2015
 
(Dollars in thousands)
Cumulative credit loss at beginning of period
$
(145,824
)
 
$
(127,050
)
Credit losses on securities for which OTTI has not previously been recognized
(5,456
)
 
(132
)
Additional credit losses on securities for which OTTI has previously been recognized
(238
)
 
—

Accumulated losses on securities that were disposed of during the period
—

 
—

Cumulative credit loss at end of period
$
(151,518
)
 
$
(127,182
)
The following table summarizes the cumulative noncredit portion of OTTI and the change in fair value since recognition of OTTI, both of which were recognized in other comprehensive income (loss), by major type of security, for securities that are part of our investment portfolio at March 31, 2016 and December 31, 2015:
 
Amortized Cost
 
OTTI
Recognized in
Other
Comprehensive
Income