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):



	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	%

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.



	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

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. 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	%

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

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):



	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		103,236
Total other invested assets	$	1,243,033	$	1,198,319