Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q
 
ý  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended JuneSeptember 30, 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 001-31901
 
PROTECTIVE LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
 
TENNESSEE 63-0169720
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
 
2801 HIGHWAY 280 SOUTH
BIRMINGHAM, ALABAMA 35223
(Address of principal executive offices and zip code)
 
(205) 268-1000
(Registrant’s telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ý  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 ý  No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See definition of “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer o
 
Accelerated Filer o
   
Non-accelerated filer x
 
Smaller Reporting Company o
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o  No ý
 
Number of shares of Common Stock, $1.00 Par Value, outstanding as of July 29,October 26, 2016:  5,000,000
 


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Table of Contents

PROTECTIVE LIFE INSURANCE COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED JUNESEPTEMBER 30, 2016
 
TABLE OF CONTENTS
 
  Page
 PART I 
   
Item 1.Financial Statements (unaudited): 
 
 
 
 
 
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Controls and Procedures
   
  
   
Risk Factors
Exhibits
 


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PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME (LOSS)
(Unaudited)
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three Months Ended June 30, 2016 For The Three Months Ended June 30, 2015 For The Six Months Ended June 30, 2016 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Revenues 
      
  
 
      
  
Premiums and policy fees$853,351
 $828,058
 $1,701,720
 $1,334,444
 $260,582
$829,835
 $793,572
 $2,531,555
 $2,128,016
 $260,582
Reinsurance ceded(340,594) (351,196) (655,468) (498,009) (91,632)(325,373) (312,256) (980,841) (810,265) (91,632)
Net of reinsurance ceded512,757
 476,862
 1,046,252
 836,435
 168,950
504,462
 481,316
 1,550,714
 1,317,751
 168,950
Net investment income458,783
 408,147
 907,012
 680,358
 164,605
451,818
 413,544
 1,358,830
 1,093,902
 164,605
Realized investment gains (losses): 
      
  
 
      
  
Derivative financial instruments43,548
 10,566
 75,456
 5,618
 22,031
532
 41,895
 75,988
 47,513
 22,031
All other investments88,783
 (102,347) 170,492
 (137,403) 81,153
24,152
 5,309
 194,644
 (132,094) 81,153
Other-than-temporary impairment losses(5,527) (13,395) (8,296) (13,395) (636)(1,898) (14,906) (10,194) (28,301) (636)
Portion recognized in other comprehensive income (before taxes)4,560
 7,661
 4,712
 7,661
 155
(1,410) 4,842
 3,302
 12,503
 155
Net impairment losses recognized in earnings(967) (5,734) (3,584) (5,734) (481)(3,308) (10,064) (6,892) (15,798) (481)
Other income71,938
 75,459
 139,116
 124,640
 23,388
76,132
 74,671
 215,248
 199,311
 23,388
Total revenues1,174,842
 862,953
 2,334,744
 1,503,914
 459,646
1,053,788
 1,006,671
 3,388,532
 2,510,585
 459,646
Benefits and expenses 
      
  
 
      
  
Benefits and settlement expenses, net of reinsurance ceded: (three and six months 2016 Successor - $274,911 and $574,179); (2015 Successor - $303,055 and $419,941); (2015 Predecessor - $87,830)712,647
 693,392
 1,425,668
 1,178,816
 266,575
Benefits and settlement expenses, net of reinsurance ceded: (three and nine months 2016 Successor - $277,383 and $851,562); (2015 Successor - $265,315 and $685,256); (2015 Predecessor - $87,830)732,339
 674,815
 2,158,007
 1,853,631
 266,575
Amortization of deferred policy acquisition costs and value of business acquired21,064
 40,348
 52,105
 68,384
 4,817
43,705
 8,979
 95,810
 77,363
 4,817
Other operating expenses, net of reinsurance ceded: (three and six months 2016 Successor - $51,664 and $100,890); (2015 Successor - $51,146 and $86,839); (2015 Predecessor - $17,700)180,551
 164,780
 361,412
 267,745
 55,407
Other operating expenses, net of reinsurance ceded: (three and nine months 2016 Successor - $49,787 and $150,677); (2015 Successor - $51,174 and $138,013); (2015 Predecessor - $17,700)183,477
 166,756
 544,889
 434,501
 55,407
Total benefits and expenses914,262
 898,520
 1,839,185
 1,514,945
 326,799
959,521
 850,550
 2,798,706
 2,365,495
 326,799
Income (loss) before income tax260,580
 (35,567) 495,559
 (11,031) 132,847
Income tax expense (benefit)87,787
 (9,991) 164,149
 (1,875) 44,325
Net income (loss)$172,793
 $(25,576) $331,410
 $(9,156) $88,522
Income before income tax94,267
 156,121
 589,826
 145,090
 132,847
Income tax expense20,965
 42,542
 185,114
 40,667
 44,325
Net income$73,302
 $113,579
 $404,712
 $104,423
 $88,522
 








See Notes to Consolidated Condensed Financial Statements



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PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited)
 
 Successor Company Predecessor Company
 For The Three Months Ended June 30, 2016 For The Three Months Ended June 30, 2015 For The Six Months Ended June 30, 2016 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
 (Dollars In Thousands) (Dollars In Thousands)
Net income (loss)$172,793
 $(25,576) $331,410
 $(9,156) $88,522
Other comprehensive income (loss): 
      
  
Change in net unrealized gains (losses) on investments, net of income tax: (three and six months 2016 Successor - $312,512 and $547,797); (2015 Successor - $(324,134) and $(481,511)); (2015 Predecessor - $259,616)580,379
 (601,964) 1,017,335
 (894,238) 482,143
Reclassification adjustment for investment amounts included in net income, net of income tax: (three and six months 2016 Successor - $(5,588) and $(6,610)); (2015 Successor - $834 and $703); (2015 Predecessor - $(2,244))(10,377) 1,550
 (12,274) 1,308
 (4,166)
Change in net unrealized gains (losses) relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (three and six months 2016 Successor - $(1,543) and $(1,384)); (2015 Successor - $(2,458) and $(2,458)); (2015 Predecessor - $(131))(2,866) (4,566) (2,572) (4,566) (243)
Change in accumulated (loss) gain - derivatives, net of income tax: (2015 Successor - $12 and $0); (2015 Predecessor - $5)
 23
 
 
 9
Reclassification adjustment for derivative amounts included in net income, net of income tax: (2015 Successor - $(31) and $0); (2015 Predecessor - $13)
 (59) 
 
 23
Total other comprehensive income (loss)567,136
 (605,016) 1,002,489
 (897,496) 477,766
Total comprehensive income (loss)$739,929
 $(630,592) $1,333,899
 $(906,652) $566,288
 Successor Company Predecessor Company
 For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
 (Dollars In Thousands) (Dollars In Thousands)
Net income$73,302
 $113,579
 $404,712
 $104,423
 $88,522
Other comprehensive income (loss): 
      
  
Change in net unrealized gains (losses) on investments, net of income tax: (three and nine months 2016 Successor - $106,446 and $654,243); (2015 Successor - $(25,285) and $(506,797)); (2015 Predecessor - $259,616)197,686
 (46,958) 1,215,021
 (941,196) 482,143
Reclassification adjustment for investment amounts included in net income, net of income tax: (three and nine months 2016 Successor - $575 and $(6,035)); (2015 Successor - $3,961 and $4,664); (2015 Predecessor - $(2,244))1,068
 7,356
 (11,206) 8,664
 (4,166)
Change in net unrealized gains (losses) relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (three and nine months 2016 Successor - $1,278 and $(106)); (2015 Successor - $781 and $(1,677)); (2015 Predecessor - $(131))2,374
 1,451
 (198) (3,115) (243)
Change in accumulated (loss) gain - derivatives, net of income tax: (2015 Successor - $0 and $(45)); (2015 Predecessor - $5)
 
 
 (86) 9
Reclassification adjustment for derivative amounts included in net income, net of income tax: (2015 Successor - $0 and $45); (2015 Predecessor - $13)
 
 
 86
 23
Total other comprehensive income (loss)201,128
 (38,151) 1,203,617
 (935,647) 477,766
Total comprehensive income (loss)$274,430
 $75,428
 $1,608,329
 $(831,224) $566,288
 

















See Notes to Consolidated Condensed Financial Statements


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Table of Contents

PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
 
Successor CompanySuccessor Company
As of
June 30, 2016
 As of
December 31, 2015
As of
September 30, 2016
 As of
December 31, 2015
(Dollars In Thousands)(Dollars In Thousands)
Assets 
  
 
  
Fixed maturities, at fair value (amortized cost: Successor 2016 - $39,286,199; 2015 - $38,389,859)$38,675,207
 $35,507,098
Fixed maturities, at amortized cost (fair value: Successor 2016 - $2,853,788; 2015 - $515,000)2,779,280
 593,314
Equity securities, at fair value (cost: Successor - $681,496; 2015 - $693,147)702,796
 699,925
Mortgage loans (related to securitizations: Successor 2016 - $305,373; 2015 - $359,181)5,748,675
 5,662,812
Investment real estate, net of accumulated depreciation (Successor 2016 - $173; 2015 - $133)7,028
 11,118
Fixed maturities, at fair value (amortized cost: Successor 2016 - $39,592,337; 2015 - $38,389,859)$39,435,064
 $35,507,098
Fixed maturities, at amortized cost (fair value: Successor 2016 - $2,894,615; 2015 - $515,000)2,775,230
 593,314
Equity securities, at fair value (cost: Successor 2016 - $680,987; 2015 - $693,147)699,686
 699,925
Mortgage loans (related to securitizations: Successor 2016 - $296,716; 2015 - $359,181)5,912,683
 5,662,812
Investment real estate, net of accumulated depreciation (Successor 2016 - $209; 2015 - $133)8,006
 11,118
Policy loans1,670,218
 1,699,508
1,656,083
 1,699,508
Other long-term investments933,646
 594,036
950,261
 594,036
Short-term investments244,363
 263,837
168,552
 263,837
Total investments50,761,213
 45,031,648
51,605,565
 45,031,648
Cash295,143
 212,358
407,578
 212,358
Accrued investment income478,505
 472,694
493,466
 472,694
Accounts and premiums receivable284,443
 54,054
134,054
 54,054
Reinsurance receivables5,206,522
 5,307,556
5,184,940
 5,307,556
Deferred policy acquisition costs and value of business acquired1,895,166
 1,562,373
1,914,388
 1,562,373
Goodwill732,443
 732,443
732,443
 732,443
Other intangibles, net of accumulated amortization (Successor 2016 - $58,524; 2015 - $37,869)624,475
 645,131
Property and equipment, net of accumulated depreciation (Successor 2016 - $12,288; 2015 - $7,908)102,397
 101,600
Other intangibles, net of accumulated amortization (Successor 2016 - $68,854; 2015 - $37,869)614,147
 645,131
Property and equipment, net of accumulated depreciation (Successor 2016 - $14,561; 2015 - $7,908)103,502
 101,600
Other assets267,089
 255,283
279,394
 255,283
Income tax receivable3,951
 
70,601
 
Assets related to separate accounts 
  
 
  
Variable annuity12,891,214
 12,829,188
13,164,747
 12,829,188
Variable universal life831,818
 827,610
868,818
 827,610
Total assets$74,374,379
 $68,031,938
$75,573,643
 $68,031,938














 See Notes to Consolidated Condensed Financial Statements

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Table of Contents

PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(continued)
(Unaudited)
 
Successor CompanySuccessor Company
As of
June 30, 2016
 As of
December 31, 2015
As of
September 30, 2016
 As of
December 31, 2015
(Dollars In Thousands)(Dollars In Thousands)
Liabilities 
  
 
  
Future policy benefits and claims$30,590,080
 $29,703,190
$30,685,509
 $29,703,190
Unearned premiums665,923
 651,205
678,735
 651,205
Total policy liabilities and accruals31,256,003
 30,354,395
31,364,244
 30,354,395
Stable value product account balances2,838,674
 2,131,822
3,412,041
 2,131,822
Annuity account balances10,678,701
 10,719,862
10,679,011
 10,719,862
Other policyholders’ funds1,354,970
 1,069,572
1,406,578
 1,069,572
Other liabilities2,011,854
 1,230,500
1,861,729
 1,230,500
Income tax payable
 76,584

 76,584
Deferred income taxes1,980,260
 1,215,180
2,094,922
 1,215,180
Non-recourse funding obligations2,981,271
 1,951,563
2,978,052
 1,951,563
Repurchase program borrowings160,000
 438,185
219,457
 438,185
Liabilities related to separate accounts 
  
 
  
Variable annuity12,891,214
 12,829,188
13,164,747
 12,829,188
Variable universal life831,818
 827,610
868,818
 827,610
Total liabilities66,984,765
 62,844,461
68,049,599
 62,844,461
Commitments and contingencies - Note 13

 



 

Shareowner’s equity 
  
 
  
Preferred Stock; $1 par value, shares authorized: 2,000; Liquidation preference: $2,0002
 2
2
 2
Common Stock, $1 par value, shares authorized and issued: 2016 and 2015 - 5,000,0005,000
 5,000
5,000
 5,000
Additional paid-in-capital7,422,407
 6,274,169
7,422,407
 6,274,169
Retained earnings206,107
 154,697
139,409
 154,697
Accumulated other comprehensive income (loss): 
  
 
  
Net unrealized gains (losses) on investments, net of income tax: (Successor 2016 - $(129,735); 2015 - $(670,922))(240,937) (1,245,998)
Net unrealized gains relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (Successor 2016 - $(1,596); 2015 - $(212))(2,965) (393)
Net unrealized gains (losses) on investments, net of income tax: (Successor 2016 - $648,208; 2015 - $(670,922))(42,183) (1,245,998)
Net unrealized gains relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (Successor 2016 - $(106); 2015 - $(212))(591) (393)
Total shareowner’s equity7,389,614
 5,187,477
7,524,044
 5,187,477
Total liabilities and shareowner’s equity$74,374,379
 $68,031,938
$75,573,643
 $68,031,938










See Notes to Consolidated Condensed Financial Statements


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Table of Contents

PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF SHAREOWNER’S EQUITY
(Unaudited)
 
 
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In-Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareowner’s
Equity
Preferred
Stock
 
Common
Stock
 
Additional
Paid-In-Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Total
Shareowner’s
Equity
Successor Company  
(Dollars In Thousands)(Dollars In Thousands)
Balance, December 31, 2015$2
 $5,000
 $6,274,169
 $154,697
 $(1,246,391) $5,187,477
$2
 $5,000
 $6,274,169
 $154,697
 $(1,246,391) $5,187,477
Net income for the six months ended June 30, 2016 
  
  
 331,410
  
 331,410
Net income for the nine months ended September 30, 2016 
  
  
 404,712
  
 404,712
Other comprehensive income 
  
  
  
 1,002,489
 1,002,489
 
  
  
  
 1,203,617
 1,203,617
Comprehensive income for the six months ended June 30, 2016 
  
  
  
  
 1,333,899
Comprehensive income for the nine months ended September 30, 2016 
  
  
  
  
 1,608,329
Capital contribution 
  
 1,148,238
  
  
 1,148,238
 
  
 1,148,238
  
  
 1,148,238
Dividends paid to the parent company      (280,000)   (280,000)      (420,000)   (420,000)
Balance, June 30, 2016$2
 $5,000
 $7,422,407
 $206,107
 $(243,902) $7,389,614
Balance, September 30, 2016$2
 $5,000
 $7,422,407
 $139,409
 $(42,774) $7,524,044
 
































See Notes to Consolidated Condensed Financial Statements



6

Table of Contents

PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Six Months Ended June 30, 2016 February 1, 2015
to
June 30, 2015
 
January 1, 2015
to
January 31, 2015
For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Cash flows from operating activities   
  
   
  
Net income (loss)$331,410
 $(9,156) $88,522
Net income$404,712
 $104,423
 $88,522
Adjustments to reconcile net income to net cash provided by operating activities: 
  
  
 
  
  
Realized investment losses (gains)(242,364) 137,519
 (102,703)
Amortization of deferred policy acquisition costs and value of business acquired52,105
 68,384
 4,817
Realized investment (gains) losses(263,740) 100,379
 (102,703)
Amortization of DAC and VOBA95,810
 77,363
 4,817
Capitalization of deferred policy acquisition costs(163,578) (132,103) (22,799)(246,073) (210,162) (22,799)
Depreciation and amortization expense24,361
 20,754
 796
37,974
 33,254
 796
Deferred income tax225,255
 (62,353) 91,709
231,631
 4,555
 91,709
Accrued income tax(80,535) 146,576
 (48,469)(147,185) 115,127
 (48,469)
Interest credited to universal life and investment products365,702
 422,093
 79,088
532,998
 521,760
 79,088
Policy fees assessed on universal life and investment products(633,366) (491,769) (90,288)(935,702) (756,276) (90,288)
Change in reinsurance receivables101,034
 138,282
 (98,148)122,616
 181,899
 (98,148)
Change in accrued investment income and other receivables(63,753) (8,398) (1,285)(76,837) 16,984
 (1,285)
Change in policy liabilities and other policyholders’ funds of traditional life and health products(187,989) (158,210) 176,119
(171,016) (157,729) 176,119
Trading securities: 
  
  
 
  
  
Maturities and principal reductions of investments54,710
 40,104
 17,946
93,397
 90,548
 17,946
Sale of investments299,517
 78,302
 26,422
390,412
 107,035
 26,422
Cost of investments acquired(331,920) (135,770) (27,289)(438,886) (174,455) (27,289)
Other net change in trading securities31,036
 83,770
 (26,901)47,879
 66,189
 (26,901)
Amortization of premiums and accretion of discounts on investments and mortgage loans195,147
 170,248
 3,420
308,030
 287,977
 3,420
Change in other liabilities301,898
 9,179
 211,031
383,921
 23,500
 211,031
Other, net(8,653) (25,256) (133,928)(74,798) (39,211) (133,928)
Net cash provided by operating activities$270,017
 $292,196
 $148,060
$295,143
 $393,160
 $148,060
 




















See Notes to Consolidated Condensed Financial Statements


7

Table of Contents

PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)

Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Six Months Ended June 30, 2016 February 1, 2015
to
June 30, 2015
 
January 1, 2015
to
January 31, 2015
For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Cash flows from investing activities 
  
  
 
  
  
Maturities and principal reductions of investments, available-for-sale$630,055
 $202,190
 $59,028
$984,510
 $756,207
 $59,028
Sale of investments, available-for-sale1,209,832
 2,057,339
 200,716
1,541,458
 1,152,725
 200,716
Cost of investments acquired, available-for-sale(2,746,767) (2,584,927) (150,030)(3,839,376) (2,316,843) (150,030)
Change in investments, held-to-maturity(2,188,000) (35,000) 
(2,185,000) (50,000) 
Mortgage loans: 
  
  
 
  
  
New lendings(575,386) (637,908) (100,530)(944,025) (1,101,820) (100,530)
Repayments457,181
 510,580
 45,741
648,109
 894,164
 45,741
Change in investment real estate, net3,883
 52
 7
2,905
 (59) 7
Change in policy loans, net29,290
 32,008
 6,365
43,425
 45,470
 6,365
Change in other long-term investments, net(66,928) (154,647) (25,372)(105,972) (76,572) (25,372)
Change in short-term investments, net(4,060) 33,933
 (39,312)59,225
 22,703
 (39,312)
Net unsettled security transactions112,433
 (46,266) 37,510
52,292
 (30,877) 37,510
Purchase of property and equipment(4,502) (2,444) (648)(8,891) (5,700) (648)
Amounts received from reinsurance transaction325,800
 
 
325,800
 
 
Net cash (used in) provided by investing activities$(2,817,169) $(625,090) $33,475
$(3,425,540) $(710,602) $33,475
Cash flows from financing activities 
  
  
 
  
  
Issuance (repayment) of non-recourse funding obligations2,176,700
 35,000
 
2,173,700
 50,000
 
Repurchase program borrowings(278,185) 552,213
 
(218,728) 405,718
 
Dividends/Return of capital to parent company(280,000) (230,000) 
(420,000) (230,000) 
Investment product deposits and change in universal life deposits2,219,455
 1,222,581
 169,233
3,509,315
 1,951,647
 169,233
Investment product withdrawals(1,208,033) (1,225,576) (240,147)(1,718,670) (1,720,926) (240,147)
Other financing activities, net
 350
 (4)
 
 (4)
Net cash provided by (used in) financing activities$2,629,937
 $354,568
 $(70,918)$3,325,617
 $456,439
 $(70,918)
Change in cash82,785
 21,674
 110,617
195,220
 138,997
 110,617
Cash at beginning of period212,358
 378,903
 268,286
212,358
 378,903
 268,286
Cash at end of period$295,143
 $400,577
 $378,903
$407,578
 $517,900
 $378,903
 
















See Notes to Consolidated Condensed Financial Statements

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PROTECTIVE LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
 
1.                                     BASIS OF PRESENTATION
 
Basis of Presentation
 
Protective Life Insurance Company (the “Company”), a stock life insurance company, was founded in 1907. The Company is a wholly owned subsidiary of Protective Life Corporation (“PLC”), an insurance holding company. On February 1, 2015, PLC became a wholly owned subsidiary of The Dai-ichi Life Insurance Company, Limited, a kabushiki kaisha organized under the laws of Japan (“Dai-ichi Life”), when DL Investment (Delaware), Inc. a wholly owned subsidiary of Dai-ichi Life, merged with and into PLC (the “Merger”). Prior to February 1, 2015, and for the periods reported as “predecessor”, PLC’s stock was publicly traded on the New York Stock Exchange. Subsequent to the Merger date, PLC and the Company remain as SEC registrants within the United States. PLC is a holding company with subsidiaries that provide financial services through the production, distribution, and administration of insurance and investment products.
 
In conjunction with the Merger, the Company elected to apply “pushdown” accounting by applying the guidance allowed by ASC Topic 805, Business Combinations, including the initial recognition of most of the Company’s assets and liabilities at fair value as of the acquisition date, and similarly recognizing goodwill calculated based on the terms of the transaction and the fair value of the new basis of net assets of the Company. The new basis of accounting will be the basis of the accounting records for assets and liabilities held at the acquisition date in the preparation of future financial statements and related disclosures after the Merger date.

These financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for the interim periods presented herein. Such accounting principles differ from statutory reporting practices used by insurance companies in reporting to state regulatory authorities. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair statement of the results for the interim periods presented. Operating results for the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company), are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2016 (Successor Company). The year-end consolidated condensed financial data included herein was derived from audited financial statements but does not include all disclosures required by GAAP within this report. For further information, refer to the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (Successor Company).

The operating results of companies in the insurance industry have historically been subject to significant fluctuations due to changing competition, economic conditions, interest rates, investment performance, insurance ratings, claims, persistency, and other factors.
 
Entities Included
 
The consolidated condensed financial statements for the predecessor and successor periods presented in this report include the accounts of Protective Life Insurance Company and its affiliate companies in which the Company holds a majority voting or economic interest. Intercompany balances and transactions have been eliminated.
 
2.                                     SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
 
Significant Accounting Policies
 
For a full description of significant accounting policies, see Note 2 to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (Successor Company). There were no significant changes to the Company's accounting policies during the sixnine months ended JuneSeptember 30, 2016 (Successor Company).
 
Accounting Pronouncements Recently Adopted

Accounting Standards Update ("ASU") No. 2015-02-Consolidation-Amendments to the Consolidation Analysis. This Update makes several targeted changes to generally accepted accounting principles, including a) eliminating the presumption that a general partner should consolidate a limited partnership and b) eliminating the consolidation model specific to limited partnerships. The amendments also clarify when fees and related party relationships should be considered in the consolidation of variable interest entities. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2015. The Update did not impact the Company's financial position or results of operations, and the Company is preparedhas revised its policies and processes to comply with the revised guidance in future periods.guidance.

ASU No. 2015-03-Interest-Imputation of Interest. The objective of this Update is to eliminate diversity in practice related to the presentation of debt issuance costs. The amendments in this Update require 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. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. The Update is effective for fiscal years beginning after December 15, 2015, and requires revised presentation of debt issuance costs in all periods presented in the financial statements. The Update did not impact

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the Company's financial position or results of operations, and the Company is preparedhas revised its policies and processes to comply with the revised guidance in future periods.guidance.

ASU No. 2015-15 - Interest - Imputation of Interest - Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements. The objective of this Update is to clarify the SEC Staff’s position on presenting and measuring debt issuance costs incurred in connection with line-of-credit arrangements given the lack of guidance on the topic in ASU No. 2015-03. This Update reflects the SEC Staff’s decision to not object when an entity defers and presents debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement. The Update did not impact the Company's financial position or results of operations, and the Company is preparedhas revised its policies and processes to comply with the revised guidance in future periods.guidance.

ASU No. 2015-05 - Intangibles - Goodwill and Other - Internal-Use Software. The amendments in this Update provide guidance to customers about whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The guidance will not change GAAP for a customer’s accounting for service contracts. The Update is effective for annual and interim periods beginning after December 15, 2015. The Update did not impact the Company's financial position or results of operations, and the Company is preparedhas revised its policies and processes to comply with the revised guidance in future periods.new standard.

 Accounting Pronouncements Not Yet Adopted

ASU No. 2014-09-Revenue from Contracts with Customers (Topic 606). This Update provides for significant revisions to the recognition of revenue from contracts with customers across various industries. Under the new guidance, entities are required to apply a prescribed 5-step process to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The accounting for revenues associated with insurance products is not within the scope of this Update. The Update was originally effective for annual and interim periods beginning after December 15, 2016. However, in August 2015, the FASB issued ASU No. 2015-14 - Revenues from Contracts with Customers: Deferral of the Effective Date, to defer the effective date of ASU No. 2014-09 by one year to annual and interim periods beginning after December 15, 2017. Early adoption will be allowed, but not before the original effective date. The Company is reviewing its policies and processes to ensure compliance with the requirements in this Update, upon adoption, and assessing the impact this standard will have on its non-insurance operations.

ASU No. 2014-15-Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. This Update will require management to assess an entity’s ability to continue as a going concern, and will require footnote disclosures in certain circumstances. Under the updated guidance, management should consider relevant conditions and evaluate whether it is probable that the entity will be unable to meet its obligations within one year after the issuance date of the financial statements. The Update is effective for annual periods ending December 31, 2016 and for annual and interim periods thereafter, with early adoption permitted. The amendments in this Update will not impact the Company’s financial position or results of operations. However, the new guidance will require a formal assessment of going concern by management based on criteria prescribed in the new guidance. The Company is reviewing its policies and processesprepared to ensure compliancecomply with the new guidance.revised guidance, upon adoption.

ASU No. 2015-09 - Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts. The amendments in this Update require additional disclosures for short-duration contracts issued by insurance entities. The additional disclosures focus on the liability for unpaid claims and claim adjustment expenses and include incurred and paid claims development information by accident year in tabular form, along with a reconciliation of this information to the statement of financial position. For accident years included in the development tables, the amendments also require disclosure of the total incurred-but-not-reported liabilities and expected development on reported claims, along with claims frequency information unless impracticable. Finally, the amendments require disclosure of the historical average annual percentage payout of incurred claims. With the exception of the current reporting period, claims development information may be presented as supplementary information. The Update is effective for annual periods beginning after December 15, 2015 and interim periods beginning after December 15, 2016. The Company does not anticipate that the additional disclosures introduced in this Update will be material to its financial statements.

ASU No. 2016-01 - Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Most notably, the Update requires that equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) be measured at fair value with changes in fair value recognized in net income. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2017. The Company is reviewing its policies and processes to ensure compliance with the revised guidance.

ASU No. 2016-02 - Leases. The amendments in this Update address certain aspects of recognition, measurement, presentation, and disclosure of leases. The most significant change will relate to the accounting model used by lessees. The Update will require all leases with terms greater than 12 months to be recorded on the balance sheet in the form of a lease asset and liability. The amendments in the Update are effective for annual and interim periods beginning after December 15, 2018. The Company is reviewing its policies and processes to ensure compliance with the revised guidance.

ASU No. 2016-13 - Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The amendments in this Update introduce a new impairment model for certain financial assets, including mortgage loans and reinsurance receivables. The new model will not apply to debt securities classified as available-for-sale. For assets within the

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scope of the new model, an entity will recognize as an allowance its estimate of the contractual cash flows not expected to be collected. This differs from the current impairment model, which requires recognition of credit losses when they have been incurred. The Update also makes targeted changes to the current impairment model for available-for-sale debt securities, which comprise the majority of the Company’s invested assets. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2019. The Company is reviewing its policies and processes to ensure compliance with the requirements in this Update, upon adoption, and assessing the impact this standard will have on its operations and financial results.

ASU No. 2016-15 - Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments. The amendments in this Update are intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. Specific transactions addressed in the new guidance include:Debt prepayment/extinguishment costs, contingent consideration payments, proceeds from the settlement of corporate-owned life insurance policies, and distributions received from equity method investments. The Update does not introduce any new accounting or financial reporting requirements, and is effective for annual and interim periods beginning after December 15, 2018. The Company is reviewing its policies and processes to ensure compliance with the requirements in this Update, upon adoption.

ASU No. 2016-16 - Income Taxes - Intra-Entity Transfers of Assets Other Than Inventory. The objective of this Update is to reduce complexity and diversity in practice related to certain types of intra-entity asset transfers. Under the revised guidance, entities will be required to recognize the income tax consequences of intra-entity transfers of an assets other than inventory when those transfers occur. The Update is effective for annual reporting periods beginning after December 15, 2018 and interim reporting periods beginning after December 15, 2019. The Company is currently reviewing the Update to determine whether the amendments will impact its financial position or results of operations, and whether changes are needed to its policies and processes to comply with the revised guidance.
 
3.                                     REINSURANCE AND FINANCING TRANSACTIONS
 
On January 15, 2016, the Company completed the transaction contemplated by the Master Agreement, dated September 30, 2015 (the “Master Agreement”), with Genworth Life and Annuity Insurance Company (“GLAIC”). Pursuant to the Master Agreement, effective January 1, 2016, the Company entered into a reinsurance agreement (the “Reinsurance Agreement”) under the terms of which the Company coinsures certain term life insurance business of GLAIC (the “GLAIC Block”). In connection with the reinsurance transaction, on January 15, 2016, Golden Gate Captive Insurance Company (“Golden Gate”), a wholly owned subsidiary of the Company, and Steel City, LLC (“Steel City”), a newly formed wholly owned subsidiary of PLC, entered into an 18-year transaction to finance $2.188 billion of “XXX” reserves related to the acquired GLAIC Block and the other term life insurance business reinsured to Golden Gate by the Company and West Coast Life Insurance Company (“WCL”), a direct wholly owned subsidiary of the Company. Steel City issued notes with an aggregate initial principal amount of $2.188 billion to Golden Gate in exchange for a surplus note issued by Golden Gate with an initial principal amount of $2.188 billion. Through the structure, Hannover Life Reassurance Company of America (Bermuda) Ltd., The Canada Life Assurance Company (Barbados Branch) and Nomura Americas Re Ltd. (collectively, the “Risk-Takers”) provide credit enhancement to the Steel City notes for the 18-year term in exchange for credit enhancement fees. The transaction is “non-recourse” to PLC, WCL and the Company, meaning that none of these companies are liable to reimburse the Risk-Takers for any credit enhancement payments required to be made. In connection with the transaction, PLC has entered into certain support agreements under which it guarantees or otherwise supports certain obligations of Golden Gate or Steel City, including a guarantee of the fees to the Risk-Takers. As a result of the financing transaction described above, the $800 million of Golden Gate Series A Surplus Notes held by PLC were contributed to the Company and then subsequently contributed to Golden Gate, which resulted in the extinguishment of these notes. Also on January 15, 2016, Golden Gate paid an extraordinary dividend of $300 million to the Company as approved by the Vermont Department of Financial Regulation.

The transactions described above resulted in an increase to total assets and total liabilities of $2.8 billion. Of the $2.8 billion increase in total assets, $0.6 billion was the result of the reinsurance transaction with GLAIC which included a $280 million increase in VOBA. The remaining $2.2 billion increase to total assets and liabilities is associated with the financing transaction between Golden Gate and Steel City.

The Company considered whether the Reinsurance Agreement constituted the purchase of a business for accounting and reporting purposes pursuant to ASC 805, Business Combinations. While the transaction included a continuation of the revenue-producing activities associated with the reinsured policies, it did not result in the acquisition of a market distribution system, sales force or production techniques. Based on Management’s decision not to pursue distribution opportunities or future sales related to the reinsured policies, the Company accounted for the transaction as a reinsurance agreement under ASC 944, Insurance Contracts and asset acquisition under ASC 805. Accordingly, the Company recorded the assets and liabilities acquired under the reinsurance agreement at fair value and recognized an intangible asset (value of business acquired or “VOBA”) equal to the excess of the fair value of assets acquired over liabilities assumed, measured in accordance with the Company's accounting policies for insurance and reinsurance contracts that it issues or holds pursuant to ASC 944.
 
4.                                     DAI-ICHI MERGER
 
On February 1, 2015 PLC, subsequent to required approvals from PLC’s shareholders and relevant regulatory authorities, became a wholly owned subsidiary of Dai-ichi Life as contemplated by the Agreement and Plan of Merger (the “Merger Agreement”) with Dai-ichi Life and DL Investment (Delaware), Inc., a Delaware corporation and wholly owned subsidiary of Dai-ichi Life, which provided for the Merger of DL Investment (Delaware), Inc. with and into PLC, with PLC surviving the Merger as a wholly owned subsidiary of Dai-ichi Life. On February 1, 2015 each share of PLC’s common stock outstanding was converted into the right to receive $70 per share, without interest (the “Per Share Merger Consideration”). The aggregate cash consideration paid in connection with the Merger for the outstanding shares of common stock was approximately $5.6 billion and paid directly to the


shareowners of record by Dai-ichi Life. The Merger provided Dai-ichi Life with a platform for growth in the United States, where it did not previously have a significant presence. In connection with the completion of the Merger, PLC’s previously publicly traded equity was delisted from the NYSE, although PLC and the Company remain SEC registrants for financial reporting purposes in the United States.
 
The Merger was accounted for under the acquisition method of accounting under ASC Topic 805. In accordance with ASC Topic 805-20-30, all identifiable assets acquired and liabilities assumed were measured at fair value as of the acquisition date. On the date of the Merger, goodwill of $735.7 million represented the cost in excess of the fair value of PLC’s net assets acquired (including identifiable intangibles) in the Merger, and reflected the Company’s assembled workforce, future growth potential and other sources of value not associated with identifiable assets. During the measurement period subsequent to February 1, 2015, the Company made adjustments to provisional amounts related to certain tax balances that resulted in a decrease to goodwill of $3.3 million from the amount recorded at the Merger date. The balance of goodwill associated with the Merger as of December 31, 2015 (Successor Company) and JuneSeptember 30, 2016 (Successor Company) was $732.4 million. None of the goodwill is tax deductible.


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The following table summarizes the fair value of assets acquired and liabilities assumed at the acquisition date:
 
 Fair Value
 As of
 February 1, 2015
 (Dollars In Thousands)
Assets 
Fixed maturities$38,342,948
Equity securities699,081
Mortgage loans5,580,229
Investment real estate7,456
Policy loans1,751,872
Other long-term investments657,346
Short-term investments311,236
Total investments47,350,168
Cash378,903
Accrued investment income483,691
Accounts and premiums receivable104,260
Reinsurance receivables5,538,637
Value of business acquired1,278,064
Goodwill735,712
Other intangibles683,000
Property and equipment102,736
Other assets224,555
Income tax receivable50,117
Assets related to separate accounts 
Variable annuity12,970,587
Variable universal life819,188
Total assets$70,719,618
Liabilities 
Future policy and benefit claims$30,195,397
Unearned premiums622,278
Total policy liabilities and accruals30,817,675
Stable value product account balances1,932,277
Annuity account balances10,941,661
Other policyholders’ funds1,388,083
Other liabilities1,533,666
Deferred income taxes1,861,632
Non-recourse funding obligations1,895,636
Repurchase program borrowings50,000
Liabilities related to separate accounts 
Variable annuity12,970,587
Variable universal life819,188
Total liabilities64,210,405
Net assets acquired$6,509,213
 
Treatment of Benefit Plans
 
At or immediately prior to the Merger, each stock appreciation right with respect to shares of PLC’s Common Stock granted under any Stock Plan (each, a “SAR”) that were outstanding and unexercised immediately prior to the Merger and that had a base price per share of Common Stock underlying such SAR (the “Base Price”) that was less than the Per Share Merger Consideration (each such SAR, an “In-the-Money SAR”), whether or not exercisable or vested, was cancelled and converted into the right to receive an amount in cash less any applicable withholding taxes, determined by multiplying (i) the excess of the Per

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Share Merger Consideration over the Base Price of such In-the-Money SAR by (ii) the number of shares of Common Stock subject to such In-the-Money SAR (such amount, the “SAR Consideration”).
 
At or immediately prior to the effective time of the Merger, each restricted stock unit with respect to a share of PLC Common Stock granted under any Stock Plan (each, a “RSU”) that was outstanding immediately prior to the Merger, whether or not vested, was cancelled and converted into the right to receive an amount in cash, without interest, less any applicable withholding taxes, determined by multiplying (i) the Per Share Merger Consideration by (ii) the number of RSUs.

The number of performance shares earned for each award of performance shares granted under any Stock Plan was calculated by determining the number of performance shares that would have been paid if the subject award period had ended on the December 31 immediately preceding the Merger (based on the conditions set for payment of performance share awards for the subject award period), provided that the number of performance shares earned for each award were not less than the aggregate number of performance shares at the target performance level. Each performance share earned that was outstanding immediately prior to the Merger, whether or not vested, was cancelled and converted into the right to receive an amount in cash, without interest, less any applicable withholding taxes, determined by multiplying (i) the Per Share Merger Consideration by (ii) the number of Performance Shares.
 
5.                                     MONY CLOSED BLOCK OF BUSINESS
 
In 1998, MONY Life Insurance Company (“MONY”) converted from a mutual insurance company to a stock corporation (“demutualization”). In connection with its demutualization, an accounting mechanism known as a closed block (the “Closed Block”) was established for certain individuals’ participating policies in force as of the date of demutualization. Assets, liabilities, and earnings of the Closed Block are specifically identified to support its participating policyholders. The Company acquired the Closed Block in conjunction with the acquisition of MONY in 2013.

Assets allocated to the Closed Block inure solely to the benefit of each Closed Block’s policyholders and will not revert to the benefit of MONY or the Company. No reallocation, transfer, borrowing or lending of assets can be made between the Closed Block and other portions of MONY’s general account, any of MONY’s separate accounts or any affiliate of MONY without the approval of the Superintendent of The New York State Department of Financial Services (the “Superintendent”). Closed Block assets and liabilities are carried on the same basis as similar assets and liabilities held in the general account.

The excess of Closed Block liabilities over Closed Block assets (adjusted to exclude the impact of related amounts in accumulated other comprehensive income (loss) (“AOCI”)) at the acquisition date of October 1, 2013, represented the estimated maximum future post-tax earnings from the Closed Block that would be recognized in income from continuing operations over the period the policies and contracts in the Closed Block remain in force. In connection with the acquisition of MONY, the Company developed an actuarial calculation of the expected timing of MONY’s Closed Block’s earnings as of October 1, 2013. Pursuant to the acquisition of the Company by Dai-ichi Life, this actuarial calculation of the expected timing of MONY’s Closed Block earnings was recalculated and reset as of February 1, 2015, along with the establishment of a policyholder dividend obligation as of such date.

If the actual cumulative earnings from the Closed Block are greater than the expected cumulative earnings, only the expected earnings will be recognized in the Company’s net income. Actual cumulative earnings in excess of expected cumulative earnings at any point in time are recorded as a policyholder dividend obligation because they will ultimately be paid to Closed Block policyholders as an additional policyholder dividend unless offset by future performance that is less favorable than originally expected. If a policyholder dividend obligation has been previously established and the actual Closed Block earnings in a subsequent period are less than the expected earnings for that period, the policyholder dividend obligation would be reduced (but not below zero). If, over the period the policies and contracts in the Closed Block remain in force, the actual cumulative earnings of the Closed Block are less than the expected cumulative earnings, only actual earnings would be recognized in income from continuing operations. If the Closed Block has insufficient funds to make guaranteed policy benefit payments, such payments will be made from assets outside the Closed Block.

Many expenses related to Closed Block operations, including amortization of VOBA, are charged to operations outside of the Closed Block; accordingly, net revenues of the Closed Block do not represent the actual profitability of the Closed Block operations. Operating costs and expenses outside of the Closed Block are, therefore, disproportionate to the business outside of the Closed Block.


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Summarized financial information for the Closed Block as of JuneSeptember 30, 2016 (Successor Company) and December 31, 2015 (Successor Company) is as follows:
 
Successor CompanySuccessor Company
As of
June 30, 2016
 As of
December 31, 2015
As of
September 30, 2016
 As of
December 31, 2015
(Dollars In Thousands)(Dollars In Thousands)
Closed block liabilities 
  
 
  
Future policy benefits, policyholders’ account balances and other policyholder liabilities$5,939,342
 $6,010,520
$5,913,411
 $6,010,520
Policyholder dividend obligation232,422
 
264,107
 
Other liabilities13,268
 24,539
52,435
 24,539
Total closed block liabilities6,185,032
 6,035,059
6,229,953
 6,035,059
Closed block assets 
  
 
  
Fixed maturities, available-for-sale, at fair value$4,677,305
 $4,426,090
$4,696,136
 $4,426,090
Mortgage loans on real estate245,997
 247,162
201,078
 247,162
Policy loans726,563
 746,102
717,887
 746,102
Cash
 34,420
79,115
 34,420
Other assets148,763
 162,640
155,360
 162,640
Total closed block assets5,798,628
 5,616,414
5,849,576
 5,616,414
Excess of reported closed block liabilities over closed block assets386,404
 418,645
380,377
 418,645
Portion of above representing accumulated other comprehensive income: 
  
 
  
Net unrealized investment gains (losses) net of policyholder dividend obligation of $(9,488) (Successor) and $(179,360) (Successor)
 (18,597)
Net unrealized investment gains (losses) net of policyholder dividend obligation of $16,169 (Successor) and $(179,360) (Successor)
 (18,597)
Future earnings to be recognized from closed block assets and closed block liabilities$386,404

$400,048
$380,377

$400,048
 
Reconciliation of the policyholder dividend obligation is as follows:
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Six Months Ended
June 30, 2016
 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Nine Months Ended
September 30, 2016
 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Policyholder dividend obligation, beginning of period$
 $323,432
 $366,745
$
 $323,432
 $366,745
Applicable to net revenue (losses)(28,921) (15,096) (1,369)(36,707) (27,854) (1,369)
Change in net unrealized investment gains (losses) allocated to the policyholder dividend obligation; includes deferred tax benefits of $5,109 (Successor); $89,618 (2015 - Successor); $47,277 (2015 - Predecessor)261,343
 (256,053) 135,077
Change in net unrealized investment gains (losses) allocated to the policyholder dividend obligation; includes deferred tax benefits of $(8,706) (Successor); $(83,000) (2015 - Successor); $47,277 (2015 - Predecessor)300,814
 (237,143) 135,077
Policyholder dividend obligation, end of period$232,422
 $52,283
 $500,453
$264,107
 $58,435
 $500,453


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Closed Block revenues and expenses were as follows:
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three
Months Ended
September 30, 2016
 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Revenues 
      
  
 
      
  
Premiums and other income$47,320
 $49,998
 $91,239
 $81,669
 $15,065
$44,043
 $46,610
 $135,282
 $128,279
 $15,065
Net investment income52,008
 54,833
 102,875
 87,681
 19,107
53,582
 54,593
 156,458
 142,274
 19,107
Net investment gains450
 2,216
 637
 2,850
 568
326
 167
 963
 3,017
 568
Total revenues99,778
 107,047
 194,751
 172,200
 34,740
97,951
 101,370
 292,703
 273,570
 34,740
Benefits and other deductions 
      
  
 
      
  
Benefits and settlement expenses92,029
 98,975
 172,084
 154,746
 31,152
88,143
 90,966
 260,227
 245,711
 31,152
Other operating expenses653
 263
 1,677
 474
 
537
 258
 2,214
 733
 
Total benefits and other deductions92,682
 99,238
 173,761
 155,220
 31,152
88,680
 91,224
 262,441
 246,444
 31,152
Net revenues before income taxes7,096
 7,809
 20,990
 16,980
 3,588
9,271
 10,146
 30,262
 27,126
 3,588
Income tax expense2,484
 2,733
 7,346
 5,943
 1,256
3,245
 3,551
 10,591
 9,494
 1,256
Net revenues$4,612
 $5,076
 $13,644
 $11,037
 $2,332
$6,026
 $6,595
 $19,671
 $17,632
 $2,332
 
6.                                     INVESTMENT OPERATIONS
 
Net realized gains (losses) for all other investments are summarized as follows:
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three Months Ended
June 30, 2016
 For The Three Months Ended June 30, 2015 For The Six Months Ended June 30, 2016 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended
September 30, 2016
 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Fixed maturities$16,730
 $3,329
 $22,432
 $3,702
 $6,891
$1,665
 $(1,304) $24,097
 $2,398
 $6,891
Equity securities202
 21
 36
 21
 

 51
 36
 72
 
Impairments on corporate securities(964) (5,734) (3,581) (5,734) (481)(3,308) (10,064) (6,892) (15,798) (481)
Modco trading portfolio76,201
 (108,741) 154,355
 (141,901) 73,062
23,995
 8,377
 178,353
 (133,524) 73,062
Other investments(4,353) 3,044
 (6,334) 775
 1,200
(1,508) (1,815) (7,842) (1,040) 1,200
Total realized gains (losses) - investments$87,816
 $(108,081) $166,908
 $(143,137) $80,672
$20,844
 $(4,755) $187,752
 $(147,892) $80,672
 
Gross realized gains and gross realized losses on investments available-for-sale (fixed maturities, equity securities, and short-term investments) are as follows:
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three Months Ended June 30, 2016 For The Three Months Ended June 30, 2015 For The Six Months Ended June 30, 2016 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended
September 30, 2016
 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Gross realized gains$18,752
 $5,425
 $27,781
 $6,932
 $6,920
$3,223
 $714
 $31,004
 $7,646
 $6,920
Gross realized losses$(2,784) $(7,809) $(8,894) $(8,943) $(469)$(4,866) $(12,031) $(13,763) $(20,974) $(469)
Impairments losses included in gross realized losses$(964) $(5,734) $(3,581) $(5,734) $
$(3,308) $(10,064) $(6,892) $(15,798) $(481)


15

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The chart below summarizes the fair value (proceeds) and the gains/losses realized on securities the Company sold that were in an unrealized gain position and an unrealized loss position.
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three Months Ended June 30, 2016 For The Three Months Ended June 30, 2015 For The Six Months Ended June 30, 2016 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended
September 30, 2016
 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Securities in an unrealized gain position:                  
Fair value (proceeds)$513,544
 $430,058
 $819,775
 $712,938
 $172,551
$167,272
 $94,825
 $987,048
 $807,763
 $172,551
Gains realized$18,752
 $5,425
 $27,781
 $6,932
 $6,920
$3,223
 $715
 $31,004
 $7,646
 $6,920
                  
Securities in an unrealized loss
position(1):
                  
Fair value (proceeds)$6,895
 $28,644
 $60,582
 $49,326
 $435
$7,105
 $34,591
 $67,688
 $83,917
 $435
Losses realized(2)
$(1,820) $(2,075) $(5,313) $(3,209) $(29)$(1,558) $(1,967) $(6,871) $(5,175) $(29)
                  
(1) The Company made the decision to exit these holdings in conjunction with its overall asset liability management process.
(1) The Company made the decision to exit these holdings in conjunction with its overall asset liability management process.
(1) The Company made the decision to exit these holdings in conjunction with its overall asset liability management process.
(2) The losses realized for the period of January 1, 2015 to January 31, 2015 (Predecessor Company), were immaterial to the Company.

 

16

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The amortized cost and fair value of the Company’s investments classified as available-for-sale as of JuneSeptember 30, 2016 (Successor Company) and December 31, 2015 (Successor Company), are as follows:
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI(1)
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI(1)
Successor Company  
As of June 30, 2016 
As of September 30, 2016 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI(1)
 (Dollars In Thousands)   (Dollars In Thousands) 
Fixed maturities:  
  
  
  
  
 
Residential mortgage-backed securities $1,891,316
 $49,750
 $(9,253) $1,931,813
 $(1) $1,842,012
 $49,259
 $(4,558) $1,886,713
 $
Commercial mortgage-backed securities 1,552,028
 29,870
 (3,726) 1,578,172
 
 1,654,152
 31,706
 (2,632) 1,683,226
 
Other asset-backed securities 1,151,430
 5,267
 (36,055) 1,120,642
 
 1,202,982
 14,625
 (15,691) 1,201,916
 
U.S. government-related securities 1,350,769
 21,232
 (205) 1,371,796
 
 1,299,876
 13,092
 (1,789) 1,311,179
 
Other government-related securities 18,348
 332
 
 18,680
 
 18,350
 184
 (2) 18,532
 
States, municipals, and political subdivisions 1,727,664
 31,429
 (21,594) 1,737,499
 
 1,725,351
 25,239
 (23,329) 1,727,261
 
Corporate securities 28,740,691
 373,820
 (1,051,924) 28,062,587
 (4,560) 28,966,811
 488,460
 (731,249) 28,724,022
 (909)
Preferred stock 64,362
 1,732
 (1,667) 64,427
 
 94,362
 1,227
 (1,815) 93,774
 
 36,496,608
 513,432
 (1,124,424) 35,885,616
 (4,561) 36,803,896
 623,792
 (781,065) 36,646,623
 (909)
Equity securities 673,448
 26,392
 (5,092) 694,748
 
 673,709
 25,454
 (6,755) 692,408
 
Short-term investments 206,157
 
 
 206,157
 
 142,870
 
 
 142,870
 
 $37,376,213
 $539,824
 $(1,129,516) $36,786,521
 $(4,561) $37,620,475
 $649,246
 $(787,820) $37,481,901
 $(909)
                    
As of December 31, 2015                    
Fixed maturities:  
  
  
  
  
  
  
  
  
  
Residential mortgage-backed securities $1,773,099
 $9,286
 $(17,112) $1,765,273
 $
 $1,773,099
 $9,286
 $(17,112) $1,765,273
 $
Commercial mortgage-backed securities 1,327,288
 428
 (41,852) 1,285,864
 
 1,327,288
 428
 (41,852) 1,285,864
 
Other asset-backed securities 813,056
 2,758
 (18,763) 797,051
 
 813,056
 2,758
 (18,763) 797,051
 
U.S. government-related securities 1,566,260
 449
 (34,532) 1,532,177
 
 1,566,260
 449
 (34,532) 1,532,177
 
Other government-related securities 18,483
 
 (743) 17,740
 
 18,483
 
 (743) 17,740
 
States, municipals, and political subdivisions 1,729,732
 682
 (126,814) 1,603,600
 
 1,729,732
 682
 (126,814) 1,603,600
 
Corporate securities 28,433,530
 26,147
 (2,681,020) 25,778,657
 (605) 28,433,530
 26,147
 (2,681,020) 25,778,657
 (605)
Preferred stock 64,362
 192
 (1,867) 62,687
 
 64,362
 192
 (1,867) 62,687
 
 35,725,810
 39,942
 (2,922,703) 32,843,049
 (605) 35,725,810
 39,942
 (2,922,703) 32,843,049
 (605)
Equity securities 684,888
 13,255
 (6,477) 691,666
 
 684,888
 13,255
 (6,477) 691,666
 
Short-term investments 202,110
 
 
 202,110
 
 202,110
 
 
 202,110
 
 $36,612,808
 $53,197
 $(2,929,180) $33,736,825
 $(605) $36,612,808
 $53,197
 $(2,929,180) $33,736,825
 $(605)
 
(1) These amounts are included in the gross unrealized gains and gross unrealized losses columns above.
 
As of JuneSeptember 30, 2016 (Successor Company) and December 31, 2015 (Successor Company), the Company had an additional $2.8 billion and $2.7 billion of fixed maturities, $8.0$7.3 million and $8.3 million of equity securities, and $38.2$25.7 million and $61.7 million of short-term investments classified as trading securities, respectively.
 

17

Table of Contents

The amortized cost and fair value of available-for-sale and held-to-maturity fixed maturities as of JuneSeptember 30, 2016 (Successor Company), by expected maturity, are shown below. Expected maturities of securities without a single maturity date are allocated based on estimated rates of prepayment that may differ from actual rates of prepayment.
 
Successor CompanySuccessor Company
Available-for-sale Held-to-maturityAvailable-for-sale Held-to-maturity
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Due in one year or less$750,175
 $750,605
 $
 $
$786,505
 $787,980
 $
 $
Due after one year through five years6,878,977
 6,918,323
 
 
6,834,174
 6,901,114
 
 
Due after five years through ten years7,673,357
 7,783,110
 
 
7,735,392
 7,887,064
 
 
Due after ten years21,194,099
 20,433,578
 2,779,280
 2,853,788
21,447,825
 21,070,465
 2,775,230
 2,894,615
$36,496,608
 $35,885,616
 $2,779,280
 $2,853,788
$36,803,896
 $36,646,623
 $2,775,230
 $2,894,615
 
The chart below summarizes the Company's other-than-temporary impairments of investments. All of the impairments were related to fixed maturities.
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three Months Ended June 30, 2016 For The Three Months Ended June 30, 2015 For The Six Months Ended June 30, 2016 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended
September 30, 2016
 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Other-than-temporary impairments$(5,527) $(13,395) $(8,296) $(13,395) $(636)$(1,898) $(14,906) $(10,194) $(28,301) $(636)
Non-credit impairment losses recorded in other comprehensive income4,560
 7,661
 4,712
 7,661
 155
(1,410) 4,842
 3,302
 12,503
 155
Net impairment losses recognized in earnings$(967) $(5,734) $(3,584) $(5,734) $(481)$(3,308) $(10,064) $(6,892) $(15,798) $(481)

There were no other-than-temporary impairments related to fixed maturities or equity securities that the Company intended to sell or expected to be required to sell for the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company), for the three months ended JuneSeptember 30, 2015 (Successor Company), for the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company), and for the period of January 1, 2015 to January 31, 2015 (Predecessor Company).
 
The following chart is a rollforward of available-for-sale credit losses on fixed maturities held by the Company for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (loss): 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three Months Ended
June 30, 2016
 For The Three Months Ended June 30, 2015 For The Six Months Ended June 30, 2016 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended
September 30, 2016
 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Beginning balance$2,619
 $
 $22,761
 $
 $15,463
$964
 $4,472
 $22,761
 $
 $15,463
Additions for newly impaired securities964
 4,472
 3,056
 4,472
 
1,721
 
 4,777
 4,472
 
Additions for previously impaired securities
 
 525
 
 221
1,521
 9,479
 2,046
 9,479
 221
Reductions for previously impaired securities due to a change in expected cash flows
 
 (22,759) 
 
(4) 
 (22,763) 
 
Reductions for previously impaired securities that were sold in the current period(2,619) 
 (2,619) 
 

 (687) (2,619) (687) 
Ending balance$964
 $4,472
 $964
 $4,472
 $15,684
$4,202
 $13,264
 $4,202
 $13,264
 $15,684


18

Table of Contents

The following table includes the gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of JuneSeptember 30, 2016 (Successor Company):
 
Less Than 12 Months 12 Months or More TotalLess Than 12 Months 12 Months or More Total
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
(Dollars In Thousands)(Dollars In Thousands)
Residential mortgage-backed securities$192,301
 $(3,103) $152,965
 $(6,150) $345,266
 $(9,253)$86,908
 $(433) $180,768
 $(4,125) $267,676
 $(4,558)
Commercial mortgage-backed securities43,965
 (283) 194,550
 (3,443) 238,515
 (3,726)175,209
 (1,162) 104,931
 (1,470) 280,140
 (2,632)
Other asset-backed securities90,316
 (1,188) 550,860
 (34,867) 641,176
 (36,055)68,039
 (268) 465,787
 (15,423) 533,826
 (15,691)
U.S. government-related securities1,283
 (5) 57,372
 (200) 58,655
 (205)128,224
 (1,789) 3
 
 128,227
 (1,789)
Other government-related securities
 
 
 
 
 
1,927
 (2) 
 
 1,927
 (2)
States, municipalities, and political subdivisions34,112
 (274) 718,798
 (21,320) 752,910
 (21,594)239,380
 (2,842) 561,253
 (20,487) 800,633
 (23,329)
Corporate securities2,336,766
 (128,908) 13,476,384
 (923,016) 15,813,150
 (1,051,924)2,769,939
 (46,629) 10,876,293
 (684,620) 13,646,232
 (731,249)
Preferred stock
 
 19,271
 (1,667) 19,271
 (1,667)53,040
 (128) 19,251
 (1,687) 72,291
 (1,815)
Equities55,137
 (1,225) 87,602
 (3,867) 142,739
 (5,092)84,188
 (989) 59,929
 (5,766) 144,117
 (6,755)
$2,753,880
 $(134,986) $15,257,802
 $(994,530) $18,011,682
 $(1,129,516)$3,606,854
 $(54,242) $12,268,215
 $(733,578) $15,875,069
 $(787,820)
 
RMBS and CMBS had gross unrealized losses greater than twelve months of $6.2$4.1 million and $3.4$1.5 million, respectively, as of JuneSeptember 30, 2016 (Successor Company). Factors such as the credit enhancement within the deal structure, the average life of the securities, and the performance of the underlying collateral support the recoverability of these investments.

The other asset-backed securities had a gross unrealized loss greater than twelve months of $34.9$15.4 million as of JuneSeptember 30, 2016 (Successor Company). This category predominately includes student-loan backed auction rate securities, the underlying collateral, of which is at least 97% guaranteed by the Federal Family Education Loan Program (“FFELP”). At this time, the Company has no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary.

The U.S. government-related securities and the states, municipalities, and political subdivisions category had gross unrealized losses greater than twelve months of $0.2$20.5 million and $21.3 million, respectively, as of JuneSeptember 30, 2016 (Successor Company). These declines were entirely related to changes in interest rates.

The corporate securities category had gross unrealized losses greater than twelve months of $923.0$684.6 million as of JuneSeptember 30, 2016 (Successor Company). The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered include credit ratings, the financial health of the issuer, the continued access of the issuer to capital markets, and other pertinent information

As of JuneSeptember 30, 2016 (Successor Company), the Company had a total of 1,4141,230 positions that were in an unrealized loss position, but the Company does not consider these unrealized loss positions to be other-than-temporary. This is based on the aggregate factors discussed previously and because the Company has the ability and intent to hold these investments until the fair values recover, and the Company does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of the securities.
 

19

Table of Contents

The following table includes the gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2015 (Successor Company):
 
 Less Than 12 Months 12 Months or More Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 (Dollars In Thousands)
Residential mortgage-backed securities$977,433
 $(17,112) $
 $
 $977,433
 $(17,112)
Commercial mortgage-backed securities1,232,495
 (41,852) 
 
 1,232,495
 (41,852)
Other asset-backed securities633,274
 (18,763) 
 
 633,274
 (18,763)
U.S. government-related securities1,291,476
 (34,532) 
 
 1,291,476
 (34,532)
Other government-related securities17,740
 (743) 
 
 17,740
 (743)
States, municipalities, and political subdivisions1,566,752
 (126,814) 
 
 1,566,752
 (126,814)
Corporate securities24,235,121
 (2,681,020) 
 
 24,235,121
 (2,681,020)
Preferred stock34,685
 (1,867) 
 
 34,685
 (1,867)
Equities248,493
 (6,477) 
 
 248,493
 (6,477)
 $30,237,469
 $(2,929,180) $
 $
 $30,237,469
 $(2,929,180)
 
The book value of the Company’s investment portfolio was marked to fair value as of February 1, 2015 (Successor Company), in conjunction with the Dai-ichi Merger which resulted in the elimination of previously unrealized gains and losses from accumulated other comprehensive income. The level of interest rates as of February 1, 2015 (Successor Company) resulted in an increase in the carrying value of the Company’s investments. Since February 1, 2015 (Successor Company), interest rates have increased resulting in net unrealized losses in the Company’s investment portfolio.

The Company does not consider these unrealized loss positions to be other-than-temporary, based on the aggregate factors discussed previously and because the Company has the ability and intent to hold these investments until the fair values recover, and does not intend to sell or expect to be required to sell the securities before recovering the Company's amortized cost of the securities.

As of JuneSeptember 30, 2016 (Successor Company), the Company had securities in its available-for-sale portfolio which were rated below investment grade of $1.8$1.9 billion and had an amortized cost of $1.9$2.0 billion. In addition, included in the Company’s trading portfolio, the Company held $270.8$266.4 million of securities which were rated below investment grade. Approximately $324.5$328.6 million of the available-for-sale and trading securities that were below investment grade securities were not publicly traded.

The change in unrealized gains (losses), net of income tax, on fixed maturitymaturity and equity securities, classified as available-for-sale is summarized as follows:
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three Months Ended
June 30, 2016
 For The Three Months Ended June 30, 2015 For The Six Months Ended June 30, 2016 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended
September 30, 2016
 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Fixed maturities$845,933
 $(1,039,827) $1,476,650
 $(1,383,066) $669,160
$294,917
 $(54,274) $1,771,567
 $(1,437,340) $669,160
Equity securities9,509
 (9,048) 9,439
 (7,537) 12,172
(1,691) 2,385
 7,749
 (5,152) 12,172
 

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The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of JuneSeptember 30, 2016 (Successor Company) and December 31, 2015 (Successor Company), are as follows:
 
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI
Successor Company  
As of June 30, 2016 
As of September 30, 2016 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI
 (Dollars In Thousands) (Dollars In Thousands)
Fixed maturities:  
  
  
  
  
 
Securities issued by affiliates:                    
Red Mountain LLC $626,280
 $
 $(22,879) $603,401
 $
 $640,230
 $
 $(1,751) $638,479
 $
Steel City LLC 2,153,000
 97,387
 
 2,250,387
 
 2,135,000
 121,136
 
 2,256,136
 
 $2,779,280
 $97,387
 $(22,879) $2,853,788
 $
 $2,775,230
 $121,136
 $(1,751) $2,894,615
 $
                    
 Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
 Total OTTI
Recognized
in OCI
 Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
 Total OTTI
Recognized
in OCI
Successor Company  
As of December 31, 2015  
 (Dollars In Thousands) (Dollars In Thousands)
Fixed maturities:  
  
  
  
  
  
  
  
  
  
Securities issued by affiliates:                    
Red Mountain LLC $593,314
 $
 $(78,314) $515,000
 $
 $593,314
 $
 $(78,314) $515,000
 $
 $593,314
 $
 $(78,314) $515,000
 $
 $593,314
 $
 $(78,314) $515,000
 $
 
During the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company), the three months ended JuneSeptember 30, 2015 (Successor Company), the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company), and the period of January 1, 2015 to January 31, 2015 (Predecessor Company), the Company did not record any other-than-temporary impairments on held-to-maturity securities.

The Company’s held-to-maturity securitiessecurities had $97.4$121.1 million of gross unrealized gains and $22.9$1.8 million of gross unrecognized holding losses by maturity as of JuneSeptember 30, 2016 (Successor Company). The Company does not consider these unrecognized holding losses to be other-than-temporary based on certain positive factors associated with the securities which include credit ratings of the guarantor, financial health of the issuer and guarantor, continued access of the issuer to capital markets and other pertinent information. These held-to-maturity securities are issued by affiliates of the Company which are considered variable interest entities ("VIE's"). The Company is not the primary beneficiary of these entities and thus the securities are not eliminated in consolidation. These securities are collateralized by non-recourse funding obligations issued by captive insurance companies that are affiliates of the Company.
 
The Company’s held-to-maturity securities had $78.3 million of gross unrecognized holding losses as of December 31, 2015 (Successor Company). The Company does not consider these unrecognized holding losses to be other-than-temporary based on certain positive factors associated with the securities which include credit ratings of the guarantor, financial health of the issuer and guarantor, continued access of the issuer to capital markets and other pertinent information.

Variable Interest Entities
 
The Company holds certain investments in entities in which its ownership interests could possibly be considered variable interests under Topic 810 of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC” or “Codification”) (excluding debt and equity securities held as trading, available for sale, or held to maturity). The Company reviews the characteristics of each of these applicable entities and compares those characteristics to applicable criteria to determine whether the entity is a variable interest entity ("VIE"). If the entity is determined to be a VIE, the Company then performs a detailed review to determine whether the interest would be considered a variable interest under the guidance. The Company then performs a qualitative review of all variable interests with the entity and determines whether the Company is the primary beneficiary. ASC 810 provides that an entity is the primary beneficiary of a VIE if the entity has 1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and 2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.

Based on this analysis, the Company had an interest in one wholly owned subsidiary, Red Mountain, LLC ("Red Mountain") as of JuneSeptember 30, 2016 (Successor Company) and December 31, 2015 (Successor Company), that was determined to be a VIE.
 
The activity most significant to Red Mountain is the issuance of a note in connection with a financing transaction involving Golden Gate V Vermont Captive Insurance Company (“Golden Gate V”) and the Company in which Golden Gate V issued non-recourse funding obligations to Red Mountain and Red Mountain issued the note to Golden Gate V. Credit enhancement on the Red Mountain Note is provided by an unrelated third party. For details of this transaction, see Note 12, Debt and Other Obligations. The Company had the power, via its 100% ownership through an affiliate, to direct the activities of the VIE, but did not have the obligation to absorb losses related to the primary risks or sources of variability to the VIE. The variability of loss would be borne

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primarily by the third party in its function as provider of credit enhancement on the Red Mountain Note. Accordingly, it was determined that the Company is not the primary beneficiary of the VIE. The Company’s risk of loss related to the VIE is limited to its investment of $10,000. Additionally, the Company has guaranteed Red Mountain’s payment obligation for the credit enhancement fee to the unrelated third party provider. As of JuneSeptember 30, 2016 (Successor Company), no payments have been made or required related to this guarantee.
    
7.                               FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The Company determined the fair value of its financial instruments based on the fair value hierarchy established in FASB guidance referenced in the Fair Value Measurements and Disclosures Topic which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company has adopted the provisions from the FASB guidance that is referenced in the Fair Value Measurements and Disclosures Topic for non-financial assets and liabilities (such as property and equipment, goodwill, and other intangible assets) that are required to be measured at fair value on a periodic basis. The effect on the Company’s periodic fair value measurements for non-financial assets and liabilities was not material.

The Company has categorized its financial instruments, based on the priority of the inputs to the valuation technique, into a three level hierarchy. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure fair value fall within different levels of the hierarchy, the category level is based on the lowest priority level input that is significant to the fair value measurement of the instrument:instrument.

Financial assets and liabilities recorded at fair value on the consolidated balance sheets are categorized as follows:
 
·Level 1: Unadjusted quoted prices for identical assets or liabilities in an active market.

·
Level 2: Quoted prices in markets that are not active or significant inputs that are observable either directly or indirectly. Level 2 inputs include the following:

a)                                    Quoted prices for similar assets or liabilities in active markets
b)       ��                            Quoted prices for identical or similar assets or liabilities in non-active markets
c)                                     Inputs other than quoted market prices that are observable
d)                                    Inputs that are derived principally from or corroborated by observable market data through correlation or other means.
 
·
Level 3: Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement. They reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability.


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The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of JuneSeptember 30, 2016 (Successor Company):
 
Level 1 Level 2 Level 3 TotalLevel 1 Level 2 Level 3 Total
(Dollars In Thousands)(Dollars In Thousands)
Assets: 
  
  
  
 
  
  
  
Fixed maturity securities - available-for-sale 
  
  
  
 
  
  
  
Residential mortgage-backed securities$
 $1,931,810
 $3
 $1,931,813
$
 $1,886,710
 $3
 $1,886,713
Commercial mortgage-backed securities
 1,578,172
 
 1,578,172

 1,659,667
 23,559
 1,683,226
Other asset-backed securities
 587,501
 533,141
 1,120,642

 648,687
 553,229
 1,201,916
U.S. government-related securities1,108,503
 263,293
 
 1,371,796
1,070,116
 241,063
 
 1,311,179
State, municipalities, and political subdivisions
 1,737,499
 
 1,737,499

 1,727,261
 
 1,727,261
Other government-related securities
 18,680
 
 18,680

 18,532
 
 18,532
Corporate securities
 27,279,444
 783,143
 28,062,587

 27,970,626
 753,396
 28,724,022
Preferred stock45,155
 19,272
 
 64,427
74,522
 19,252
 
 93,774
Total fixed maturity securities - available-for-sale1,153,658
 33,415,671
 1,316,287
 35,885,616
1,144,638
 34,171,798
 1,330,187
 36,646,623
Fixed maturity securities - trading 
  
  
  
 
  
  
  
Residential mortgage-backed securities
 271,994
 
 271,994

 264,142
 
 264,142
Commercial mortgage-backed securities
 157,176
 
 157,176

 157,152
 
 157,152
Other asset-backed securities
 123,076
 151,964
 275,040

 117,380
 145,833
 263,213
U.S. government-related securities41,639
 4,868
 
 46,507
32,143
 4,735
 
 36,878
State, municipalities, and political subdivisions
 362,504
 
 362,504

 340,983
 
 340,983
Other government-related securities
 60,261
 
 60,261

 60,774
 
 60,774
Corporate securities
 1,595,943
 16,587
 1,612,530

 1,655,812
 5,699
 1,661,511
Preferred stock3,432
 147
 
 3,579
3,788
 
 
 3,788
Total fixed maturity securities - trading45,071
 2,575,969
 168,551
 2,789,591
35,931
 2,600,978
 151,532
 2,788,441
Total fixed maturity securities1,198,729
 35,991,640
 1,484,838
 38,675,207
1,180,569
 36,772,776
 1,481,719
 39,435,064
Equity securities636,270
 
 66,526
 702,796
633,160
 
 66,526
 699,686
Other long-term investments (1)
311,141
 266,478
 62,920
 640,539
316,007
 270,661
 87,149
 673,817
Short-term investments240,841
 3,522
 
 244,363
164,702
 3,850
 
 168,552
Total investments2,386,981
 36,261,640
 1,614,284
 40,262,905
2,294,438
 37,047,287
 1,635,394
 40,977,119
Cash295,143
 
 
 295,143
407,578
 
 
 407,578
Assets related to separate accounts 
  
  
  
 
  
  
  
Variable annuity12,891,214
 
 
 12,891,214
13,164,747
 
 
 13,164,747
Variable universal life831,818
 
 
 831,818
868,818
 
 
 868,818
Total assets measured at fair value on a recurring basis$16,405,156
 $36,261,640
 $1,614,284
 $54,281,080
$16,735,581
 $37,047,287
 $1,635,394
 $55,418,262
Liabilities: 
  
  
  
 
  
  
  
Annuity account balances(2)
$
 $
 $88,820
 $88,820
$
 $
 $88,857
 $88,857
Other liabilities (1)
59,711
 142,794
 581,046
 783,551
102,318
 139,766
 604,827
 846,911
Total liabilities measured at fair value on a recurring basis$59,711
 $142,794
 $669,866
 $872,371
$102,318
 $139,766
 $693,684
 $935,768
(1)Includes certain freestanding and embedded derivatives.
(2)Represents liabilities related to fixed indexed annuities.


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The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of December 31, 2015 (Successor Company):
 
 Level 1 Level 2 Level 3 Total
 (Dollars In Thousands)
Assets: 
  
  
  
Fixed maturity securities - available-for-sale 
  
  
  
Residential mortgage-backed securities$
 $1,765,270
 $3
 $1,765,273
Commercial mortgage-backed securities
 1,285,864
 
 1,285,864
Other asset-backed securities
 210,020
 587,031
 797,051
U.S. government-related securities1,054,353
 477,824
 
 1,532,177
State, municipalities, and political subdivisions
 1,603,600
 
 1,603,600
Other government-related securities
 17,740
 
 17,740
Corporate securities83
 24,876,455
 902,119
 25,778,657
Preferred stock43,073
 19,614
 
 62,687
Total fixed maturity securities - available-for-sale1,097,509
 30,256,387
 1,489,153
 32,843,049
Fixed maturity securities - trading 
  
  
  
Residential mortgage-backed securities
 286,658
 
 286,658
Commercial mortgage-backed securities
 146,743
 
 146,743
Other asset-backed securities
 122,511
 152,912
 275,423
U.S. government-related securities233,592
 4,755
 
 238,347
State, municipalities, and political subdivisions
 313,354
 
 313,354
Other government-related securities
 58,827
 
 58,827
Corporate securities
 1,322,276
 18,225
 1,340,501
Preferred stock2,794
 1,402
 
 4,196
Total fixed maturity securities - trading236,386
 2,256,526
 171,137
 2,664,049
Total fixed maturity securities1,333,895
 32,512,913
 1,660,290
 35,507,098
Equity securities620,358
 13,063
 66,504
 699,925
Other long-term investments (1)
113,699
 141,487
 68,384
 323,570
Short-term investments261,659
 2,178
 
 263,837
Total investments2,329,611
 32,669,641
 1,795,178
 36,794,430
Cash212,358
 
 
 212,358
Assets related to separate accounts 
  
  
  
Variable annuity12,829,188
 
 
 12,829,188
Variable universal life827,610
 
 
 827,610
Total assets measured at fair value on a recurring basis$16,198,767
 $32,669,641
 $1,795,178
 $50,663,586
Liabilities: 
  
  
  
Annuity account balances (2)
$
 $
 $92,512
 $92,512
Other liabilities (1)
40,067
 106,310
 375,848
 522,225
Total liabilities measured at fair value on a recurring basis$40,067
 $106,310
 $468,360
 $614,737
(1)Includes certain freestanding and embedded derivatives.
(2)Represents liabilities related to fixed indexed annuities.
 
Determination of fair values
 
The valuation methodologies used to determine the fair values of assets and liabilities reflect market participant assumptions and are based on the application of the fair value hierarchy that prioritizes observable market inputs over unobservable inputs. The Company determines the fair values of certain financial assets and financial liabilities based on quoted market prices, where available. The Company also determines certain fair values based on future cash flows discounted at the appropriate current market rate. Fair values reflect adjustments for counterparty credit quality, the Company’s credit standing, liquidity, and where appropriate, risk margins on unobservable parameters. The following is a discussion of the methodologies used to determine fair values for the financial instruments as listed in the above table.
 

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The fair value of fixed maturity, short-term, and equity securities is determined by management after considering one of three primary sources of information: third party pricing services, non-binding independent broker quotations, or pricing matrices. Security pricing is applied using a “waterfall” approach whereby publicly available prices are first sought from third party pricing services, the remaining unpriced securities are submitted to independent brokers for non-binding prices, or lastly, securities are priced using a pricing matrix. Typical inputs used by these three pricing methods include, but are not limited to: benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. Third party pricing services price approximately 90%approximately 91% of the Company’s available-for-sale and trading fixed maturity securities. Based on the typical trading volumes and the lack of quoted market prices for available-for-sale and trading fixed maturities, third party pricing services derive the majority of security prices from observable market inputs such as recent reported trades for identical or similar securities making adjustments through the reporting date based upon available market observable information outlined above. If there are no recent reported trades, the third party pricing services and brokers may use matrix or model processes to develop a security price where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Certain securities are priced via independent non-binding broker quotations, which are considered to have no significant unobservable inputs. When using non- binding independent broker quotations, the Company obtains one quote per security, typically from the broker from which we purchased the security. A pricing matrix is used to price securities for which the Company is unable to obtain or effectively rely on either a price from a third party pricing service or an independent broker quotation.
 
The pricing matrix used by the Company begins with current spread levels to determine the market price for the security. The credit spreads, assigned by brokers, incorporate the issuer’s credit rating, liquidity discounts, weighted- average of contracted cash flows, risk premium, if warranted, due to the issuer’s industry, and the security’s time to maturity. The Company uses credit ratings provided by nationally recognized rating agencies.

For securities that are priced via non-binding independent broker quotations, the Company assesses whether prices received from independent brokers represent a reasonable estimate of fair value through an analysis using internal and external cash flow models developed based on spreads and, when available, market indices. The Company uses a market-based cash flow analysis to validate the reasonableness of prices received from independent brokers. These analytics, which are updated daily, incorporate various metrics (yield curves, credit spreads, prepayment rates, etc.) to determine the valuation of such holdings. As a result of this analysis, if the Company determines there is a more appropriate fair value based upon the analytics, the price received from the independent broker is adjusted accordingly. The Company did not adjust any quotes or prices received from brokers during the sixnine months ended JuneSeptember 30, 2016 (Successor Company).
 
The Company has analyzed the third party pricing services’ valuation methodologies and related inputs and has also evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs that is in accordance with the Fair Value Measurements and Disclosures Topic of the ASC. Based on this evaluation and investment class analysis, each price was classified into Level 1, 2, or 3. Most prices provided by third party pricing services are classified into Level 2 because the significant inputs used in pricing the securities are market observable and the observable inputs are corroborated by the Company. Since the matrix pricing of certain debt securities includes significant non-observable inputs, they are classified as Level 3.
 
Asset-Backed Securities
 
This category mainly consists of residential mortgage-backed securities, commercial mortgage-backed securities, and other asset-backed securities (collectively referred to as asset-backed securities or “ABS”). As of JuneSeptember 30, 2016 (Successor Company), the Company held $4.6$4.7 billion of ABS classified as Level 2. These securities are priced from information provided by a third party pricing service and independent broker quotes. The third party pricing services and brokers mainly value securities using both a market and income approach to valuation. As part of this valuation process they consider the following characteristics of the item being measured to be relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, and 7) credit ratings of the securities.
 
After reviewing these characteristics of the ABS, the third party pricing service and brokers use certain inputs to determine the value of the security. For ABS classified as Level 2, the valuation would consist of predominantly market observable inputs such as, but not limited to: 1) monthly principal and interest payments on the underlying assets, 2) average life of the security, 3) prepayment speeds, 4) credit spreads, 5) treasury and swap yield curves, and 6) discount margin. The Company reviews the methodologies and valuation techniques (including the ability to observe inputs) in assessing the information received from external pricing services and in consideration of the fair value presentation.
 
As of JuneSeptember 30, 2016 (Successor Company), the Company held $685.1$722.6 million of Level 3 ABS, which included $533.1$553.2 million of other asset-backed securities classified as available-for-sale and $152.0$145.8 million of other asset-backed securities classified as trading. These securities are predominantly ARS whose underlying collateral is at least 97% guaranteed by the FFELP. As a result of the ARS market collapse during 2008, the Company prices its ARS using an income approach valuation model. As part of the valuation process the Company reviews the following characteristics of the ARS in determining the relevant inputs: 1) weighted-average coupon rate, 2) weighted-average years to maturity, 3) types of underlying assets, 4) weighted-average coupon rate of the underlying assets, 5) weighted-average years to maturity of the underlying assets, 6) seniority level of the tranches owned, 7) credit ratings of the securities, 8) liquidity premium, and 9) paydown rate.
 

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CorporateCorporate Securities, U.S. Government-Related Securities, States, Municipals, and Political Subdivisions, and Other Government Related Securities
 
As of JuneSeptember 30, 2016 (Successor Company), the Company classified approximately $31.3$32.0 billion of corporate securities, U.S. government-related securities, states, municipals, and political subdivisions, and other government-related securities as Level 2. The fair value of the Level 2 securities is predominantly priced by broker quotes and a third party pricing service. The Company has reviewed the valuation techniques of the brokers and third party pricing service and has determined that such techniques used Level 2 market observable inputs. The following characteristics of the securities are considered to be the primary relevant inputs to the valuation: 1) weighted- average coupon rate, 2) weighted-average years to maturity, 3) seniority, and 4) credit ratings. The Company reviews the methodologies and valuation techniques (including the ability to observe inputs) in assessing the information received from external pricing services and in consideration of the fair value presentation.

The brokers and third party pricing service utilize valuation models that consist of a hybrid income and market approach to valuation. The pricing models utilize the following inputs: 1) principal and interest payments, 2) treasury yield curve, 3) credit spreads from new issue and secondary trading markets, 4) dealer quotes with adjustments for issues with early redemption features, 5) liquidity premiums present on private placements, and 6) discount margins from dealers in the new issue market.
 
As of JuneSeptember 30, 2016 (Successor Company), the Company classified approximately $799.7$759.1 million of securities as Level 3 valuations. Level 3 securities primarily represent investments in illiquid bonds for which no price is readily available. To determine a price, the Company uses a discounted cash flow model with both observable and unobservable inputs. These inputs are entered into an industry standard pricing model to determine the final price of the security. These inputs include: 1) principal and interest payments, 2) coupon rate, 3) sector and issuer level spread over treasury, 4) underlying collateral, 5) credit ratings, 6) maturity, 7) embedded options, 8) recent new issuance, 9) comparative bond analysis, and 10) an illiquidity premium.
 
Equities
 
As of JuneSeptember 30, 2016 (Successor Company), the Company held approximately $66.5 million of equity securities classified as Level 2 and Level 3. Of this total, $65.7 million represents Federal Home Loan Bank (“FHLB”) stock. The Company believes that the cost of the FHLB stock approximates fair value.
 
Other long-term investments and Other liabilities
 
Other long-term investments and other liabilities consist entirely of free-standing and embedded derivative financial instruments. Refer to Note 8, Derivative Financial Instruments for additional information related to derivatives. Derivative financial instruments are valued using exchange prices, independent broker quotations, or pricing valuation models, which utilize market data inputs. Excluding embedded derivatives, as of JuneSeptember 30, 2016 (Successor Company), 75.0%78.1% of derivatives based upon notional values were priced using exchange prices or independent broker quotations. The remaining derivatives were priced by pricing valuation models, which predominantly utilize observable market data inputs. Inputs used to value derivatives include, but are not limited to, interest swap rates, credit spreads, interest rate and equity market volatility indices, equity index levels, and treasury rates. The Company performs monthly analysis on derivative valuations that includes both quantitative and qualitative analyses.
 
Derivative instruments classified as Level 1 generally include futures and options, which are traded on active exchange markets.

Derivative instruments classified as Level 2 primarily include interest rate and inflation swaps, options, and swaptions. These derivative valuations are determined using independent broker quotations, which are corroborated with observable market inputs.

Derivative instruments classified as Level 3 were embedded derivatives and include at least one significant non-observable input. A derivative instrument containing Level 1 and Level 2 inputs will be classified as a Level 3 financial instrument in its entirety if it has at least one significant Level 3 input.

The Company utilizes derivative instruments to manage the risk associated with certain assets and liabilities. However, the derivative instruments may not be classified within the same fair value hierarchy level as the associated assets and liabilities. Therefore, the changes in fair value on derivatives reported in Level 3 may not reflect the offsetting impact of the changes in fair value of the associated assets and liabilities.

The embedded derivatives are carried at fair value in “other long-term investments” and “other liabilities” on the Company’s consolidated condensed balance sheet. The changes in fair value are recorded in earnings as “Realized investment gains (losses)-Derivative financial instruments”. Refer to Note 8, Derivative Financial Instruments for more information related to each embedded derivatives gains and losses.
 
The fair value of the GMWB embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using multiple risk neutral stochastic equity scenarios and policyholder behavior assumptions. The risk neutral scenarios are generated using the current swap curve and projected equity volatilities and correlations. The projected equity volatilities are based on a blend of historical volatility and near- term equity market implied

volatilities. The equity correlations are based on historical price observations. For policyholder behavior assumptions, expected lapse and utilization assumptions are used and updated for actual experience, as necessary. The Company assumes age-based mortality from the National Association of Insurance Commissioners 1994 Variable Annuity MGDB Mortality Table with company experience,the Ruark 2015 ALB table with attained age factors varying from 44.5% 91.1%- 100%106.6%. The present value of the cash flows is determined using the discount rate curve, which

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is based upon LIBOR plus a credit spread (to represent the Company’s non-performance risk). As a result of using significant unobservable inputs, the GMWB embedded derivative is categorized as Level 3. These assumptions are reviewed on a quarterly basis.
 
The balance of the FIA embedded derivative is impacted by policyholder cash flows associated with the FIA product that are allocated to the embedded derivative in addition to changes in the fair value of the embedded derivative during the reporting period. The fair value of the FIA embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using current index values and volatility, the hedge budget used to price the product, and policyholder assumptions (both elective and non-elective). For policyholder behavior assumptions, expected lapse and withdrawal assumptions are used and updated for actual experience, as necessary. The Company assumes age-based mortality from the 1994 Variable Annuity MGDB mortality table modified for company experience, with attained age factors varying from 49%46% - 80%113%. The present value of the cash flows is determined using the discount rate curve, which is based upon LIBOR up to one year and constant maturity treasury rates plus a credit spread (to represent the Company’s non-performance risk) thereafter. Policyholder assumptions are reviewed on an annual basis. As a result of using significant unobservable inputs, the FIA embedded derivative is categorized as Level 3.
 
The balance of the indexed universal life (“IUL”) embedded derivative is impacted by policyholder cash flows associated with the IUL product that are allocated to the embedded derivative in addition to changes in the fair value of the embedded derivative during the reporting period. The fair value of the IUL embedded derivative is derived through the income method of valuation using a valuation model that projects future cash flows using current index values and volatility, the hedge budget used to price the product, and policyholder assumptions (both elective and non-elective). For policyholder behavior assumptions, expected lapse and withdrawal assumptions are used and updated for actual experience, as necessary. The Company assumes age-based mortality from the SOA 2015 VBT Primary Tables modified forwith company experience, with attained age factors varying from 38% - 153%. The present value of the cash flows is determined using the discount rate curve, which is based upon LIBOR up to one year and constant maturity treasury rates plus a credit spread (to represent the Company’s non-performance risk) thereafter. Policyholder assumptions are reviewed on an annual basis. As a result of using significant unobservable inputs, the IUL embedded derivative is categorized as Level 3.
 
The Company has assumed and ceded certain blocks of policies under modified coinsurance agreements in which the investment results of the underlying portfolios inure directly to the reinsurers. As a result, these agreements contain embedded derivatives that are reported at fair value. Changes in their fair value are reported in earnings. The investments supporting these agreements are designated as “trading securities”; therefore changes in their fair value are also reported in earnings. As of JuneSeptember 30, 2016 (Successor Company), the fair value of the embedded derivative is based upon the relationship between the statutory policy liabilities (net of policy loans) of $2.4 billion and the statutory unrealized gain (loss) of the securities of $253.2$265.6 million. As a result, changes in the fair value of the embedded derivatives are largely offset by the changes in fair value of the related investments and each are reported in earnings. The fair value of the embedded derivative is considered a Level 3 valuation due to the unobservable nature of the policy liabilities.
 
Certain of the Company’s subsidiaries have entered into interest support, yearly renewable term (“YRT”) premium support, and portfolio maintenance agreements with PLC. These agreements meet the definition of a derivative and are accounted for at fair value and are considered Level 3 valuations. The fair value of these derivatives as of JuneSeptember 30, 2016 (Successor Company) was $37.3$50.7 million and is included in Other long-term investments. For information regarding realized gains on these derivatives please refer to Note 8, Derivative Financial Instruments.
 
The Interest Support Agreement provides that PLC will make payments to Golden Gate II if actual investment income on certain of Golden Gate II’s asset portfolios falls below a calculated investment income amount as defined in the Interest Support Agreement. The calculated investment income amount is a level of investment income deemed to be sufficient to support certain of Golden Gate II’s obligations under a reinsurance agreement with the Company, dated July 1, 2007. The derivative is valued using an internal valuation model that assumes a conservative projection of investment income under an adverse interest rate scenario and the probability that the expectation falls below the calculated investment income amount. This derivative had a fair value of $29.6$44.5 million as of JuneSeptember 30, 2016 (Successor Company). As of September 30, 2016 (Successor Company), no payments have been triggered under this agreement, however, certain interest support agreement obligations to Golden Gate II of approximately $1.5 million have been collateralized by PLC. Re-evaluation and, if necessary, adjustments of any support agreement collateralization amounts occur annually during the first quarter pursuant to the terms of the support agreement. As of JuneSeptember 30, 2016 (Successor Company), no payments have been triggered under this agreement.

The YRT premium support agreements provide that PLC will make payments to Golden Gate and Golden Gate II in the event that YRT premium rates increase. The derivatives are valued using an internal valuation model. The valuation model is a probability weighted discounted cash flow model. The value is primarily a function of the likelihood and severity of future YRT premium increases. The fair value of these derivatives as of JuneSeptember 30, 2016 (Successor Company) was $3.3$2.7 million. As of JuneSeptember 30, 2016 (Successor Company), no payments have been made under these agreements.
 
The portfolio maintenance agreements provide that PLC will make payments to Golden Gate, Golden Gate V, and WCL in the event of other-than-temporary impairments on investments that exceed defined thresholds. The derivatives are valued using an internal discounted cash flow model. The significant unobservable inputs are the projected probability and severity of credit losses used to project future cash flows on the investment portfolios. The fair value of the portfolio maintenance

agreements as of JuneSeptember 30, 2016 (Successor Company), was $4.4$3.6 million. As of JuneSeptember 30, 2016 (Successor Company), no payments have been made under these agreements.
 
The Funds Withheld derivative results from a reinsurance agreement with Shades Creek where the economic performance of certain hedging instruments held by the Company is ceded to Shades Creek. The value of the Funds Withheld derivative is

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directly tied to the value of the hedging instruments held in the funds withheld account. The hedging instruments predominantly consist of derivative instruments the fair values of which are classified as a Level 2 measurement; as such, the fair value of the Funds Withheld derivative has been classified as a Level 2 measurement. The fair value of the Funds Withheld derivative as of JuneSeptember 30, 2016 (Successor Company) was a liability of $129.5$112.3 million.
 
Annuity account balances
 
The Company records certain of its FIA reserves at fair value. The fair value is considered a Level 3 valuation. The FIA valuation model calculates the present value of future benefit cash flows less the projected future profits to quantify the net liability that is held as a reserve. This calculation is done using multiple risk neutral stochastic equity scenarios. The cash flows are discounted using LIBOR plus a credit spread. Best estimate assumptions are used for partial withdrawals, lapses, expenses and asset earned rate with a risk margin applied to each. These assumptions are reviewed at least annually as a part of the formal unlocking process. If an event were to occur within a quarter that would make the assumptions unreasonable, the assumptions would be reviewed within the quarter.
 
The discount rate for the fixed indexed annuities is based on an upward sloping rate curve which is updated each quarter. The discount rates for JuneSeptember 30, 2016 (Successor Company), ranged from a one month rate of 0.68%0.73%, a 5 year rate of 1.82%1.99%, and a 30 year rate of 3.03%2.97%. A credit spread component is also included in the calculation to accommodate non-performance risk.
 
Separate Accounts
 
Separate account assets are invested in open-ended mutual funds and are included in Level 1.


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Valuation of Level 3 Financial Instruments
 
The following table presents the valuation method for material financial instruments included in Level 3, as well as the unobservable inputs used in the valuation of those financial instruments:
 
Successor Company Successor Company 
Fair Value
As of
June 30, 2016
 
Valuation
Technique
 
Unobservable
Input
 
Range
(Weighted Average)
Fair Value
As of
September 30, 2016
 
Valuation
Technique
 
Unobservable
Input
 
Range
(Weighted Average)
(Dollars In Thousands)      (Dollars In Thousands)      
Assets:              
Other asset-backed securities$524,166
 Discounted cash flow Liquidity premium 0.24% - 1.14% (0.55%)$554,230
 Discounted cash flow Liquidity premium 0.44% - 1.19% (0.70%)
 
   Paydown rate 9.37% - 11.91% (10.16%) 
   Paydown rate 10.90% - 11.83% (11.18%)
Corporate securities758,312
 Discounted cash flow Spread over treasury 0.70% - 6.25% (2.45%)726,890
 Discounted cash flow Spread over treasury 0.97% - 5.10% (2.11%)
Liabilities: 
       
      
Embedded derivatives - GMWB(1)
$151,212
 Actuarial cash flow model Mortality 1994 MGDB table with$128,877
 Actuarial cash flow model Mortality 91.1% to 106.6% of
 
     company experience 
     Ruark 2015 ALB Table
 
   Lapse 0.3% - 15%, depending on 
   Lapse 0.3% - 15%, depending on
 
     product/duration/funded 
     product/duration/funded
 
     status of guarantee 
     status of guarantee
 
   Utilization 99%. 10% of policies have 
   Utilization 99%. 10% of policies have
 
     a one-time over-utilization 
     a one-time over-utilization
 
     of 400% 
     of 400%
 
   Nonperformance risk 0.22% - 1.20% 
   Nonperformance risk 0.20% - 1.19%
Annuity account balances(2)
88,820
 Actuarial cash flow model Asset earned rate 4.53% - 5.67%88,857
 Actuarial cash flow model Asset earned rate 4.02% - 5.76%
 
   Expenses $83 per policy 
   Expenses $126 per policy
 
   Withdrawal rate 2.20% 
   Withdrawal rate 2.20%
 
   Mortality 1994 MGDB table with 
   Mortality 1994 MGDB table with
 
     company experience 
     company experience
 
   Lapse 2.2% - 33.0%, depending 
   Lapse 2.2% - 33.0%, depending
 
     on duration/surrender 
     on duration/surrender
 
     charge period 
     charge period
 
   Return on assets 1.50% - 1.85% depending on 
   Return on assets 1.50% - 1.85% depending on
 
     surrender charge period 
     duration/surrender charge period
 
   Nonperformance risk 0.22% - 1.20% 
   Nonperformance risk 0.20% - 1.19%
Embedded derivative - FIA119,997
 Actuarial cash flow model Expenses $83 per policy141,651
 Actuarial cash flow model Expenses $126 per policy
 
   Withdrawal rate 1.1% - 4.5% depending on 
   Withdrawal rate 1% prior to age 70, 100%
 
     duration and tax qualification 
     of the RMD for ages 70+
 
   Mortality 1994 MGDB table with 
   Mortality 1994 MGDB table with
 
     company experience 
     company experience
 
   Lapse 2.5% - 40.0%, depending on 
   Lapse 2.0% - 40.0%, depending on
 
     on duration/surrender 
     on duration/surrender
 
     charge period 
     charge period
 
   Nonperformance risk 0.22% - 1.20% 
   Nonperformance risk 0.20% - 1.19%
Embedded derivative - IUL46,711
 Actuarial cash flow model Mortality 38% - 153% of 201546,348
 Actuarial cash flow model Mortality 38% - 153% of 2015
 
     VBT Primary Tables 
     VBT Primary Tables
 
   Lapse 0.5% - 10.0%, depending on 
   Lapse 0.5% - 10.0%, depending on
 
     duration/distribution channel 
     duration/distribution channel
 
     and smoking class 
     and smoking class
 
   Nonperformance risk 0.22% - 1.20% 
   Nonperformance risk 0.20% - 1.19%
 
(1)The fair value for the GMWB embedded derivative is presented as a net liability for the purposes of this chart. Excludes modified coinsurance arrangements.
(2)Represents liabilities related to fixed indexed annuities.
 
The chart above excludes Level 3 financial instruments that are valued using broker quotes and those which book value approximates fair value.


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The Company has considered all reasonably available quantitative inputs as of JuneSeptember 30, 2016 (Successor Company), but the valuation techniquestechniques and inputs used by some brokers in pricing certain financial instruments are not shared with the Company. This resulted in $202.4$210.6 million of financial instruments being classified as Level 3 as of JuneSeptember 30, 2016 (Successor Company). Of the $202.4$210.6 million, $160.9$178.4 million are other asset-backed securities and $41.4$32.2 million are corporate securities.
 
In certain cases the Company has determined that book value materially approximates fair value. As of JuneSeptember 30, 2016 (Successor Company), the Company held $66.5 million of financial instruments where book value approximates fair value which were predominantly FHLB stock.


The following table presents the valuation method for material financial instruments included in Level 3, as well as the unobservable inputs used in the valuation of those financial instruments:
 
 Successor Company      
 Fair Value
As of
December 31, 2015
 
Valuation
Technique
 
Unobservable
Input
 
Range
(Weighted Average)
 (Dollars In Thousands)      
Assets:       
Other asset-backed securities$587,031
 Discounted cash flow Liquidity premium 0.27% - 1.49% (0.42%)
     Paydown rate 10.20% - 14.72% (13.11%)
Corporate securities875,810
 Discounted cash flow Spread over 0.10% - 19.00% (2.61%)
     treasury  
Liabilities:       
Embedded derivatives - GMWB(1)
$18,511
 Actuarial cash flow model Mortality 1994 MGDB table with
       company experience
     Lapse 0.3% - 15%, depending on
       product/duration/funded
       status of guarantee
     Utilization 99%. 10% of policies have
       a one-time over-utilization
       of 400%
     Nonperformance risk 0.18% - 1.04%
Annuity account balances(2)
92,512
 Actuarial cash flow model Asset earned rate 4.53% - 5.67%
  
   Expenses $81 per policy
  
   Withdrawal rate 2.20%
  
   Mortality 1994 MGDB table with
  
     company experience
  
   Lapse 2.2% - 33.0%, depending
  
     on duration/surrender
  
     charge period
  
   Return on assets 1.50% - 1.85% depending on
  
     surrender charge period
  
   Nonperformance risk 0.18% - 1.04%
Embedded derivative - FIA100,329
 Actuarial cash flow model Expenses $81.50 per policy
  
   Withdrawal rate 1.1% - 4.5% depending on
  
     duration and tax qualification
  
   Mortality 1994 MGDB table with
  
     company experience
  
   Lapse 2.5% - 40.0%, depending
  
     on duration/surrender
  
     charge period
  
   Nonperformance risk 0.18% - 1.04%
Embedded derivative - IUL29,629
 Actuarial cash flow model Mortality 38% - 153% of 2015
       VBT Primary Tables
     Lapse 0.5% - 10.0%, depending
       on duration/distribution
       channel and smoking class
     Nonperformance risk 0.18% - 1.04%
 
(1)The fair value for the GMWB embedded derivative is presented as a net liability, for the purposes of this chart.  Excludes modified coinsurance arrangements.
(2)Represents liabilities related to fixed indexed annuities.

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The chart above excludes Level 3 financial instruments that are valued using broker quotes and those which book value approximates fair value.
 
The Company has considered all reasonably available quantitative inputs as of December 31, 2015 (Successor Company), but the valuation techniques and inputs used by some brokers in pricing certain financial instruments are not shared with the Company. This resulted in $197.5 million of financial instruments being classified as Level 3 as of December 31, 2015 (Successor Company). Of the $197.5 million, $152.9 million are other asset backed securities and $44.6 million are corporate securities.

 
In certain cases the Company has determined that book value materially approximates fair value. As of December 31, 2015 (Successor Company), the Company held $66.5 million of financial instruments where book value approximates fair value which are predominantly FHLB stock.
 
The asset-backed securities classified as Level 3 are predominantly ARS. A change in the paydown rate (the projected annual rate of principal reduction) of the ARS can significantly impact the fair value of these securities. A decrease in the paydown rate would increase the projected weighted average life of the ARS and increase the sensitivity of the ARS’ fair value to changes in interest rates. An increase in the liquidity premium would result in a decrease in the fair value of the securities, while a decrease in the liquidity premium would increase the fair value of these securities.

The fair value of corporate bonds classified as Level 3 is sensitive to changes in the interest rate spread over the corresponding U.S. Treasury rate. This spread represents a risk premium that is impacted by company specific and market factors. An increase in the spread can be caused by a perceived increase in credit risk of a specific issuer and/or an increase in the overall market risk premium associated with similar securities. The fair values of corporate bonds are sensitive to changes in spread. When holding the treasury rate constant, the fair value of corporate bonds increases when spreads decrease, and decreases when spreads increase.

The fair value of the GMWB embedded derivative is sensitive to changes in the discount rate which includes the Company’s nonperformance risk, volatility, lapse, and mortality assumptions. The volatility assumption is an observable input as it is based on market inputs. The Company’s nonperformance risk, lapse, and mortality are unobservable. An increase in the three unobservable assumptions would result in a decrease in the fair value of the liability and conversely, if there is a decrease in the assumptions the fair value would increase. The fair value is also dependent on the assumed policyholder utilization of the GMWB where an increase in assumed utilization would result in an increase in the fair value of the liability and conversely, if there is a decrease in the assumption, the fair value would decrease.

The fair value of the FIA account balance liability is predominantly impacted by observable inputs such as discount rates and equity returns. However, the fair value of the FIA embedded derivative is sensitive to non-performance risk, which is unobservable. The value of the liability increases with decreases in discount rate and non-performance risk and decreases with increases in the discount rate and non-performance risk. The value of the liability increases with increases in equity returns and the liability decreases with a decrease in equity returns.

The fair value of the FIA embedded derivative is predominantly impacted by observable inputs such as discount rates and equity returns. However, the fair value of the FIA embedded derivative is sensitive to non-performance risk, which is unobservable. The value of the liability increases with decreases in the discount rate and non-performance risk and decreases with increases in the discount rate and nonperformance risk. The value of the liability increases with increases in equity returns and the liability decreases with a decrease in equity returns.

The fair value of the IUL embedded derivative is predominantly impacted by observable inputs such as discount rates and equity returns. However, the fair value of the IUL embedded derivative is sensitive to non-performance risk, which is unobservable. The value of the liability increases with decreases in the discount rate and non-performance risk and decreases with increases in the discount rate and non-performance risk. The value of the liability increases with increases in equity returns and the liability decreases with a decrease in equity returns.

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The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the three months ended JuneSeptember 30, 2016 (Successor Company), for which the Company has used significant unobservable inputs (Level 3):
 
  
Total
Realized and Unrealized
Gains
 
Total
Realized and Unrealized
Losses
               
Total
Gains (losses)
included in
  
Total
Realized and Unrealized
Gains
 
Total
Realized and Unrealized
Losses
               
Total
Gains (losses)
included in
Beginning
Balance
 
Included in
Earnings
 
Included in
Other
Comprehensive
Income
 
Included in
Earnings
 
Included in
Other
Comprehensive
Income
 Purchases Sales Issuances Settlements 
Transfers
in/out of
Level 3
 Other 
Ending
Balance
 
Earnings
related to
Instruments
still held at
the Reporting
Date
Beginning
Balance
 
Included in
Earnings
 
Included in
Other
Comprehensive
Income
 
Included in
Earnings
 
Included in
Other
Comprehensive
Income
 Purchases Sales Issuances Settlements 
Transfers
in/out of
Level 3
 Other 
Ending
Balance
 
Earnings
related to
Instruments
still held at
the Reporting
Date
(Dollars In Thousands)(Dollars In Thousands)
Assets: 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
  
Fixed maturity securities available-for-sale 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
  
Residential mortgage-backed securities$3
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $3
 $
$3
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $3
 $
Commercial mortgage-backed securities
 
 6
 
 
 23,559
 
 
 
 
 (6) 23,559
 
Other asset-backed securities537,831
 
 769
 
 (8,350) 9,597
 (7,629) 
 
 
 923
 533,141
 
533,141
 
 23,350
 
 (19) 
 (12) 
 
 
 (3,231) 553,229
 
Corporate securities833,737
 925
 16,189
 
 (694) 9,558
 (57,123) 
 
 (16,773) (2,676) 783,143
 
783,143
 
 9,324
 
 (3,335) 28,327
 (26,001) 
 
 (36,237) (1,825) 753,396
 
Total fixed maturity securities - available-for-sale1,371,571
 925
 16,958
 
 (9,044) 19,155
 (64,752) 
 
 (16,773) (1,753) 1,316,287
 
1,316,287
 
 32,680
 
 (3,354) 51,886
 (26,013) 
 
 (36,237) (5,062) 1,330,187
 
Fixed maturity securities - trading 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
  
Other asset-backed securities150,683
 1,822
 
 (8) 
 
 (609) 
 
 
 76
 151,964
 1,814
151,964
 3,260
 
 (71) 
 
 (9,366) 
 
 
 46
 145,833
 3,189
Corporate securities5,677
 24
 
 
 
 10,908
 1
 
 
 
 (23) 16,587
 25
16,587
 381
 
 
 
 
 
 
 
 (11,243) (26) 5,699
 42
Total fixed maturity securities - trading156,360
 1,846
 
 (8) 
 10,908
 (608) 
 
 
 53
 168,551
 1,839
168,551
 3,641
 
 (71) 
 
 (9,366) 
 
 (11,243) 20
 151,532
 3,231
Total fixed maturity securities1,527,931
 2,771
 16,958
 (8) (9,044) 30,063
 (65,360) 
 
 (16,773) (1,700) 1,484,838
 1,839
1,484,838
 3,641
 32,680
 (71) (3,354) 51,886
 (35,379) 
 
 (47,480) (5,042) 1,481,719
 3,231
Equity securities66,504
 
 
 
 
 22
 
 
 
 
 
 66,526
 
66,526
 
 
 
 
 
 
 
 
 
 
 66,526
 
Other long-term investments(1)
57,048
 16,275
 
 (10,403) 
 
 
 
 
 
 
 62,920
 5,872
62,920
 25,674
 
 (1,445) 
 
 
 
 
 
 
 87,149
 24,229
Short-term investments
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total investments1,651,483
 19,046
 16,958
 (10,411) (9,044) 30,085
 (65,360) 
 
 (16,773) (1,700) 1,614,284
 7,711
1,614,284
 29,315
 32,680
 (1,516) (3,354) 51,886
 (35,379) 
 
 (47,480) (5,042) 1,635,394
 27,460
Total assets measured at fair value on a recurring basis$1,651,483
 $19,046
 $16,958
 $(10,411) $(9,044) $30,085
 $(65,360) $
 $
 $(16,773) $(1,700) $1,614,284
 $7,711
$1,614,284
 $29,315
 $32,680
 $(1,516) $(3,354) $51,886
 $(35,379) $
 $
 $(47,480) $(5,042) $1,635,394
 $27,460
Liabilities: 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
  
Annuity account balances(2)
$90,123
 $
 $
 $(530) $
 $
 $
 $63
 $1,896
 
 $
 $88,820
 $
$88,820
 $
 $
 $(735) $
 $
 $
 $279
 $2,226
 
 $1,249
 $88,857
 $
Other liabilities(1)
496,238
 15,217
 
 (100,025) 
 
 
 
 
 
 
 581,046
 (84,808)581,046
 22,275
 
 (46,056) 
 
 
 
 
 
 
 604,827
 (23,781)
Total liabilities measured at fair value on a recurring basis$586,361
 $15,217
 $
 $(100,555) $
 $
 $
 $63
 $1,896
 $
 $
 $669,866
 $(84,808)$669,866
 $22,275
 $
 $(46,791) $
 $
 $
 $279
 $2,226
 $
 $1,249
 $693,684
 $(23,781)

(1)Represents certain freestanding and embedded derivatives.
(2)Represents liabilities related to fixed indexed annuities.
 
For the three months ended JuneSeptember 30, 2016 (Successor Company), therethere were $27.2 millionno transfers of securities into Level 3.
 
For the three months ended JuneSeptember 30, 2016 (Successor Company), $44.0$47.5 million of securities were transferred into Level 2. This amount was transferred from Level 3. These transfers resulted from securities that were priced internally using significant unobservable inputs where market observable inputs were not available in previous periods but were priced by independent pricing services or brokers as of JuneSeptember 30, 2016 (Successor Company).
 
For the three months ended JuneSeptember 30, 2016 (Successor Company), there were no transfers of securities from Level 2 to Level 1.
 
For the three months ended JuneSeptember 30, 2016 (Successor Company), there were no transfers of securitiessecurities from Level 1.

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The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the sixnine months ended JuneSeptember 30, 2016 (Successor Company), for which the Company has used significant unobservable inputs (Level 3):
 
  
Total
Realized and Unrealized
Gains
 
Total
Realized and Unrealized
Losses
               
Total
Gains (losses)
included in
  
Total
Realized and Unrealized
Gains
 
Total
Realized and Unrealized
Losses
               
Total
Gains (losses)
included in
Beginning
Balance
 
Included
 in
Earnings
 
Included 
in
Other
Comprehensive
Income
 
Included 
in
Earnings
 
Included 
in
Other
Comprehensive
Income
 Purchases Sales Issuances Settlements 
Transfers
in/out of
Level 3
 Other 
Ending
Balance
 
Earnings
related to
Instruments
still held at
the Reporting
Date
Beginning
Balance
 
Included
 in
Earnings
 
Included 
in
Other
Comprehensive
Income
 
Included 
in
Earnings
 
Included 
in
Other
Comprehensive
Income
 Purchases Sales Issuances Settlements 
Transfers
in/out of
Level 3
 Other 
Ending
Balance
 
Earnings
related to
Instruments
still held at
the Reporting
Date
(Dollars In Thousands)(Dollars In Thousands)
Assets: 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
  
Fixed maturity securities available-for-sale 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
  
Residential mortgage-backed securities$3
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $3
 $
$3
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $3
 $
Commercial mortgage-backed securities
 
 6
 
 
 23,559
 
 
 
 
 (6) 23,559
 
Other asset-backed securities587,031
 6,859
 769
 
 (21,407) 9,597
 (58,449) 
 
 7,457
 1,284
 533,141
 
587,031
 6,859
 24,119
 
 (21,426) 9,597
 (58,461) 
 
 7,457
 (1,947) 553,229
 
Corporate securities902,119
 925
 31,111
 (4,135) (6,981) 25,558
 (81,865) 
 
 (77,952) (5,637) 783,143
 
902,119
 925
 40,435
 (4,135) (10,316) 53,885
 (107,866) 
 
 (114,189) (7,462) 753,396
 
Total fixed maturity securities - available-for-sale1,489,153
 7,784
 31,880
 (4,135) (28,388) 35,155
 (140,314) 
 
 (70,495) (4,353) 1,316,287
 
1,489,153
 7,784
 64,560
 (4,135) (31,742) 87,041
 (166,327) 
 
 (106,732) (9,415) 1,330,187
 
Fixed maturity securities - trading 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
  
Other asset-backed securities152,912
 2,050
 
 (942) 
 
 (2,212) 
 
 172
 (16) 151,964
 1,105
152,912
 5,310
 
 (1,013) 
 
 (11,578) 
 
 172
 30
 145,833
 4,294
Corporate securities18,225
 332
 
 (259) 
 10,908
 (4,071) 
 
 (8,479) (69) 16,587
 241
18,225
 713
 
 (259) 
 10,908
 (4,071) 
 
 (19,722) (95) 5,699
 283
Total fixed maturity securities - trading171,137
 2,382
 
 (1,201) 
 10,908
 (6,283) 
 
 (8,307) (85) 168,551
 1,346
171,137
 6,023
 
 (1,272) 
 10,908
 (15,649) 
 
 (19,550) (65) 151,532
 4,577
Total fixed maturity securities1,660,290
 10,166
 31,880
 (5,336) (28,388) 46,063
 (146,597) 
 
 (78,802) (4,438) 1,484,838
 1,346
1,660,290
 13,807
 64,560
 (5,407) (31,742) 97,949
 (181,976) 
 
 (126,282) (9,480) 1,481,719
 4,577
Equity securities66,504
 
 
 
 
 22
 
 
 
 
 
 66,526
 
66,504
 
 
 
 
 22
 
 
 
 
 
 66,526
 
Other long-term investments(1)
68,384
 20,492
 
 (27,385) 
 1,429
 
 
 
 
 
 62,920
 (6,893)68,384
 46,166
 
 (28,830) 
 1,429
 
 
 
 
 
 87,149
 17,336
Total investments1,795,178
 30,658
 31,880
 (32,721) (28,388) 47,514
 (146,597) 
 
 (78,802) (4,438) 1,614,284
 (5,547)1,795,178
 59,973
 64,560
 (34,237) (31,742) 99,400
 (181,976) 
 
 (126,282) (9,480) 1,635,394
 21,913
Total assets measured at fair value on a recurring basis$1,795,178
 $30,658
 $31,880
 $(32,721) $(28,388) $47,514
 $(146,597) $
 $
 $(78,802) $(4,438) $1,614,284
 $(5,547)$1,795,178
 $59,973
 $64,560
 $(34,237) $(31,742) $99,400
 $(181,976) $
 $
 $(126,282) $(9,480) $1,635,394
 $21,913
Liabilities: 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
  
Annuity account balances(2)
$92,512
 $
 $
 $(1,096) $
 $
 $
 $250
 $5,038
 $
 $
 $88,820
 $
$92,512
 $
 $
 $(1,831) $
 $
 $
 $529
 $7,264
 $
 $1,249
 $88,857
 $
Other liabilities(1)
375,848
 15,585
 
 (220,783) 
 
 
 
 
 
 
 581,046
 (205,198)375,848
 37,860
 
 (266,839) 
 
 
 
 
 
 
 604,827
 (228,979)
Total liabilities measured at fair value on a recurring basis$468,360
 $15,585
 $
 $(221,879) $
 $
 $
 $250
 $5,038
 $
 $
 $669,866
 $(205,198)$468,360
 $37,860
 $
 $(268,670) $
 $
 $
 $529
 $7,264
 $
 $1,249
 $693,684
 $(228,979)

(1)Represents certain freestanding and embedded derivatives.
(2)Represents liabilities related to fixed indexed annuities.
     
For the sixnine months ended JuneSeptember 30, 2016 (Successor Company), $71.3 million of securities were transferred into Level 3.
 
For the sixnine months ended JuneSeptember 30, 2016 (Successor Company), $150.1$197.6 million of securities were transferred into Level 2. This amount was transferred from Level 3. These transfers resulted from securities that were priced internally using significant unobservable inputs where market observable inputs were not available in previous periods but were priced by independent pricing services or brokers as of JuneSeptember 30, 2016 (Successor Company).
 
For the sixnine months ended JuneSeptember 30, 2016 (Successor Company), $12.2 million of securities were transferred from Level 2 to Level 1.
 
For the sixnine months ended JuneSeptember 30, 2016 (Successor Company), $0.1 million of securities were transferred from Level 1.

33

Table of Contents


The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the three months ended JuneSeptember 30, 2015 (Successor Company), for which the Company has used significant unobservable inputs (Level 3):
 
  
Total
Realized and Unrealized
Gains
 
Total
Realized and Unrealized
Losses
               
Total
Gains (losses)
included in
  
Total
Realized and Unrealized
Gains
 
Total
Realized and Unrealized
Losses
               
Total
Gains (losses)
included in
Beginning
Balance
 
Included
 in
Earnings
 
Included 
in
Other
Comprehensive
Income
 
Included 
in
Earnings
 
Included 
in
Other
Comprehensive
Income
 Purchases Sales Issuances Settlements 
Transfers
in/out of
Level 3
 Other 
Ending
Balance
 
Earnings
related to
Instruments
still held at
the Reporting
Date
Beginning
Balance
 
Included
 in
Earnings
 
Included 
in
Other
Comprehensive
Income
 
Included 
in
Earnings
 
Included 
in
Other
Comprehensive
Income
 Purchases Sales Issuances Settlements 
Transfers
in/out of
Level 3
 Other 
Ending
Balance
 
Earnings
related to
Instruments
still held at
the Reporting
Date
(Dollars In Thousands)(Dollars In Thousands)
Assets: 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
  
Fixed maturity securities available-for-sale 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
  
Residential mortgage-backed securities$3
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $3
 $
$3
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $3
 $
Other asset-backed securities600,132
 
 165
 (92) (9,323) 
 (87) 
 
 
 90
 590,885
 
590,885
 
 
 
 (4,185) 
 
 
 
 
 (949) 585,751
 
Corporate securities1,283,142
 3,656
 4,001
 (687) (24,247) 89,929
 (219,148) 
 
 (21,803) (3,412) 1,111,431
 
1,111,431
 76
 5,939
 (164) (8,800) 62,183
 (101,161) 
 
 (20,037) (729) 1,048,738
 
Total fixed maturity securities - available-for-sale1,883,277
 3,656
 4,166
 (779) (33,570) 89,929
 (219,235) 
 
 (21,803) (3,322) 1,702,319
 
1,702,319
 76
 5,939
 (164) (12,985) 62,183
 (101,161) 
 
 (20,037) (1,678) 1,634,492
 
Fixed maturity securities - trading 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
  
Other asset-backed securities170,500
 589
 
 (5,173) 
 
 (5,468) 
 
 
 146
 160,594
 (4,587)160,594
 83
 
 (1,640) 
 2,000
 (6,001) 
 
 
 117
 155,153
 (1,500)
Corporate securities19,614
 140
 
 (233) 
 
 (161) 
 
 
 (44) 19,316
 (93)19,316
 73
 
 (970) 
 
 (56) 
 
 
 (44) 18,319
 (897)
Total fixed maturity securities - trading190,114
 729
 
 (5,406) 
 
 (5,629) 
 
 
 102
 179,910
 (4,680)179,910
 156
 
 (2,610) 
 2,000
 (6,057) 
 
 
 73
 173,472
 (2,397)
Total fixed maturity securities2,073,391
 4,385
 4,166
 (6,185) (33,570) 89,929
 (224,864) 
 
 (21,803) (3,220) 1,882,229
 (4,680)1,882,229
 232
 5,939
 (2,774) (12,985) 64,183
 (107,218) 
 
 (20,037) (1,605) 1,807,964
 (2,397)
Equity securities66,691
 
 
 
 
 
 (231) 
 
 
 
 66,460
 
66,460
 
 44
 
 
 
 
 
 
 
 
 66,504
 
Other long-term investments(1)
79,222
 24,982
 
 (3,685) 
 
 
 
 
 
 
 100,519
 21,297
100,519
 
 
 (44,769) 
 
 
 
 
 
 
 55,750
 (44,769)
Total investments2,219,304
 29,367
 4,166
 (9,870) (33,570) 89,929
 (225,095) 
 
 (21,803) (3,220) 2,049,208
 16,617
2,049,208
 232
 5,983
 (47,543) (12,985) 64,183
 (107,218) 
 
 (20,037) (1,605) 1,930,218
 (47,166)
Total assets measured at fair value on a recurring basis$2,219,304
 $29,367
 $4,166
 $(9,870) $(33,570) $89,929
 $(225,095) $
 $
 $(21,803) $(3,220) $2,049,208
 $16,617
$2,049,208
 $232
 $5,983
 $(47,543) $(12,985) $64,183
 $(107,218) $
 $
 $(20,037) $(1,605) $1,930,218
 $(47,166)
Liabilities: 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
  
Annuity account balances(2)
$97,108
 $
 $
 $(911) $
 $
 $
 $72
 $2,913
 $
 $
 $95,178
 $
$95,178
 $
 $
 $(3,173) $
 $
 $
 $93
 $3,246
 $
 $
 $95,198
 $
Other liabilities(1)
477,729
 147,963
 
 (13,179) 
 
 
 
 
 
 
 342,945
 134,784
342,945
 17,329
 
 (58,193) 
 
 
 
 
 
 
 383,809
 (40,864)
Total liabilities measured at fair value on a recurring basis$574,837
 $147,963
 $
 $(14,090) $
 $
 $
 $72
 $2,913
 $
 $
 $438,123
 $134,784
$438,123
 $17,329
 $
 $(61,366) $
 $
 $
 $93
 $3,246
 $
 $
 $479,007
 $(40,864)

(1)Represents certain freestanding and embedded derivatives.
(2)Represents liabilities related to fixed indexed annuities.
     
For the three months ended JuneSeptember 30, 2015 (Successor Company), there were no securities transferred into Level 3.
 
For the three months ended JuneSeptember 30, 2015 (Successor Company), $21.8$20.0 million of securities were transferred into Level 2. This amount was transferred from Level 3. These transfers resulted from securities that were priced internally using significant unobservable inputs where market observable inputs were not available in previous periods but were priced by independent pricing services or brokers as of JuneSeptember 30, 2015 (Successor Company).
 
For the three months ended JuneSeptember 30, 2015 (Successor Company), there were no securities transferred from Level 2 to Level 1.
 
For the three months ended JuneSeptember 30, 2015 (Successor Company), there were no securities transferred from Level 1.

34

Table of Contents



The following table presents a reconciliation of the beginning and ending balances for fair value measurements for the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company), for which the Company has used significant unobservable inputs (Level 3):
 
  
Total
Realized and Unrealized
Gains
 
Total
Realized and Unrealized
Losses
               Total
Gains (losses)
included in
  
Total
Realized and Unrealized
Gains
 
Total
Realized and Unrealized
Losses
               Total
Gains (losses)
included in
Beginning
Balance
 
Included in
Earnings
 
Included in
Other
Comprehensive
Income
 
Included in
Earnings
 
Included in
Other
Comprehensive
Income
 Purchases Sales Issuances Settlements 
Transfers
in/out of
Level 3
 Other 
Ending
Balance
 Earnings
related to
Instruments
still held at
the Reporting
Date
Beginning
Balance
 
Included in
Earnings
 
Included in
Other
Comprehensive
Income
 
Included in
Earnings
 
Included in
Other
Comprehensive
Income
 Purchases Sales Issuances Settlements 
Transfers
in/out of
Level 3
 Other 
Ending
Balance
 Earnings
related to
Instruments
still held at
the Reporting
Date
(Dollars In Thousands)(Dollars In Thousands)
Assets: 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
  
Fixed maturity securities available-for-sale 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
  
Residential mortgage-backed securities$3
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $3
 $
$3
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $3
 $
Other asset-backed securities603,646
 
 165
 (92) (12,891) 
 (127) 
 
 
 184
 590,885
 
603,646
 
 165
 (92) (17,076) 
 (127) 
 
 
 (765) 585,751
 
States, municipals, and political subdivisions3,675
 
 
 
 
 
 (3,675) 
 
 
 
 
 
3,675
 
 
 
 
 
 (3,675) 
 
 
 
 
 
Corporate securities1,307,259
 4,291
 15,619
 (687) (24,247) 111,929
 (254,935) 
 
 (41,853) (5,945) 1,111,431
 
1,307,259
 4,367
 21,558
 (851) (33,047) 174,112
 (356,096) 
 
 (61,890) (6,674) 1,048,738
 
Total fixed maturity securities - available-for-sale1,914,583
 4,291
 15,784
 (779) (37,138) 111,929
 (258,737) 
 
 (41,853) (5,761) 1,702,319
 
1,914,583
 4,367
 21,723
 (943) (50,123) 174,112
 (359,898) 
 
 (61,890) (7,439) 1,634,492
 
Fixed maturity securities - trading 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
  
Other asset-backed securities169,473
 3,949
 
 (5,173) 
 
 (7,876) 
 
 
 221
 160,594
 (5,829)169,473
 4,032
 
 (6,813) 
 2,000
 (13,877) 
 
 
 338
 155,153
 (6,896)
Corporate securities25,130
 174
 
 (299) 
 
 (5,584) 
 
 
 (105) 19,316
 (1,180)25,130
 247
 
 (1,269) 
 
 (5,640) 
 
 
 (149) 18,319
 (1,546)
Total fixed maturity securities - trading194,603
 4,123
 
 (5,472) 
 
 (13,460) 
 
 
 116
 179,910
 (7,009)194,603
 4,279
 
 (8,082) 
 2,000
 (19,517) 
 
 
 189
 173,472
 (8,442)
Total fixed maturity securities2,109,186
 8,414
 15,784
 (6,251) (37,138) 111,929
 (272,197) 
 
 (41,853) (5,645) 1,882,229
 (7,009)2,109,186
 8,646
 21,723
 (9,025) (50,123) 176,112
 (379,415) 
 
 (61,890) (7,250) 1,807,964
 (8,442)
Equity securities66,691
 
 
 
 
 
 (231) 
 
 
 
 66,460
 
66,691
 
 44
 
 
 
 (231) 
 
 
 
 66,504
 
Other long-term investments(1)
64,200
 40,032
 
 (3,713) 
 
 
 
 
 
 
 100,519
 36,319
64,200
 40,032
 
 (48,482) 
 
 
 
 
 
 
 55,750
 (8,450)
Short-term investments
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
Total investments2,240,077
 48,446
 15,784
 (9,964) (37,138) 111,929
 (272,428) 
 
 (41,853) (5,645) 2,049,208
 29,310
2,240,077
 48,678
 21,767
 (57,507) (50,123) 176,112
 (379,646) 
 
 (61,890) (7,250) 1,930,218
 (16,892)
Total assets measured at fair value on a recurring basis$2,240,077
 $48,446
 $15,784
 $(9,964) $(37,138) $111,929
 $(272,428) $
 $
 $(41,853) $(5,645) $2,049,208
 $29,310
$2,240,077
 $48,678
 $21,767
 $(57,507) $(50,123) $176,112
 $(379,646) $
 $
 $(61,890) $(7,250) $1,930,218
 $(16,892)
Liabilities: 
  
  
  
  
  
  
  
  
  
  
  
  
 
  
  
  
  
  
  
  
  
  
  
  
  
Annuity account balances(2)
$98,279
 $
 $
 $(1,544) $
 $
 $
 $86
 $4,731
 $
 $
 $95,178
 $
$98,279
 $
 $
 $(4,716) $
 $
 $
 $179
 $7,976
 $
 $
 $95,198
 $
Other liabilities(1)
530,118
 212,854
 
 (25,681) 
 
 
 
 
 
 
 342,945
 187,173
530,118
 230,183
 
 (83,874) 
 
 
 
 
 
 
 383,809
 146,309
Total liabilities measured at fair value on a recurring basis$628,397
 $212,854
 $
 $(27,225) $
 $
 $
 $86
 $4,731
 $
 $
 $438,123
 $187,173
$628,397
 $230,183
 $
 $(88,590) $
 $
 $
 $179
 $7,976
 $
 $
 $479,007
 $146,309
 
(1)Represents certain freestanding and embedded derivatives.
(2)Represents liabilities related to fixed indexed annuities.
 
For the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company), there were no transfers of securities into Level 3.
 
For the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company), $41.9$61.9 million of securities were transferred into Level 2. This amount was transferred from Level 3. These transfers resulted from securities that were priced internally using significant unobservable inputs where market observable inputs were not available in previous periods but were priced by independent pricing services or brokers as of JuneSeptember 30, 2015 (Successor Company).
 
For the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company), $90.4 million of securities were transferred from Level 2 to Level 1.
 
For the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company), there were no transfers from Level 1.


35

Table of Contents

The following table presents a reconciliation of the beginning and ending balances for fair value measurements for period of January 1, 2015 to January 31, 2015 (Predecessor Company), for which the Company has used significant unobservable inputs (Level 3):
 
   
Total
Realized and Unrealized
Gains
 
Total
Realized and Unrealized
Losses
               Total
Gains (losses)
included in
 
Beginning
Balance
 
Included in
Earnings
 
Included in
Other
Comprehensive
Income
 
Included in
Earnings
 
Included in
Other
Comprehensive
Income
 Purchases Sales Issuances Settlements 
Transfers
in/out of
Level 3
 Other 
Ending
Balance
 Earnings
related to
Instruments
still held at
the Reporting
Date
 (Dollars In Thousands)
Assets: 
  
  
  
  
  
  
  
  
  
  
  
  
Fixed maturity securities available-for-sale 
  
  
  
  
  
  
  
  
  
  
  
  
Residential mortgage-backed securities$3
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $
 $3
 $
Other asset-backed securities563,961
 
 
 
 (3,867) 
 (32) 
 
 43,205
 379
 603,646
 
States, municipals, and political subdivisions3,675
 
 
 
 
 
 
 
 
 
 
 3,675
 
Corporate securities1,325,683
 
 12,282
 
 (23,029) 
 (7,062) 
 
 
 (615) 1,307,259
 
Total fixed maturity securities - available-for-sale1,893,322
 
 12,282
 
 (26,896) 
 (7,094) 
 
 43,205
 (236) 1,914,583
 
Fixed maturity securities - trading 
  
  
  
  
  
  
  
  
  
  
  
  
Other asset-backed securities169,461
 586
 
 (139) 
 
 (472) 
 
 
 37
 169,473
 447
Corporate securities24,744
 602
 
 (196) 
 
 (20) 
 
 
 
 25,130
 406
Total fixed maturity securities - trading194,205
 1,188
 
 (335) 
 
 (492) 
 
 
 37
 194,603
 853
Total fixed maturity securities2,087,527
 1,188
 12,282
 (335) (26,896) 
 (7,586) 
 
 43,205
 (199) 2,109,186
 853
Equity securities66,691
 
 
 
 
 
 
 
 
 
 
 66,691
 
Other long-term investments(1)
44,625
 16,617
 
 (15,166) 
 
 
 
 
 
 
 46,076
 1,451
Short-term investments
 
 
 
 
 
 
 
 
 
 
 
 
Total investments2,198,843
 17,805
 12,282
 (15,501) (26,896) 
 (7,586) 
 
 43,205
 (199) 2,221,953
 2,304
Total assets measured at fair value on a recurring basis$2,198,843
 $17,805
 $12,282
 $(15,501) $(26,896) $
 $(7,586) $
 $
 $43,205
 $(199) $2,221,953
 $2,304
Liabilities: 
  
  
  
  
  
  
  
  
  
  
  
  
Annuity account balances(2)
$97,825
 $
 $
 $(536) $
 $
 $
 $7
 $419
 $
 $
 $97,949
 $
Other liabilities(1)
506,343
 61
 
 (125,995) 
 
 
 
 
 
 
 632,277
 (125,934)
Total liabilities measured at fair value on a recurring basis$604,168
 $61
 $
 $(126,531) $
 $
 $
 $7
 $419
 $
 $
 $730,226
 $(125,934)

(1)Represents certain freestanding and embedded derivatives.
(2)Represents liabilities related to fixed indexed annuities.
 
For the period of January 1, 2015 to January 31, 2015 (Predecessor Company), $43.2 million of securities were transferred into Level 3. This amount was transferred from Level 2. These transfers resulted from securities that were priced by independent pricing services or brokers in previous periods, using no significant unobservable inputs, but were priced internally using significant unobservable inputs where market observable inputs were no longer available as of January 31, 2015 (Predecessor Company). All transfers are recognized as of the end of the period.
 
For the period of January 1, 2015 to January 31, 2015 (Predecessor Company), there were no transfers from Level 3 to Level 2.
 
For the period of January 1, 2015 to January 31, 2015 (Predecessor Company), there were no transfers from Level 2 to Level 1 and there were no transfers out of Level 1.

     Total realized and unrealized gains (losses) on Level 3 assets and liabilities are primarily reported in either realized investment gains (losses) within the consolidated condensed statements of income (loss) or other comprehensive income (loss) within shareowner’s equity based on the appropriate accounting treatment for the item.
 
Purchases, sales, issuances, and settlements, net, represent the activity that occurred during the period that results in a change of the asset or liability but does not represent changes in fair value for the instruments held at the beginning of the period. Such activity primarily relates to purchases and sales of fixed maturity securities and issuances and settlements of fixed indexed annuities.
 
The Company reviews the fair value hierarchy classifications each reporting period. Changes in the observability of the valuation attributes may result in a reclassification of certain financial assets or liabilities. Such reclassifications are reported as

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reported as transfers in and out of Level 3 at the beginning fair value for the reporting period in which the changes occur. The asset transfers in the table(s) above primarily related to positions moved from Level 3 to Level 2 as the Company determined that certain inputs were observable.
 
The amount of total gains (losses) for assets and liabilities still held as of the reporting date primarily represents changes in fair value of trading securities and certain derivatives that exist as of the reporting date and the change in fair value of fixed indexed annuities.
 
Estimated Fair Value of Financial Instruments
 
The carrying amounts and estimated fair values of the Company’s financial instruments as of the periods shown below are as follows:
 
 Successor Company Successor Company
 As of
June 30, 2016
 As of
December 31, 2015
 As of
September 30, 2016
 As of
December 31, 2015
Fair Value
Level
 
Carrying
Amounts
 Fair Values 
Carrying
Amounts
 Fair Values
Fair Value
Level
 
Carrying
Amounts
 Fair Values 
Carrying
Amounts
 Fair Values
  (Dollars In Thousands)  (Dollars In Thousands)
Assets:   
�� 
  
  
   
  
  
  
Mortgage loans on real estate3 $5,748,675
 $5,735,650
 $5,662,812
 $5,529,803
3 $5,912,683
 $5,946,153
 $5,662,812
 $5,529,803
Policy loans3 1,670,218
 1,670,218
 1,699,508
 1,699,508
3 1,656,083
 1,656,083
 1,699,508
 1,699,508
Fixed maturities, held-to-maturity(1)
3 2,779,280
 2,853,788
 593,314
 515,000
3 2,775,230
 2,894,615
 593,314
 515,000
Liabilities:   
  
  
  
   
  
  
  
Stable value product account balances3 $2,838,674
 $2,855,064
 $2,131,822
 $2,124,712
3 $3,412,041
 $3,436,797
 $2,131,822
 $2,124,712
Annuity account balances3 10,678,701
 10,221,680
 10,719,862
 10,274,571
3 10,679,011
 10,288,929
 10,719,862
 10,274,571
Debt:   
  
  
  
   
  
  
  
Non-recourse funding obligations(2)
3 $2,981,271
 $3,054,637
 $1,951,563
 $1,621,773
3 $2,978,052
 $3,093,432
 $1,951,563
 $1,621,773
 
Except as noted below, fair values were estimated using quoted market prices.

(1)    Securities purchased from unconsolidated affiliates, Red Mountain LLC and Steel City LLC.
(2)    Of this carrying amount, $2.8$2.7 billion, fair value of $2.8$2.9 billion, as of JuneSeptember 30, 2016 (Successor Company), and $500.0 million, fair value of $495.5 million, as of December 31, 2015 (Successor Company), relates to non-recourse funding obligations issued by Golden Gate and Golden Gate V.

Fair Value Measurements
 
Mortgage loans on real estate
 
The Company estimates the fair value of mortgage loans using an internally developed model. This model includes inputs derived by the Company based on assumed discount rates relative to the Company’s current mortgage loan lending rate and an expected cash flow analysis based on a review of the mortgage loan terms. The model also contains the Company’s determined representative risk adjustment assumptions related to credit and liquidity risks.
 
Policy loans
 
The Company believes the fair value of policy loans approximates book value. Policy loans are funds provided to policy holders in return for a claim on the policy. The funds provided are limited to the cash surrender value of the underlying policy. The nature of policy loans is to have a negligible default risk as the loans are fully collateralized by the value of the policy. Policy loans do not have a stated maturity and the balances and accrued interest are repaid either by the policyholder or with proceeds from the policy. Due to the collateralized nature of policy loans and unpredictable timing of repayments, the Company believes the fair value of policy loans approximates carrying value.
 
Fixed maturities, held-to-maturity
 
The Company estimates the fair value of its fixed maturity, held-to-maturity securities using internal discounted cash flow models. The discount rates used in the model are based on a current market yield for similar financial instruments.
 
Stable Value Product and Annuity Account Balances
 
The Company estimates the fair value of stable value product account balances and annuity account balances using models based on discounted expected cash flows. The discount rates used in the models are based on a current market rate for similar financial instruments.

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Non-recourse Funding Obligations
 
The Company estimates the fair value of its non-recourse funding obligations using internal discounted cash flow models. The discount rates used in the model are based on a current market yield for similar financial instruments.
 
8.                               DERIVATIVE FINANCIAL INSTRUMENTS
 
Types of Derivative Instruments and Derivative Strategies
 
The Company utilizes a risk management strategy that incorporates the use of derivative financial instruments to reduce exposure to certain risks, including but not limited to, interest rate risk, inflation risk, currency exchange risk, volatility risk, and equity market risk. These strategies are developed through the Company’s analysis of data from financial simulation models and other internal and industry sources, and are then incorporated into the Company’s risk management program.

Derivative instruments expose the Company to credit and market risk and could result in material changes from period to period. The Company attempts to minimize its credit risk by entering into transactions with highly rated counterparties. The Company manages the market risk by establishing and monitoring limits as to the types and degrees of risk that may be undertaken. The Company monitors its use of derivatives in connection with its overall asset/liability management programs and risk management strategies. In addition, all derivative programs are monitored by our risk management department.
 
Derivatives Related to Interest Rate Risk Management
 
Derivative instruments that are used as part of the Company’s interest rate risk management strategy include interest rate swaps, interest rate futures, interest rate caps, and interest rate swaptions. The Company’s inflation risk management strategy involves the use of swaps that requires the Company to pay a fixed rate and receive a floating rate that is based on changes in the Consumer Price Index (“CPI”).
 
Derivatives Related to Risk Mitigation of Certain Annuity Contracts
 
The Company may use the following types of derivative contracts to mitigate its exposure to certain guaranteed benefits related to VA contracts and fixed indexed annuities:
 
Foreign Currency Futures
Variance Swaps
Interest Rate Futures
Equity Options
Equity Futures
Credit Derivatives
Interest Rate Swaps
Interest Rate Swaptions
Volatility Futures
Volatility Options
Funds Withheld Agreement
Total Return Swaps
 
Other Derivatives
 
The Company and certain of its subsidiaries have derivatives with PLC. These derivatives consist of an interest support agreement, YRT premium support agreements, and portfolio maintenance agreements with PLC.
 
The Company has a funds withheld account that consists of various derivative instruments held by us that is used to hedge the GMWB and GMDB riders. The economic performance of derivatives in the funds withheld account is ceded to Shades Creek. The funds withheld account is accounted for as a derivative financial instrument.
 
Accounting for Derivative Instruments
 
The Company records its derivative financial instruments in the consolidated balance sheet in “other long-term investments” and “other liabilities” in accordance with GAAP, which requires that all derivative instruments be recognized in the balance sheet at fair value. The change in the fair value of derivative financial instruments is reported either in the statement of income or in other comprehensive income (loss), depending upon whether it qualified for and also has been properly identified as being part of a hedging relationship, and also on the type of hedging relationship that exists.

For a derivative financial instrument to be accounted for as an accounting hedge, it must be identified and documented as such on the date of designation. For cash flow hedges, the effective portion of their realized gain or loss is reported as a component of other comprehensive income and reclassified into earnings in the same period during which the hedged item impacts earnings. Any remaining gain or loss, the ineffective portion, is recognized in current earnings. For fair value hedge derivatives, their gain or loss as well as the offsetting loss or gain attributable to the hedged risk of the hedged item is recognized in current earnings. Effectiveness of the Company’s hedge relationships is assessed on a quarterly basis.


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Table of Contents

The Company reports changes in fair values of derivatives that are not part of a qualifying hedge relationship through earnings in the period of change. Changes in the fair value of derivatives that are recognized in current earnings are reported in “Realized investment gains (losses)-Derivative financial instruments”.

Derivative Instruments Designated and Qualifying as Hedging Instruments
 
Cash-Flow Hedges
 
In connection with the issuance of inflation-adjusted funding agreements, the Company has entered into swaps to essentially convert the floating CPI-linked interest rate on these agreements to a fixed rate. The Company pays a fixed rate on the swap and receives a floating rate primarily determined by the period’s change in the CPI. The amounts that are received on the swaps are almost equal to the amounts that are paid on the agreements. None of these positions were held as of JuneSeptember 30, 2016 (Successor Company), as these funding agreements and correlating swaps matured in June of 2015.
 
Derivative Instruments Not Designated and Not Qualifying as Hedging Instruments
 
The Company uses various other derivative instruments for risk management purposes that do not qualify for hedge accounting treatment. Changes in the fair value of these derivatives are recognized in earnings during the period of change.
 
Derivatives Related to Variable Annuity Contracts
 
The Company uses equity, interest rate, currency, and volatility futures to mitigate the risk related to certain guaranteed minimum benefits, including GMWB, within its VA products. In general, the cost of such benefits varies with the level of equity and interest rate markets, foreign currency levels, and overall volatility.
 
The Company uses equity options, variance swaps, and volatility options to mitigate the risk related to certain guaranteed minimum benefits, including GMWB, within its VA products. In general, the cost of such benefits varies with the level of equity markets and overall volatility.
 
The Company uses interest rate swaps and interest rate swaptions to mitigate the risk related to certain guaranteed minimum benefits, including GMWB, within its VA products.
 
The Company markets certain VA products with a GMWB rider. The GMWB component is considered an embedded derivative, not considered to be clearly and closely related to the host contract.
 
The Company has a funds withheld account that consists of various derivative instruments held by the Company that are used to hedge the GMWB and GMDB riders. The economic performance of derivatives in the funds withheld account is ceded to Shades Creek. The funds withheld account is accounted for as a derivative financial instrument.
 
Derivatives Related to Fixed Annuity Contracts
 
The Company uses equity, futures, and options to mitigate the risk within its fixed indexed annuity products. In general, the cost of such benefits varies with the level of equity and overall volatility.
 
The Company uses equity options to mitigate the risk within its fixed indexed annuity products. In general, the cost of such benefits varies with the level of equity markets.
 
The Company markets certain fixed indexed annuity products. The FIA component is considered an embedded derivative, not considered to be clearly and closely related to the host contract.
 
Derivatives Related to Indexed Universal Life Contracts
 
The Company uses equity, futures, and options to mitigate the risk within its indexed universal life products. In general, the cost of such benefits varies with the level of equity markets.

The Company markets certain IUL products. The IUL component is considered an embedded derivative, not considered to be clearly and closely related to the host contract.
 
Other Derivatives
 
The Company uses certain interest rate swaps to mitigate the price volatility of fixed maturities. None of these positions were held as of JuneSeptember 30, 2016 (Successor Company).
 
The Company and certain of its subsidiaries have an interest support agreement, two YRT premium support agreements, and three portfolio maintenance agreements with PLC. The Company entered into three separate portfolio maintenance agreements, two in October 2012 and one in January 2016.
 
The Company uses various swaps and other types of derivatives to manage risk related to other exposures.

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The Company is involved in various modified coinsurance and funds withheld arrangements which contain embedded derivatives. Changes in their fair value are recorded in current period earnings. The investment portfolios that support the related modified coinsurance reserves and funds withheld arrangements had fair value changes which substantially offset the gains or losses on these embedded derivatives.

The following table sets forth realized investments gains and losses for the periods shown:
 
Realized investment gains (losses) - derivative financial instruments
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three Months Ended
June 30, 2016
 For The Three Months Ended June 30, 2015 For The Six Months Ended June 30, 2016 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended
September 30, 2016
 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Derivatives related to VA contracts: 
      
  
 
      
  
Interest rate futures - VA$31,266
 $(14,183) $69,067
 $(14,231) $1,413
$(7,002) $12,140
 $62,065
 $(2,091) $1,413
Equity futures - VA(21,328) (5,267) (24,556) (37,736) 9,221
(41,836) 40,951
 (66,392) 3,215
 9,221
Currency futures - VA11,112
 (8,709) 4,954
 (2,572) 7,778
934
 4,000
 5,888
 1,428
 7,778
Equity options - VA(3,232) (3,550) 13,072
 (25,324) 3,047
(36,482) 33,519
 (23,410) 8,195
 3,047
Interest rate swaptions - VA(749) 2,547
 (2,983) (8,781) 9,268
(229) (3,618) (3,212) (12,399) 9,268
Interest rate swaps - VA81,554
 (121,167) 207,147
 (175,958) 122,710
14,737
 101,808
 221,884
 (74,150) 122,710
Embedded derivative - GMWB(66,019) 45,969
 (132,695) 81,839
 (68,503)24,150
 (71,296) (108,545) 10,543
 (68,503)
Funds withheld derivative17,850
 6,335
 10,052
 44,571
 (9,073)53,834
 (52,872) 63,886
 (8,301) (9,073)
Total derivatives related to VA contracts50,454
 (98,025) 144,058
 (138,192) 75,861
8,106
 64,632
 152,164
 (73,560) 75,861
Derivatives related to FIA contracts: 
 

 

  
  
 
 

 

  
  
Embedded derivative - FIA710
 290
 (1,452) (2,293) 1,769
(14,486) 11,328
 (15,938) 9,035
 1,769
Equity futures - FIA651
 123
 2,033
 307
 (184)2,236
 709
 4,269
 1,016
 (184)
Volatility futures - FIA
 25
 
 29
 

 (24) 
 6
 
Equity options - FIA735
 1,226
 (4,827) 5,601
 (2,617)6,583
 (12,099) 1,756
 (6,499) (2,617)
Total derivatives related to FIA contracts2,096
 1,664
 (4,246) 3,644
 (1,032)(5,667) (86) (9,913) 3,558
 (1,032)
Derivatives related to IUL contracts: 
 

 

  
  
 
 

 

  
  
Embedded derivative - IUL(96) 1,538
 (834) 1,795
 (486)7,136
 1,287
 6,302
 3,082
 (486)
Equity futures - IUL47
 9
 (172) 23
 3
101
 17
 (71) 39
 3
Equity options - IUL241
 (78) 214
 62
 (115)1,607
 (1,110) 1,821
 (1,048) (115)
Total derivatives related to IUL contracts192
 1,469
 (792) 1,880
 (598)8,844
 194
 8,052
 2,073
 (598)
Embedded derivative - Modco reinsurance treaties(22,820) 109,131
 (81,175) 141,322
 (68,026)(24,187) (9,817) (105,362) 131,505
 (68,026)
Derivatives with PLC (1)
13,681
 (3,684) 17,711
 (3,119) 15,863
13,387
 (12,978) 31,098
 (16,096) 15,863
Other derivatives(55) 11
 (100) 83
 (37)49
 (50) (51) 33
 (37)
Total realized gains (losses) - derivatives$43,548
 $10,566
 $75,456
 $5,618
 $22,031
$532
 $41,895
 $75,988
 $47,513
 $22,031
 
(1)These derivatives include the Interest, YRT premium support, and portfolio maintenance agreements between certain of the Company’s subsidiaries and PLC.
 

40

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The following table sets forth realized investments gains and losses for the Modco trading portfolio that is included in realized investment gains (losses) — all other investments:
 
Realized investment gains (losses) - all other investments
 
 Successor Company Predecessor Company
 For the Three Months Ended
June 30, 2016
 For The Three Months Ended June 30, 2015 For The Six Months Ended June 30, 2016 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
 (Dollars In Thousands) (Dollars In Thousands)
Modco trading portfolio(1)
$76,201
 $(108,741) $154,355
 $(141,901) $73,062
 Successor Company Predecessor Company
 For The Three Months Ended
September 30, 2016
 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
 (Dollars In Thousands) (Dollars In Thousands)
Modco trading portfolio(1)
$23,995
 $8,377
 $178,353
 $(133,524) $73,062
 
(1)The Company elected to include the use of alternate disclosures for trading activities.

The following table presents the components of the gain or loss on derivatives that qualify as a cash flow hedging relationship:relationship. The Company did not have any derivatives that qualified as a cash flow hedging relationships for the three and nine months ended September 30, 2016 (Successor Company) and for the three months ended September 30, 2015 (Successor Company):
 
Gain (Loss) on Derivatives in Cash Flow Hedging Relationship
 
Amount of Gains (Losses)
Deferred in
Accumulated Other
Comprehensive Income
(Loss) on Derivatives
 
Amount and Location of
Gains (Losses)
Reclassified from
Accumulated Other
Comprehensive Income
(Loss) into Income (Loss)
 
Amount and Location of
(Losses) Recognized in
Income (Loss) on
Derivatives
Amount of Gains (Losses)
Deferred in
Accumulated Other
Comprehensive Income
(Loss) on Derivatives
 
Amount and Location of
Gains (Losses)
Reclassified from
Accumulated Other
Comprehensive Income
(Loss) into Income (Loss)
 
Amount and Location of
(Losses) Recognized in
Income (Loss) on
Derivatives
(Effective Portion) (Effective Portion) (Ineffective Portion)(Effective Portion) (Effective Portion) (Ineffective Portion)
  
Benefits and settlement
expenses
 
Realized investment
gains (losses)
  
Benefits and settlement
expenses
 
Realized investment
gains (losses)
  (Dollars In Thousands)    (Dollars In Thousands)  
Successor Company 
  
   
  
  
For The Three Months Ended June 30, 2015 
  
  
Inflation$(95) $(41) $77
Total$(95) $(41) $77
     
February 1, 2015 to June 30, 2015 
  
  
February 1, 2015 to September 30, 2015 
  
  
Inflation$(131) $(131) $73
$(131) $(131) $73
Total$(131) $(131) $73
$(131) $(131) $73
          
          
Predecessor Company 
  
  
 
  
  
January 1, 2015 to January 31, 2015 
  
  
 
  
  
Inflation$13
 $(36) $(7)$13
 $(36) $(7)
Total$13
 $(36) $(7)$13
 $(36) $(7)


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The table below present information about the nature and accounting treatment of the Company’s primary derivative financial instruments and the location in and effect on the consolidated condensed financial statements for the periods presented below:
 
Successor CompanySuccessor Company
As of June 30, 2016 As of December 31, 2015As of September 30, 2016 As of December 31, 2015
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
Notional
Amount
 
Fair
Value
 
Notional
Amount
 
Fair
Value
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Other long-term investments 
  
  
  
 
  
  
  
Derivatives not designated as hedging instruments: 
  
  
  
 
  
  
  
Interest rate swaps$1,640,000
 $255,439
 $1,435,000
 $66,408
$1,640,000
 $267,389
 $1,435,000
 $66,408
Derivatives with PLC(1)
2,869,315
 37,300
 1,619,200
 18,161
2,881,274
 50,687
 1,619,200
 18,161
Embedded derivative - Modco reinsurance treaties64,201
 1,850
 64,593
 1,215
64,411
 2,787
 64,593
 1,215
Embedded derivative - GMWB891,276
 23,770
 1,723,081
 49,007
1,155,640
 33,675
 1,723,081
 49,007
Interest rate futures1,155,001
 35,366
 282,373
 1,537
796,694
 2,256
 282,373
 1,537
Equity futures190,058
 752
 262,485
 1,275
45,261
 556
 262,485
 1,275
Currency futures314,256
 15,915
 226,936
 2,499
321,917
 4,735
 226,936
 2,499
Equity options2,725,744
 269,217
 2,198,340
 179,458
3,542,544
 311,158
 2,198,340
 179,458
Interest rate swaptions225,000
 681
 225,000
 3,663
225,000
 451
 225,000
 3,663
Other298
 249
 242
 347
212
 123
 242
 347
$10,075,149
 $640,539
 $8,037,250
 $323,570
$10,672,953
 $673,817
 $8,037,250
 $323,570
Other liabilities 
  
  
  
 
  
  
  
Derivatives not designated as hedging instruments: 
  
  
  
 
  
  
  
Interest rate swaps$270,000
 $3,215
 $475,000
 $16,579
$70,000
 $1,658
 $475,000
 $16,579
Embedded derivative - Modco reinsurance treaties2,457,293
 239,350
 2,473,427
 178,362
2,455,121
 254,285
 2,473,427
 178,362
Funds withheld derivative1,492,757
 129,473
 1,149,664
 102,378
1,625,725
 112,344
 1,149,664
 102,378
Embedded derivative - GMWB2,853,530
 174,988
 1,834,308
 67,528
2,670,968
 162,543
 1,834,308
 67,528
Embedded derivative - FIA1,313,404
 119,997
 1,110,790
 100,329
1,408,469
 141,651
 1,110,790
 100,329
Embedded derivative - IUL77,879
 46,711
 57,760
 29,629
90,848
 46,348
 57,760
 29,629
Interest rate futures
 
 793,763
 1,539
480,897
 7,419
 793,763
 1,539
Equity futures582,493
 7,461
 233,412
 2,599
862,034
 9,504
 233,412
 2,599
Currency futures64,445
 1,805
 46,692
 1,115
81,768
 447
 46,692
 1,115
Equity options1,459,533
 60,551
 1,205,204
 22,167
2,202,799
 110,712
 1,205,204
 22,167
$10,571,334
 $783,551
 $9,380,020
 $522,225
$11,948,629
 $846,911
 $9,380,020
 $522,225

(1)These derivatives include the Interest, YRT premium support, and portfolio maintenance agreements between certain of the Company’s subsidiaries and PLC.

During the first quarter 2016, the Company revised its methodology for estimating notional amounts associated with the YRT Support Agreements among certain of its affiliates. The Company's revised approach reflects its position that no reasonably estimable notional amounts exist for the YRT Support Agreements, which contain payment positions based on the movement of the underlying premium rates, as described in Note 7, Fair Value of Financial Instruments. Current period amounts disclosed above reflect this change in estimate, which did not impact the Company's financial position or results of operations.

9.          OFFSETTING OF ASSETS AND LIABILITIES
 
Certain of the Company’s derivative instruments are subject to enforceable master netting arrangements that provide for the net settlement of all derivative contracts between the Company and a counterparty in the event of default or upon the occurrence of certain termination events. Collateral support agreements associated with each master netting arrangement provide that the Company will receive or pledge financial collateral in the event either minimum thresholds, or in certain cases ratings levels, have been reached. Additionally, certain of the Company’s repurchase agreements provide for net settlement on termination of the agreement. Refer to Note 12, Debt and Other Obligations for details of the Company’s repurchase agreement programs.
 

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The tables below present the derivative instruments by assets and liabilities for the Company as of JuneSeptember 30, 2016 (Successor Company).
 
    Net Amounts          Net Amounts      
Gross 
Gross
Amounts
Offset in the
 
of Assets
Presented in
the
 
Gross Amounts Not Offset
in the Statement of
Financial Position
  Gross 
Gross
Amounts
Offset in the
 
of Assets
Presented in
the
 
Gross Amounts Not Offset
in the Statement of
Financial Position
  
Amounts of
Recognized
Assets
 
Statement of
Financial
Position
 
Statement of
Financial
Position
 
Financial
Instruments
 
Cash
Collateral
Received
 Net Amount
Amounts of
Recognized
Assets
 
Statement of
Financial
Position
 
Statement of
Financial
Position
 
Financial
Instruments
 
Cash
Collateral
Received
 Net Amount
(Dollars In Thousands)(Dollars In Thousands)
Offsetting of Derivative Assets 
  
  
  
  
  
 
  
  
  
  
  
Derivatives: 
  
  
  
  
  
 
  
  
  
  
  
Free-Standing derivatives$577,370
 $
 $577,370
 $66,347
 $336,163
 $174,860
$586,545
 $
 $586,545
 $114,968
 $299,819
 $171,758
Total derivatives, subject to a master netting arrangement or similar arrangement577,370
 
 577,370
 66,347
 336,163
 174,860
586,545
 
 586,545
 114,968
 299,819
 171,758
Derivatives not subject to a master netting arrangement or similar arrangement 
  
  
  
  
  
 
  
  
  
  
  
Embedded derivative - Modco reinsurance treaties1,850
 
 1,850
 
 
 1,850
2,787
 
 2,787
 
 
 2,787
Embedded derivative - GMWB23,770
 
 23,770
 
 
 23,770
33,675
 
 33,675
 
 
 33,675
Derivatives with PLC37,300
 
 37,300
 
 
 37,300
50,687
 
 50,687
 
 
 50,687
Other249
 
 249
 
 
 249
123
 
 123
 
 
 123
Total derivatives, not subject to a master netting arrangement or similar arrangement63,169
 
 63,169
 
 
 63,169
87,272
 
 87,272
 
 
 87,272
Total derivatives640,539
 
 640,539
 66,347
 336,163
 238,029
673,817
 
 673,817
 114,968
 299,819
 259,030
Total Assets$640,539
 $
 $640,539
 $66,347
 $336,163
 $238,029
$673,817
 $
 $673,817
 $114,968
 $299,819
 $259,030



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    Net Amounts          Net Amounts      
Gross 
Gross
Amounts
Offset in the
 
of Liabilities
Presented in
the
 
Gross Amounts Not Offset
in the Statement of
Financial Position
  Gross 
Gross
Amounts
Offset in the
 
of Liabilities
Presented in
the
 
Gross Amounts Not Offset
in the Statement of
Financial Position
  
Amounts of
Recognized
Liabilities
 
Statement of
Financial
Position
 
Statement of
Financial
Position
 
Financial
Instruments
 
Cash
Collateral
Paid
 Net Amount
Amounts of
Recognized
Liabilities
 
Statement of
Financial
Position
 
Statement of
Financial
Position
 
Financial
Instruments
 
Cash
Collateral
Paid
 Net Amount
(Dollars In Thousands)(Dollars In Thousands)
Offsetting of Derivative Liabilities 
  
  
  
  
  
 
  
  
  
  
  
Derivatives: 
  
  
  
  
  
 
  
  
  
  
  
Free-Standing derivatives$73,032
 $
 $73,032
 $66,347
 $6,685
 $
$129,740
 $
 $129,740
 $114,968
 $14,772
 $
Total derivatives, subject to a master netting arrangement or similar arrangement73,032
 
 73,032
 66,347
 6,685
 
129,740
 
 129,740
 114,968
 14,772
 
Derivatives, not subject to a master netting arrangement or similar arrangement 
  
  
  
  
  
 
  
  
  
  
  
Embedded derivative - Modco reinsurance treaties239,350
 
 239,350
 
 
 239,350
254,285
 
 254,285
 
 
 254,285
Funds withheld derivative129,473
 
 129,473
 
 
 129,473
112,344
 
 112,344
 
 
 112,344
Embedded derivative - GMWB174,988
 
 174,988
 
 
 174,988
162,543
 
 162,543
 
 
 162,543
Embedded derivative - FIA119,997
 
 119,997
 
 
 119,997
141,651
 
 141,651
 
 
 141,651
Embedded derivative - IUL46,711
 
 46,711
 
 
 46,711
46,348
 
 46,348
 
 
 46,348
Total derivatives, not subject to a master netting arrangement or similar arrangement710,519
 
 710,519
 
 
 710,519
717,171
 
 717,171
 
 
 717,171
Total derivatives783,551
 
 783,551
 66,347
 6,685
 710,519
846,911
 
 846,911
 114,968
 14,772
 717,171
Repurchase agreements(1)
160,000
 
 160,000
 
 
 160,000
219,457
 
 219,457
 
 
 219,457
Total Liabilities$943,551
 $
 $943,551
 $66,347
 $6,685
 $870,519
$1,066,368
 $
 $1,066,368
 $114,968
 $14,772
 $936,628
 
(1) Borrowings under repurchase agreements are for a term less than 90 days.


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The tables below present the derivative instruments by assets and liabilities for the Company as of December 31, 2015 (Successor Company).
 
     Net Amounts      
 Gross 
Gross
Amounts
Offset in the
 
of Assets
Presented in
the
 
Gross Amounts Not Offset
in the Statement of
Financial Position
  
 
Amounts of
Recognized
Assets
 
Statement of
Financial
Position
 
Statement of
Financial
Position
 
Financial
Instruments
 
Cash
Collateral
Received
 Net Amount
 (Dollars In Thousands)
Offsetting of Derivative Assets 
  
  
  
  
  
Derivatives: 
  
  
  
  
  
Free-Standing derivatives$254,840
 $
 $254,840
 $42,382
 $105,842
 $106,616
Total derivatives, subject to a master netting arrangement or similar arrangement254,840
 
 254,840
 42,382
 105,842
 106,616
Derivatives not subject to a master netting arrangement or similar arrangement 
  
  
  
  
  
Embedded derivative - Modco reinsurance treaties1,215
 
 1,215
 
 
 1,215
Embedded derivative - GMWB49,007
 
 49,007
 
 
 49,007
Derivatives with PLC18,161
 
 18,161
 
 
 18,161
Other347
 
 347
 
 
 347
Total derivatives, not subject to a master netting arrangement or similar arrangement68,730
 
 68,730
 
 
 68,730
Total derivatives323,570
 
 323,570
 42,382
 105,842
 175,346
Total Assets$323,570
 $
 $323,570
 $42,382
 $105,842
 $175,346
 

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     Net Amounts      
 Gross 
Gross
Amounts
Offset in the
 
of Liabilities
Presented in
the
 
Gross Amounts Not Offset
in the Statement of
Financial Position
  
 
Amounts of
Recognized
Liabilities
 
Statement of
Financial
Position
 
Statement of
Financial
Position
 
Financial
Instruments
 
Cash
Collateral
Paid
 Net Amount
 (Dollars In Thousands)
Offsetting of Derivative Liabilities 
  
  
  
  
  
Derivatives: 
  
  
  
  
  
Free-Standing derivatives$43,999
 $
 $43,999
 $42,382
 $1,617
 $
Total derivatives, subject to a master netting arrangement or similar arrangement43,999
 
 43,999
 42,382
 1,617
 
Derivatives not subject to a master netting arrangement or similar arrangement 
  
  
  
  
  
Embedded derivative - Modco reinsurance treaties178,362
 
 178,362
 
 
 178,362
Funds withheld derivative102,378
 
 102,378
 
 
 102,378
Embedded derivative - GMWB67,528
 
 67,528
 
 
 67,528
Embedded derivative - FIA100,329
 
 100,329
 
 
 100,329
Embedded derivative - IUL29,629
 
 29,629
 
 
 29,629
Total derivatives, not subject to a master netting arrangement or similar arrangement478,226
 
 478,226
 
 
 478,226
Total derivatives522,225
 
 522,225
 42,382
 1,617
 478,226
Repurchase agreements(1)
438,185
 
 438,185
 
 
 438,185
Total Liabilities$960,410
 $
 $960,410
 $42,382
 $1,617
 $916,411
 
(1) Borrowings under repurchase agreements are for a term less than 90 days.

10.                               MORTGAGE LOANS
 
Mortgage Loans
 
The Company invests a portion of its investment portfolio in commercial mortgage loans. As of JuneSeptember 30, 2016 (Successor Company), the Company’s mortgage loan holdings were approximately $5.7approximately $5.9 billion. The Company has specialized in making loans on either credit-oriented commercial properties or credit-anchored strip shopping centers and apartments. The Company’s underwriting procedures relative to its commercial loan portfolio are based, in the Company’s view, on a conservative and disciplined approach. The Company concentrates on a small number of commercial real estate asset types associated with the necessities of life (retail, multi-family, senior living, professional office buildings, and warehouses). The Company believes that these asset types tend to weather economic downturns better than other commercial asset classes in which it has chosen not to participate. The Company believes this disciplined approach has helped to maintain a relatively low delinquency and foreclosure rate throughout its history. The majority of the Company’s mortgage loans portfolio was underwritten by the Company. From time to time, the Company may acquire loans in conjunction with an acquisition.

The Company’s commercial mortgage loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, and net of valuation allowances. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Amortization of premiums and accretion of discounts is recorded using the effective yield method. Interest income, amortization of premiums and accretion of discounts and prepayment fees are reported in net investment income.

As of February 1, 2015, all mortgage loans were measured at fair value. Each mortgage loan was individually analyzed to determine the fair value. Each loan was either analyzed and assigned a discount rate or given an impairment, based on whether facts and circumstances which, as of the acquisition date, indicated less than full projected collections of contractual principal and interest payments. Various market factors were considered in determining the net present value of the expected cash flow stream or underlying real estate collateral, including the characteristics of the borrower, the underlying collateral, underlying credit worthiness of the tenants, and tenant payment history. Known events and risks, such as refinancing risks, were also considered in the fair value determination. In certain cases, fair value was based on the net present value of the expected cash flow stream or the underlying value of the real estate collateral.
 
Certain of the mortgage loans have call options that occur within the next 12 years.years. However, if interest rates were to significantly increase, we may be unable to exercise the call options on our existing mortgage loans commensurate with the

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significantly increasedincreased market rates. As of JuneSeptember 30, 2016 (Successor Company), assuming the loans are called at their next call dates, approximately $42.7$28.1 million of principal would become due for the remainder of 2016, $922.1$972.7 million in 2017 through 2021, $238.1$235.0 million in 2022 through 2026, and $11.1$11.0 million thereafter.
 
The Company offers a type of commercial mortgage loan under which the Company will permit a loan-to-value ratio of up to 85% in exchange for a participating interest in the cash flows from the underlying real estate. As of JuneSeptember 30, 2016 (Successor Company) and December 31, 2015 (Successor Company), approximately $522.8$549.2 million and $449.2 million, respectively, of the Company’s total mortgage loan principal balance have this participation feature. Cash flows received as a result of this participation feature are recorded as interest income. During the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company), the three months ended JuneSeptember 30, 2015 (Successor Company), the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company), and January 1, 2015 to January 31, 2015 (Predecessor Company), the Company recognized $5.7$3.3 million, $12.5$15.8 million, $3.3 million, $5.1$8.4 million, and $0.1 million, respectively, of participating mortgage loan income.
 
As of JuneSeptember 30, 2016 (Successor Company), approximately $1.0 million of invested assets consisted of nonperforming mortgage loans, restructured mortgage loans, or mortgage loans that were foreclosed and were converted to real estate properties. The Company does not expect these investments to adversely affect its liquidity or ability to maintain proper matching of assets and liabilities. During the sixnine months ended JuneSeptember 30, 2016 (Successor Company), the Company did not enter into certainany mortgage loan transactions that werewould have been accounted for as troubled debt restructurings under Topic 310 of the FASB ASC.restructurings. If the Company had troubled debt restructurings, these transactions would include either the acceptance of assets in satisfaction of principal during the respective periods or at a future date, and were the result of agreements between the creditor and the debtor.debtor. During the sixnine months ended JuneSeptember 30, 2016 (Successor Company), the Company did not accept or agree to accept assets in satisfaction of principal. As of JuneSeptember 30, 2016 (Successor Company), the Company did not have any mortgage loan transactions accounted for as troubled debt restructurings.

The Company’s mortgage loan portfolio consists of two categories of loans: 1) those not subject to a pooling and servicing agreement and 2) those subject to a contractual pooling and servicing agreement. As of JuneSeptember 30, 2016 (Successor Company), $1.0 million of mortgage loans not subject to a pooling and servicing agreement were nonperforming mortgage loans, restructured, or mortgage loans that were foreclosed and were converted to real estate properties. The Company did not forecloseforeclosed on any$1.0 million of nonperforming loans not subject to a pooling and servicing agreement during the sixnine months ended JuneSeptember 30, 2016 (Successor Company).
 
As of JuneSeptember 30, 2016 (Successor Company), none of the loans subject to a pooling and servicing agreement were nonperforming or restructured. The Company did not foreclose on any nonperforming loans subject to a pooling and servicing agreement during the sixnine months ended JuneSeptember 30, 2016 (Successor Company).
 
As of JuneSeptember 30, 2016 (Successor Company), the Company had an allowance for mortgage loan credit losses of $3.9$3.4 million and no allowance as of December 31, 2015 (Successor Company). Due to the Company’s loss experience and nature of the loan portfolio, the Company believes that a collectively evaluated allowance would be inappropriate. The Company believes an allowance calculated through an analysis of specific loans that are believed to have a higher risk of credit impairment provides a more accurate presentation of expected losses in the portfolio and is consistent with the applicable guidance for loan impairments in ASC Subtopic 310. Since the Company uses the specific identification method for calculating the allowance, it is necessary to review the economic situation of each borrower to determine those that have higher risk of credit impairment. The Company has a team of professionals that monitors borrower conditions such as payment practices, borrower credit, operating performance, and property conditions, as well as ensuring the timely payment of property taxes and insurance. Through this monitoring process, the Company assesses the risk of each loan. When issues are identified, the severity of the issues are assessed and reviewed for possible credit impairment. If a loss is probable, an expected loss calculation is performed and an allowance is established for that loan based on the expected loss. The expected loss is calculated as the excess carrying value of a loan over either the present value of expected future cash flows discounted at the loan’s original effective interest rate, or the current estimated fair value of the loan’s underlying collateral. A loan may be subsequently charged off at such point that the Company no longer expects to receive cash payments, the present value of future expected payments of the renegotiated loan is less than the current principal balance, or at such time that the Company is party to foreclosure or bankruptcy proceedings associated with the borrower and does not expect to recover the principal balance of the loan.
 
A charge off is recorded by eliminating the allowance against the mortgage loan and recording the renegotiated loan or the collateral property related to the loan as investment real estate on the balance sheet, which is carried at the lower of the appraised fair value of the property or the unpaid principal balance of the loan, less estimated selling costs associated with the property. 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
As of
June 30, 2016
 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
As of
September 30, 2016
 February 1, 2015
to
December 31, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Beginning balance$
 $
 $5,720
$
 $
 $5,720
Charge offs
 (2,561) (861)(1,950) (2,561) (861)
Recoveries
 (638) (2,359)
 (638) (2,359)
Provision3,850
 3,199
 
5,396
 3,199
 
Ending balance$3,850
 $
 $2,500
$3,446
 $
 $2,500


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It is the Company’s policy to cease to carry accrued interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. If a loan becomes over 90 days delinquent, it is the Company’s general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place. For loans subject to a pooling and servicing agreement, there are certain additional restrictions and/or requirements related to workout proceedings, and as such, these loans may have different attributes and/or circumstances affecting the status of delinquency or categorization of those in nonperforming status. An analysis of the delinquent loans is shown in the following chart. 
     Greater       Greater  
Successor Company 30-59 Days 60-89 Days than 90 Days Total 30-59 Days 60-89 Days than 90 Days Total
As of June 30, 2016 Delinquent Delinquent Delinquent Delinquent
As of September 30, 2016 Delinquent Delinquent Delinquent Delinquent
 (Dollars In Thousands) (Dollars In Thousands)
Commercial mortgage loans $9,167
 $
 $1,034
 $10,201
 $2,894
 $
 $
 $2,894
Number of delinquent commercial mortgage loans 3
 
 1
 4
 2
 
 
 2
                
As of December 31, 2015                
Commercial mortgage loans $6,002
 $1,033
 $
 $7,035
 $6,002
 $1,033
 $
 $7,035
Number of delinquent commercial mortgage loans 6
 1
 
 7
 6
 1
 
 7
 
The Company’s commercial mortgage loan portfolio consists of mortgage loans that are collateralized by real estate. Due to the collateralized nature of the loans, any assessment of impairment and ultimate loss given a default on the loans is based upon a consideration of the estimated fair value of the real estate. The Company limits accrued interest income on impaired loans to 90 days of interest. Once accrued interest on the impaired loan is received, interest income is recognized on a cash basis. For information regarding impaired loans, please refer to the following chart: 
   Unpaid   Average Interest Cash Basis   Unpaid   Average Interest Cash Basis
Successor Company Recorded Principal Related Recorded Income Interest Recorded Principal Related Recorded Income Interest
As of June 30, 2016 Investment Balance Allowance Investment Recognized Income
As of September 30, 2016 Investment Balance Allowance Investment Recognized Income
 (Dollars In Thousands) (Dollars In Thousands)
Commercial mortgage loans:  
  
  
  
  
  
  
  
  
  
  
  
With no related allowance recorded $1,034
 $1,067
 $
 $1,034
 $
 $
 $
 $
 $
 $
 $
 $
With an allowance recorded 12,313
 12,301
 3,850
 6,156
 190
 199
 10,693
 11,060
 3,446
 3,564
 352
 343
  
  
  
  
  
  
  
  
  
  
  
  
As of December 31, 2015  
  
  
  
  
  
  
  
  
  
  
  
Commercial mortgage loans:  
  
  
  
  
  
  
  
  
  
  
  
With no related allowance recorded $1,694
 $1,728
 $
 $847
 $104
 $117
 $1,694
 $1,728
 $
 $847
 $104
 $117
With an allowance recorded 
 
 
 
 
 
 
 
 
 
 
 

As of JuneSeptember 30, 2016 (Successor Company) and December 31, 2015 (Successor Company), the Company did not carry any mortgage loans that have been modified in a troubled debt restructuring.
 
11.                              GOODWILL
 
As permitted by ASC Topic 805, Business Combinations, the Company measured its assets and liabilities at fair value on the date of the Merger, February 1, 2015. The purchase price in excess of the fair value of PLC’s assets and liabilities resulted in the establishment of goodwill as of the date of the Merger. As of February 1, 2015 (Successor Company), the Company was allocated an aggregate goodwill balance of $735.7 million. During the measurement period subsequent to February 1, 2015, the Company has made adjustments to provisional amounts related to certain tax balances that resulted in a decrease to goodwill of $3.3 million from the amount recorded at the Merger date. This reduction in Goodwill was applied to the Life Marketing segment's goodwill. The balance of goodwill associated with the Merger as of JuneSeptember 30, 2016 (Successor Company) and December 31, 2015 (Successor Company) was $732.4 million. There has been no change in the goodwill during the sixnine months ended JuneSeptember 30, 2016 (Successor Company).

Accounting for goodwill requires an estimate of the future profitability of the associated lines of business to assess the recoverability of the capitalized acquisition goodwill. The Company evaluates the carrying value of goodwill at the segment (or reporting unit) level at least annually and between annual evaluations if events occur or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Such circumstances could include, but are not limited to: 1) a significant adverse change in legal factors or in business climate, 2) unanticipated competition, or 3) an adverse action or assessment by a regulator. When evaluating whether goodwill is impaired, the Company first determines through qualitative analysis whether relevant events and circumstances indicate that it is more likely than not that segment goodwill balances are impaired as of the testing date. If it is determined that it is more likely than not that impairment exists, the Company compares its estimate of the fair value of the reporting unit to which the goodwill is assigned to the reporting unit’s carrying amount, including goodwill. The Company utilizes a fair value measurement (which includes a discounted cash flows analysis) to assess the carrying


value of the reporting units in consideration of the recoverability of the goodwill balance assigned to each reporting unit as of the

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measurement date. The Company’s material goodwill balances are attributable to certain of its operating segments (which are each considered to be reporting units). The cash flows used to determine the fair value of the Company’s reporting units are dependent on a number of significant assumptions. The Company’s estimates, which consider a market participant view of fair value, are subject to change given the inherent uncertainty in predicting future results and cash flows, which are impacted by such things as policyholder behavior, competitor pricing, capital limitations, new product introductions, and specific industry and market conditions.

The balance recognized as goodwill is not amortized, but is reviewed for impairment on an annual basis, or more frequently as events or circumstances may warrant, including those circumstances which would more likely than not reduce the fair value of the Company’s reporting units below its carrying amount. During the fourth quarter of 2015, the Company performed its annual evaluation of goodwill based on information as of September 30, 2015 (Successor Company) and determined that no adjustment to impair goodwill was necessary. During the sixnine months ended JuneSeptember 30, 2016 (Successor Company), the Company did not identify any events or circumstances which would indicate that the fair value of its operating segments would have declined below their book value, either individually or in the aggregate. Accordingly, no impairment to the Company’s goodwill balance has been recorded.

12.                            DEBT AND OTHER OBLIGATIONS
 
In conjunction with the Merger and in accordance with ASC Topic 805, the Company adjusted the carrying value of debt to fair value as of the date of the Merger, February 1, 2015. This resulted in the Company establishing premiums and discounts on its outstanding debt, subordinated debentures and non-recourse funding obligations. The carrying value of the Company’s revolving line of credit approximates fair value due to the nature of the borrowings and the fact the Company pays a variable rate of interest that reflects current market conditions. The fair value of the Company’s senior notes, subordinated debt, non-recourse funding obligations associated with Golden Gate II Captive Insurance Company and MONY Life Insurance Company, were determined using market prices as of February 1, 2015. The fair value of the Golden Gate V non-recourse funding obligation was determined using a discounted cash flow model with inputs derived from comparable financial instruments. The premiums and discounts established as of February 1, 2015 are amortized over the expected life of the instruments using the effective interest method. The amortization of premiums and discounts are recorded as a component of interest expense and are recorded in “Other operating expenses” on the Company’s Consolidated Condensed Statements of Income.
 
On February 2, 2015, the Company and PLC amended and restated the Credit Facility (the “Credit Facility”). Under the Credit Facility, the Company has the ability to borrow on an unsecured basis up to an aggregate principal amount of $1.0 billion. The Company has the right in certain circumstances to request that the commitment under the Credit Facility be increased up to a maximum principal amount of $1.25 billion. Balances outstanding under the Credit Facility accrue interest at a rate equal to, at the option of the Borrowers, (i) LIBOR plus a spread based on the ratings of PLC’s Senior Debt, or (ii) the sum of (A) a rate equal to the highest of (x) the Administrative Agent’s prime rate, (y) 0.50% above the Federal Funds rate, or (z) the one-month LIBOR plus 1.00% and (B) a spread based on the ratings of PLC’s Senior Debt. The Credit Facility also provided for a facility fee at a rate that varies with the ratings of PLC’s Senior Debt and that is calculated on the aggregate amount of commitments under the Credit Facility, whether used or unused. The initial facility fee rate was 0.15% on February 2, 2015, and was adjusted to 0.125% upon PLC’s subsequent ratings upgrade on February 2, 2015. The Credit Facility provides that PLC is liable for the full amount of any obligations for borrowings or letters of credit, including those of the Company, under the Credit Facility. The maturity date of the Credit Facility is February 2, 2020. The Company is not aware of any non-compliance with the financial debt covenants of the Credit Facility as of JuneSeptember 30, 2016 (Successor(Successor Company). PLC had an outstanding balance of $360.0$385.0 million bearing interest at a rate of LIBOR plus 1.00% as JuneSeptember 30, 2016 (Successor Company). As of June 30, 2016 (Successor Company), the Company hashad used $30.0 million of borrowing capacity by executing a Letter of Credit under the Credit Facility for the benefit on an affiliated captive reinsurance subsidiarysubsidiary of the Company. This Letter of Credit had not been drawn uponwas terminated during the period and no Letter of Credit was outstanding as of JuneSeptember 30, 2016 (Successor Company).

Non-Recourse Funding Obligations
 
Golden Gate Captive Insurance Company
 
On January 15, 2016, Golden Gate Captive Insurance Company (“Golden Gate”), a Vermont special purpose financial insurance company and a wholly owned subsidiary of the Company, and Steel City, LLC (“Steel City”), a newly formed wholly owned subsidiary of PLC, entered into an 18-year transaction to finance $2.188 billion of “XXX” reserves related to the acquired GLAIC Block and the other term life insurance business reinsured to Golden Gate by the Company and WCL, a direct wholly owned subsidiary of the Company. Steel City issued notes (the "Steel City Notes") with an aggregate initial principal amount of $2.188 billion to Golden Gate in exchange for a surplus note issued by Golden Gate with an initial principal amount of $2.188 billion. Through the structure, Hannover Life Reassurance Company of America (Bermuda) Ltd., The Canada Life Assurance Company (Barbados Branch) and Nomura Americas Re Ltd. (collectively, the “Risk-Takers”) provide credit enhancement to the Steel City Notes for the 18-year18-year term in exchange for credit enhancement fees. The transaction is “non-recourse” to PLC, WCL and the Company, meaning that none of these companies, other than Golden Gate, are liable to reimburse the Risk-Takers for any credit enhancement payments required to be made. As of JuneSeptember 30, 2016 (Successor Company), the aggregate principal balance of the Steel City Notes was $2.153$2.135 billion. In connection with this transaction, PLC has entered into certain support agreements under which it guarantees or otherwise supports certain obligations of Golden Gate or Steel City. The support agreements provide that amounts would become payable by PLC if Golden Gate’s annual general corporate expenses were higher than modeled amounts, certain reinsurance rates applicable to the subject business increase beyond modeled amounts or in the event write-downs due to other-than-temporary impairments on assets held in certain accounts exceed defined threshold levels. Additionally, PLC


has entered into a separate agreement to guarantee payment of certain fee amounts in connection with the credit enhancement of the Steel City Notes. As of JuneSeptember 30, 2016 (Successor Company), no payments have been made under these agreements.

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In connection with the transaction outlined above, Golden Gate had a $2.153$2.135 billion outstanding non-recourse funding obligation as of JuneSeptember 30, 2016 (Successor Company). This non-recourse funding obligation matures in 2034 and accrues interest at a fixed annual rate of 4.75%.
    
Prior to this transaction Golden Gate had three series of non-recourse funding obligations with a total outstanding balance of $800 million. PLC held the entire outstanding balance of non-recourse funding obligations. Series A1 non-recourse funding obligations had a balance of $400 million and accrued interest at 7.375%, the Series A2 non-recourse funding obligations had a balance of $100 million and accrued interest at 8.00%, and the Series A3 non-recourse funding obligations had a balance of $300 million and accrued interest at 8.45%. As a result of the transaction described above, the $800 million of Golden Gate Series A Surplus Notes held by PLC were contributed to the Company and then subsequently contributed to Golden Gate, which resulted in the extinguishment of these notes. The contribution of the non-recourse funding obligations from PLC to the Company, and the subsequent contribution of the obligations by the Company to Golden Gate, was recognized based on the respective carrying value of the obligations, which was approximately $1.15 billion. This carrying value included a premium over the outstanding principal balance of the notenote issuances due to the effect of purchase accounting applied as a result of the Merger on February 1, 2015. As of the transaction date, the respective carrying value of the non-recourse funding obligation asset previously held by PLC was also approximately $1.15 billion; therefore this transaction did not result in the recognition of a gain or loss for PLC or the Company.

Golden Gate II Captive Insurance Company
 
Golden Gate II Captive Insurance Company (“Golden Gate II”), a South Carolina special purpose financial captive insurance company and wholly owned subsidiary, had $575 million of outstanding non-recourse funding obligations as of JuneSeptember 30, 2016 (Successor Company). These outstanding non-recourse funding obligations were issued to special purpose trusts, which in turn issued securities to third parties. Certain of our affiliates own a portion of these securities. As of JuneSeptember 30, 2016 (Successor Company), securities related to $133.6$58.6 million of the outstanding balance of the non-recourse funding obligations were held by external parties, securities related to $145.3$220.3 million of the non-recourse funding obligations were held by nonconsolidated affiliates, and $296.1 million were held by consolidated subsidiaries of the Company. PLC has entered into certain support agreements with Golden Gate II obligating it to make capital contributions or provide support related to certain of Golden Gate II’s expenses and in certain circumstances, to collateralize certain of PLC’s obligations to Golden Gate II. These support agreements provide that amounts would become payable by PLC to Golden Gate II if its annual general corporate expenses were higher than modeled amounts or if Golden Gate II’s investment income on certain investments or premium income was below certain actuarially determined amounts. As of JuneSeptember 30, 2016 (Successor Company), no payments have been made under these agreements; however, certain support agreement obligations to Golden Gate II of approximately $1.5 million have been collateralized by PLC. Re-evaluation and, if necessary, adjustments of any support agreement collateralization amounts occur annually during the first quarter pursuant to the terms of the support agreements.  There are no support agreements between the Company and Golden Gate II.

During the sixnine months ended JuneSeptember 30, 2016 (Successor Company), the Company and its affiliates repurchased $11.3 million of its outstanding non-recourse funding obligations, at a discount. These repurchases did not result in a material gain or loss for the Company. During the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company) and the period of January 1, 2015 to January 31, 2015 (Predecessor Company), the Company did not repurchase any of its outstanding non-recourse funding obligations.
 
Golden Gate V Vermont Captive Insurance Company
 
On October 10, 2012, Golden Gate V Vermont Captive Insurance Company (“Golden Gate V”), a Vermont special purpose financial insurance company and Red Mountain, LLC (“Red Mountain”), both wholly owned subsidiaries, entered into a 20-year transaction to finance up to $945 million of “AXXX” reserves related to a block of universal life insurance policies with secondary guarantees issued by the Company and its subsidiary, West Coast Life Insurance Company (“WCL”). Golden Gate V issued non-recourse funding obligations to Red Mountain, and Red Mountain issued a note with an initial principal amount of $275 million, increasing to a maximum of $945 million in 2027, to Golden Gate V for deposit to a reinsurance trust supporting Golden Gate V’s obligations under a reinsurance agreement with WCL, pursuant to which WCL cedes liabilities relating to the policies of WCL and retrocedes liabilities relating to the policies of the Company. Through the structure, Hannover Life Reassurance Company of America (“Hannover Re”), the ultimate risk taker in the transaction, provides credit enhancement to the Red Mountain note for the 20-year term in exchange for a fee. The transaction is “non-recourse” to Golden Gate V, Red Mountain, WCL, PLC, and the Company, meaning that none of these companies are liable for the reimbursement of any credit enhancement payments required to be made. As of JuneSeptember 30, 2016 (Successor Company), the principal balance of the Red Mountain note was $535$550 million. Future scheduled capital contributions to prefund credit enhancement fees amount to approximately $134.2 million and will be paid in annual installments through 2031. In connection with the transaction, PLC has entered into certain support agreements under which PLC guarantees or otherwise supports certain obligations of Golden Gate V or Red Mountain. The support agreements provide that amounts would become payable by PLC if Golden Gate V’s annual general corporate expenses were higher than modeled amounts or in the event write-downs due to other-than-temporary impairments on assets held in certain accounts exceed defined threshold levels. Additionally, PLC has entered into separate agreements to indemnify Golden Gate V with respect to material adverse changes in non-guaranteed elements of insurance policies reinsured by Golden Gate V, and to guarantee payment of certain fee amounts in connection with the credit enhancement of the Red Mountain note. As of JuneSeptember 30, 2016 (Successor Company), no payments have been made under these agreements.
 


In connection with the transaction outlined above, Golden Gate V had a $535$550 million outstandingoutstanding non-recourse funding obligation as of JuneSeptember 30, 2016 (Successor Company). This non-recourse funding obligation matures in 2037, has scheduled increases in principal to a maximum of $945 million, and accrues interest at a fixed annual rate of 6.25%.
 

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Non-recourse funding obligations outstanding as of JuneSeptember 30, 2016 (Successor Company), on a consolidated basis, are shown in the following table:
 
   Maturity 
Year-to-Date
Weighted-Avg
   Maturity 
Year-to-Date
Weighted-Avg
Issuer 
Carrying Value(1)
 Year Interest Rate 
Carrying Value(1)
 Year Interest Rate
 (Dollars In Thousands)    
 (Dollars In Thousands)    
Golden Gate Captive Insurance Company(2)(3)
 $2,153,000
 2039 4.75% $2,135,000
 2039 4.75%
Golden Gate II Captive Insurance Company 226,912
 2052 1.29%
Golden Gate V Vermont Captive Insurance Company(2)(3)
 598,863
 2037 5.12%
MONY Life Insurance Company(3)
 2,496
 2024 6.19%
Golden Gate II Captive Insurance Company (outstanding principal - $278,949) 227,124
 2052 1.28%
Golden Gate V Vermont Captive Insurance Company(2)(3) (outstanding principal - $550,000)
 613,447
 2037 5.12%
MONY Life Insurance Company(3) (outstanding principal - $1,091)
 2,481
 2024 6.19%
Total $2,981,271
    
 $2,978,052
    
 
(1)  Carrying values include premiums and discounts and do not represent unpaid principal balances.
(2) Obligations are issued to non-consolidated subsidiaries of PLC. These obligations collateralize certain held-to-maturity securities issued by wholly owned subsidiaries of the Company.
(3)  Fixed rate obligations.
 
Letters of Credit

Golden Gate III Vermont Captive Insurance Company

     Golden Gate III Vermont Captive Insurance Company (“Golden Gate III”), a Vermont special purpose financial insurance company and wholly owned subsidiary, is party to a Reimbursement Agreement (the “Reimbursement Agreement”) with UBS AG, Stamford Branch (“UBS”), as issuing lender. Under the original Reimbursement Agreement, dated April 23, 2010, UBS issued a letter of credit (the “LOC”) in the initial amount of $505 million to a trust for the benefit of WCL. The Reimbursement Agreement was subsequently amended and restated effective November 21, 2011 (the “First Amended and Restated Reimbursement Agreement”), to replace the existing LOC with one or more letters of credit from UBS, and to extend the maturity date from April 1, 2018, to April 1, 2022. On August 7, 2013, Golden Gate III entered into a Second Amended and Restated Reimbursement Agreement with UBS (the “Second Amended and Restated Reimbursement Agreement”), which amended and restated the First Amended and Restated Reimbursement Agreement. Under the Second and Amended and Restated Reimbursement Agreement a new LOC in an initial amount of $710 million was issued by UBS in replacement of the existing LOC issued under the First Amended and Restated Reimbursement Agreement. The term of the LOC was extended from April 1, 2022 to October 1, 2023, subject to certain conditions being satisfied including scheduled capital contributions being made to Golden Gate III by one of its affiliates. The maximum stated amount of the LOC was increased from $610 million to $720 million in 2016 if certain conditions had been met. On June 25, 2014, Golden Gate III entered into a Third Amended and Restated Reimbursement Agreement with UBS (the “Third Amended and Restated Reimbursement Agreement”), which amended and restated the Second Amended and Restated Reimbursement Agreement. Under the Third Amended and Restated Reimbursement Agreement, a new LOC in an initial amount of $915 million was issued by UBS in replacement of the existing LOC issued under the Second Amended and Restated Reimbursement Agreement. The term of the LOC was extended from October 1, 2023 to April 1, 2025, subject to certain conditions being satisfied including scheduled capital contributions being made to Golden Gate III by one of its affiliates. The maximum stated amount of the LOC was increased from $720 million to $935 million in 2015. The LOC is held in trust for the benefit of WCL, and supports certain obligations of Golden Gate III to WCL under an indemnity reinsurance agreement originally effective April 1, 2010, as amended and restated on November 21, 2011, and as further amended and restated on August 7, 2013 and on June 25, 2014 to include additional blocks of policies, and pursuant to which WCL cedes liabilities relating to the policies of WCL and retrocedesretrocedes liabilities relating to the policies of the Company. The LOC balance reached its scheduled peak amount of $935$935 million in 2015 and remained asat this level as of JuneSeptember 30, 2016 (Successor Company). The term of the LOC is expected to be approximately 15 years from the original issuance date. This transaction is “non-recourse” to WCL, PLC, and the Company, meaning that none of these companies other than Golden Gate III are liable for reimbursement on a draw of the LOC. PLC has entered into certain support agreements with GoldenGolden Gate III obligating PLC to make capital contributions or provide support related to certain of Golden Gate III’s expenses and in certain circumstances, to collateralize certain of PLC’s obligations to Golden Gate III. Future scheduled capital contributions amount to approximately $122.5 million and will be paid in three installments with the last payment occurring in 2021, and these contributions may be subject to potential offset against dividend payments as permitted under the terms of the Third Amended and Restated Reimbursement Agreement. The support agreements provide that amounts would become payable by PLC to Golden Gate III if Golden Gate III’s annual general corporate expenses were higher than modeled amounts or if specified catastrophic losses occur during defined time periods with respect to the policies reinsured by Golden Gate III. Pursuant to the terms of an amended and restated letter agreement with UBS, PLC has continued to guarantee the payment of fees to UBS as specified in the Third Amended and Restated Reimbursement Agreement. As of JuneSeptember 30, 2016 (Successor Company), no payments have been made under these agreements.
 
Golden Gate IV Vermont Captive Insurance Company


Golden Gate IV Vermont Captive Insurance Company (“Golden Gate IV”), a Vermont special purpose financial insurance company and wholly owned subsidiary, is party to a Reimbursement Agreement with UBS AG, Stamford Branch, as issuing lender. Under the Reimbursement Agreement, dated December 10, 2010, UBS issued an LOC in the initial amount of $270 million to a trust for the benefit of WCL. The LOC balance, in accordance with the terms of the Reimbursement Agreement, reached its scheduled peak amount of $790 million during the second quarter of 2016 and remained at this level as of JuneSeptember 30, 2016 (Successor Company). The term of the LOC is expected to be 12 years

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from the original issuance date (stated maturity of December 30, 2022). The LOC was issued to support certain obligations of Golden Gate IV to WCL under an indemnity reinsurance agreement, pursuant to which WCL cedes liabilities relating to the policies of WCL and retrocedes liabilities relating to the policies of the Company. This transaction is “non-recourse” to WCL, PLC, and the Company, meaning that none of these companies other than Golden Gate IV are liable for reimbursement on a draw of the LOC. PLC has entered into certain support agreements with Golden Gate IV obligating PLC to make capital contributions or provide support related to certain of Golden Gate IV’s expenses and in certain circumstances, to collateralize certain of PLC’s obligations to Golden Gate IV. The support agreements provide that amounts would become payable by PLC to Golden Gate IV if Golden Gate IV’s annual general corporate expenses were higher than modeled amounts or if specified catastrophic losses occur during defined time periods with respect to the policies reinsured by Golden Gate IV. PLC has also entered into a separate agreement to guarantee the payments of LOC fees under the terms of the Reimbursement Agreement. As of JuneSeptember 30, 2016 (Successor Company), no payments have been made under these agreements.
 
Repurchase Program Borrowings
 
While the Company anticipates that the cash flows of its operating subsidiaries will be sufficient to meet its investment commitments and operating cash needs in a normal credit market environment, the Company recognizes that investment commitments scheduled to be funded may, from time to time, exceed the funds then available. Therefore, the Company has established repurchase agreement programs for certain of its insurance subsidiaries to provide liquidity when needed. The Company expects that the rate received on its investments will equal or exceed its borrowing rate. Under this program, the Company may, from time to time, sell an investment security at a specific price and agree to repurchase that security at another specified price at a later date. These borrowings are typically for a term less than 90 days. The market value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty against credit exposure. Cash received is invested in fixed maturity securities, and the agreements provided for net settlement in the event of default or on termination of the agreements. As of JuneSeptember 30, 2016 (Successor Company), the fair value of securities pledged under the repurchase program was $177.5$224.8 million and the repurchase obligation of $160.0$219.5 million was included in the Company’s consolidated condensed balance sheets (at an average borrowing rate of 4243 basis points). During the sixnine months ended JuneSeptember 30, 2016 (Successor Company), the maximum balance outstanding at any one point in time related to these programs was $725.0 million. The average daily balance was $464.5$453.0 million (at an average borrowing rate of 4041 basis points) during the sixnine months ended JuneSeptember 30, 2016 (Successor Company). As of December 31, 2015 (Successor Company), the fair value of securities pledged under the repurchase program was $479.9 million and the repurchase obligation of $438.2 million was included in the Company's consolidated condensed balance sheets. During 2015, the maximum balance outstanding at any one point in time related to these programs was $912.7 million. The average daily balance was $540.3 million and $77.4 million (at an average borrowing rate of 20 and 16 basis points) during the period of February 1, 2015 to December 31, 2015 (Successor Company) and the period of January 1, 2015 to January 31, 2015 (Predecessor Company).
 
The following table provides the amount of collateral pledged for repurchase agreements, grouped by asset class, as of JuneSeptember 30, 2016 (Successor Company):
 
Repurchase Agreements, Securities Lending Transactions, and Repurchase-to-Maturity Transactions
Accounted for as Secured Borrowings 
Remaining Contractual Maturity of the AgreementsRemaining Contractual Maturity of the Agreements
As of June 30, 2016 (Successor Company)As of September 30, 2016 (Successor Company)
(Dollars In Thousands)(Dollars In Thousands)
Overnight and
Continuous
 Up to 30 days 30-90 days 
Greater Than
90 days
 Total
Overnight and
Continuous
 Up to 30 days 30-90 days 
Greater Than
90 days
 Total
Repurchase agreements and repurchase-to-maturity transactions 
  
  
  
  
 
  
  
  
  
U.S. Treasury and agency securities$
 $
 $
 $
 $
$
 $
 $
 $
 $
State and municipal securities
 
 
 
 

 
 
 
 
Other asset-backed securities
 
 
 
 
Corporate securities
 
 
 
 

 
 
 
 
Equity securities
 
 
 
 

 
 
 
 
Non-U.S. sovereign debt
 
 
 
 

 
 
 
 
Mortgage loans177,463
 
 
 
 177,463
224,767
 
 
 
 224,767
Other asset-backed securities
 
 
 
 

 
 
 
 
Total borrowings$177,463
 $
 $
 $
 $177,463
$224,767
 $
 $
 $
 $224,767
 
13.                              COMMITMENTS AND CONTINGENCIES


 
Under insurance guaranty fund laws, in most states insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. In addition, from time to time, companies may be asked to contribute amounts beyond prescribed limits. Most insurance guaranty fund laws provide that an assessment may be excused or deferred if it would threaten an insurer’s own financial strength. The Company does not believe its insurance guaranty fund assessments will be materially different from amounts already provided for in the financial statements.

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A number of civil jury verdicts have been returned against insurers, broker dealersbroker-dealers and other providers of financial services involving sales, refund or claims practices, alleged agent misconduct, failure to properly supervise representatives, relationships with agents or persons with whom the insurer does business, and other matters. Often these lawsuits have resulted in the award of substantial judgments that are disproportionate to the actual damages, including material amounts of punitive and non-economic compensatory damages. In some states, juries, judges, and arbitrators have substantial discretion in awarding punitive non-economic compensatory damages which creates the potential for unpredictable material adverse judgments or awards in any given lawsuit or arbitration. Arbitration awards are subject to very limited appellate review. In addition, in some class action and other lawsuits, companies have made material settlement payments. Public companies in general and the financial services and insurance industries in particular are also sometimes the target of law enforcement and regulatory investigations relating to the numerous laws and regulations that govern such companies. Some companies have been the subject of law enforcement or regulatory actions or other actions resulting from such investigations. The Company, in the ordinary course of business, is involved in such matters.

The Company establishes liabilities for litigation and regulatory actions when it is probable that a loss has been incurred and the amount of the loss can be reasonably estimated. For matters where a loss is believed to be reasonably possible, but not probable, no liability is established. For such matters, the Company may provide an estimate of the possible loss or range of loss or a statement that such an estimate cannot be made. The Company reviews relevant information with respect to litigation and regulatory matters on a quarterly and annual basis and updates its established liabilities, disclosures and estimates of reasonably possible losses or range of loss based on such reviews.
 
In 2012, the IRS proposed favorable and unfavorable adjustments to the Company’s 2003 through 2007 reported taxable income. The Company protested certain unfavorable adjustments and sought resolution at the IRS’ Appeals Division. In October 2015, Appeals accepted the Company’s earlier proposed settlement offer. In September 2015, the IRS proposed favorable and unfavorable adjustments to the Company’s 2008 through 2011 reported taxable income. The Company agreed to these adjustments. As a result, pending a routine review by Congress’ Joint Committee on Taxation, the Company expects to receive an approximate $6.2$6.2 million netnet tax refund in a future period. This refund will not materially affect the Company’s effective tax rate.
 
Certain of the Company’s insurance subsidiaries, as well as certain other insurance companies for which the Company has coinsured blocks of life insurance and annuity policies, are under audit for compliance with the unclaimed property laws of a number of states. The audits are being conducted on behalf of the treasury departments or unclaimed property administrators in such states. The focus of the audits is on whether there have been unreported deaths, maturities, or policies that have exceeded limiting age with respect to which death benefits or other payments under life insurance or annuity policies should be treated as unclaimed property that should be escheated to the state. The Company is presently unable to estimate the reasonably possible loss or range of loss that may result from the audits due to a number of factors, including uncertainty as to the legal theory or theories that may give rise to liability, the early stages of the audits being conducted, and, with respect to one block of life insurance policies that is co-insured by a subsidiary of the Company, uncertainty as to whether the Company or other companies are responsible for the liabilities, if any, arising in connection with such policies. The Company will continue to monitor the matter for any developments that would make the loss contingency associated with the audits probable or reasonably estimable.

Certain of the Company’s subsidiaries are under a targeted multi-state examination with respect to their claims paying practices and their use of the U.S. Social Security Administration’s Death Master File or similar databases (a “Death Database”) to identify unreported deaths in their life insurance policies, annuity contracts and retained asset accounts. There is no clear basis in previously existing law for requiring a life insurer to search for unreported deaths in order to determine whether a benefit is owed, and substantial legal authority exists to support the position that the prevailing industry practice was lawful. A number of life insurers, however, have entered into settlement or consent agreements with state insurance regulators under which the life insurers agreed to implement procedures for periodically comparing their life insurance and annuity contracts and retained asset accounts against a Death Database, treating confirmed deaths as giving rise to a death benefit under their policies, locating beneficiaries and paying them the benefits and interest, escheating the benefits and interest to the state if the beneficiary could not be found, and paying penalties to the state, if required. It has been publicly reported that the life insurers have paid administrative and/or examination fees to the insurance regulators in connection with the settlement or consent agreements. The Company believes it is reasonably possible that insurance regulators could demand from the Company administrative and/or examination fees relating to the targeted multi-state examination. Based on publicly reported payments by other life insurers, the Company estimates the range of such fees to be from $0 to $4.5 million.
    
14.                              EMPLOYEE BENEFIT PLANS
 
Beginning with the December 31, 2015 measurement, PLC changed its method used to estimate the service and interest cost components of net periodic benefit cost for pension and other postretirement benefits by applying a spot rate approach. Historically, PLC utilized a single weighted average discount rate derived from a selected yield curve used to measure the benefit obligation as of the measurement date. Under the new spot rate approach, the actual calculation of service and interest cost will reflect an array of spot rates along the yield curve used in the determination of the benefit obligation to the relevant projected cash flows. PLC made this change to provide a more precise measurement of service and interest costs by improving the correlation between projected benefit cash flows to the corresponding spot rates from the selected yield curve. This new approach does not affect the measurement of the total benefit obligation.


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Components of the net periodic benefit cost for the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company), the three months ended JuneSeptember 30, 2015 (Successor Company), the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company), and the period of January 1, 2015 to January 31, 2015 (Predecessor Company), are as follows:
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three Months Ended June 30, 2016 For The Three Months Ended June 30, 2015 For The Six Months Ended June 30, 2016 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
Defined
Benefit
Pension
Plan


Excess
Benefit
Plan
 Defined
Benefit
Pension
Plan
 
Excess
Benefit
Plan
 Defined
Benefit
Pension
Plan
 Excess
Benefit
Plan
 
Defined
Benefit
Pension
Plan
 

Excess
Benefit
Plan
 
Defined
Benefit
Pension
Plan
 

Excess
Benefit
Plan
Defined
Benefit
Pension
Plan


Excess
Benefit
Plan
 Defined
Benefit
Pension
Plan
 
Excess
Benefit
Plan
 Defined
Benefit
Pension
Plan
 Excess
Benefit
Plan
 
Defined
Benefit
Pension
Plan
 

Excess
Benefit
Plan
 
Defined
Benefit
Pension
Plan
 

Excess
Benefit
Plan
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Service cost — benefits earned during the period$2,906
 $313
 $2,973
 $333
 $5,812
 $625
 $4,955
 $555
 $974
 $95
$2,906
 $311
 $2,973
 $333
 $8,717
 $1,102
 $7,928
 $888
 $974
 $95
Interest cost on projected benefit obligation2,737
 438
 2,433
 408
 5,474
 877
 4,055
 680
 1,002
 140
2,737
 299
 2,433
 408
 8,210
 1,054
 6,488
 1,088
 1,002
 140
Expected return on plan assets(3,605) 
 (3,642) 
 (7,211) 
 (6,070) 
 (1,293) 
(3,605) 
 (3,642) 
 (10,816) 
 (9,712) 
 (1,293) 
Amortization of prior service cost
 
 
 
 
 
 
 
 (33) 1

 
 
 
 
 
 
 
 (33) 1
Amortization of actuarial losses
 
 
 
 
 
 
 
 668
 138

 64
 
 
 
 114
 
 
 668
 138
Preliminary net periodic benefit cost2,038
 751
 1,764
 741
 4,075
 1,502
 2,940
 1,235
 1,318
 374
2,038
 674
 1,764
 741
 6,111
 2,270
 4,704
 1,976
 1,318
 374
Settlement/curtailment expense
 1,500
 
 
 
 1,500
 
 
 
 

 635
 
 
 
 2,135
 
 
 
 
Total net periodic benefit costs$2,038
 $2,251
 $1,764
 $741
 $4,075
 $3,002
 $2,940
 $1,235
 $1,318
 $374
$2,038
 $1,309
 $1,764
 $741
 $6,111
 $4,405
 $4,704
 $1,976
 $1,318
 $374
 
On May 5, 2016, the Board of Directors of Protective Life Corporation decided to convert the accrued benefit payable under the excess benefit plan as of March 31, 2016 to John D. Johns, PLC's Chairman and Chief Executive Officer, into a lump sum amount. Upon the completion of the final terms of the conversion agreement,On September 30, 2016, the lump sum amount will bewas allocated to a book entry account that will be treated as though it were a deferral account under PLC’s deferred compensation plan for officers. Mr. Johns will continue to accrue benefits with respect to his continued service as an employee of PLC after March 31, 2016 in a manner that is consistent with the provisions of the excess benefit plan. The conversion event will requirerequired PLC to re-measure the excess benefit plan as of May 31, 2016 and will result in settlement expense recognition upon the completion of the final conversion agreement. PLC estimates that the re-measurement of the excess benefit plan will resultresulted in the recognition of $1.5$2.1 millionin settlementsettlement expense and has been accrued during the threenine months ended JuneSeptember 30, 2016 (Successor Company). Financial re-measurement of the excess benefit plan will be performed as soon as the conversion agreement is in place.

During the sixnine months ended JuneSeptember 30, 2016 (Successor Company), PLC did not make a contributioncontributed $1.9 million to its defined benefit pension plan.plan for the 2015 plan year. PLC will make contributions in future periods as necessary to at least satisfy minimum funding requirements. PLC may also make additional contributions in future periods to maintain an adjusted funding target attainment percentage (“AFTAP”) of at least 80% and to avoid certain Pension Benefit Guaranty Corporation (“PBGC”) reporting triggers.


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15.                              ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
 
The following tables summarize the changes in the accumulated balances for each component of accumulated other comprehensive income (loss) (“AOCI”) as of JuneSeptember 30, 2016 (Successor Company), December 31, 2015 (Successor Company), and January 31, 2015 (Predecessor Company).
 
Changes in Accumulated Other Comprehensive Income (Loss) by Component 
Successor Company 
Unrealized
Gains and Losses
on Investments(2)
 
Accumulated
Gain and Loss
Derivatives
 
Total
Accumulated
Other
Comprehensive
Income (Loss)
 
Unrealized
Gains and Losses
on Investments(2)
 
Accumulated
Gain and Loss
Derivatives
 
Total
Accumulated
Other
Comprehensive
Income (Loss)
 (Dollars In Thousands, Net of Tax) (Dollars In Thousands, Net of Tax)
Beginning Balance, December 31, 2015 $(1,246,391) $
 $(1,246,391) $(1,246,391) $
 $(1,246,391)
Other comprehensive income (loss) before reclassifications 1,017,335
 
 1,017,335
 1,215,021
 
 1,215,021
Other comprehensive income relating to other-than-temporary impaired investments for which a portion has been recognized in earnings (2,572) 
 (2,572) (198) 
 (198)
Amounts reclassified from accumulated other comprehensive income (loss)(1)
 (12,274) 
 (12,274) (11,206) 
 (11,206)
Net current-period other comprehensive income (loss) 1,002,489
 
 1,002,489
 1,203,617
 
 1,203,617
Ending Balance, June 30, 2016 $(243,902) $
 $(243,902)
Ending Balance, September 30, 2016 $(42,774) $
 $(42,774)

(1) See Reclassification table below for details.
(2) As of JuneSeptember 30, 2016 net unrealized losses reported in AOCI were offset by $139.3$47.3 million due to the impact those net unrealized losses would have had on certain of the Company’s insurance assets and liabilities if the net unrealized losses had been recognized in net income.


Changes in Accumulated Other Comprehensive Income (Loss) by Component
 
Successor Company 
Unrealized
Gains and Losses
on Investments(2)
 
Accumulated
Gain and Loss
Derivatives
 
Total
Accumulated
Other
Comprehensive
Income (Loss)
  (Dollars In Thousands, Net of Tax)
Beginning Balance, February 1, 2015 $
 $
 $
Other comprehensive income (loss) before reclassifications (1,263,367) (86) (1,263,453)
Other comprehensive income relating to other-than-temporary impaired investments for which a portion has been recognized in earnings (393) 
 (393)
Amounts reclassified from accumulated other comprehensive income (loss)(1)
 17,369
 86
 17,455
Net current-period other comprehensive income (loss) (1,246,391) 
 (1,246,391)
Ending Balance, December 31, 2015 $(1,246,391) $
 $(1,246,391)

(1) See Reclassification table below for details.
(2) As of December 31, 2015 net unrealized losses reported in AOCI were offset by $623.0 million due to the impact those net unrealized losses would have had on certain of the Company’s insurance assets and liabilities if the net unrealized losses had been recognized in net income.

 



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Changes in Accumulated Other Comprehensive Income (Loss) by Component
 
Predecessor Company 
Unrealized
Gains and Losses
on Investments(2)
 
Accumulated
Gain and Loss
Derivatives
 
Total
Accumulated
Other
Comprehensive
Income (Loss)
  (Dollars In Thousands, Net of Tax)
Beginning Balance, December 31, 2014 $1,483,293
 $(82) $1,483,211
Other comprehensive income (loss) before reclassifications 482,143
 9
 482,152
Other comprehensive income relating to other-than-temporary impaired investments for which a portion has been recognized in earnings (243) 
 (243)
Amounts reclassified from accumulated other comprehensive income (loss)(1)
 (4,166) 23
 (4,143)
Net current-period other comprehensive income (loss) 477,734
 32
 477,766
Ending Balance, January 31, 2015 $1,961,027
 $(50) $1,960,977

(1) See Reclassification table below for details.
(2) As of January 31, 2015 net unrealized losses reported in AOCI were offset by $(492.6) million due to the impact those net unrealized losses would have had on certain of the Company’s insurance assets and liabilities if the net unrealized losses had been recognized in net income.
 


The following tables summarize the reclassifications amounts out of AOCI for the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company), the three months ended JuneSeptember 30, 2015 (Successor Company), the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company), and the period of January 1, 2015 to January 31, 2015 (Predecessor Company).
 
Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
 
Successor Company
Amount
Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
 
Affected Line Item in the
Consolidated Condensed Statements of Income
For the Three Months Ended June 30, 2016 
 (Dollars In Thousands)  
Unrealized gains and losses on available-for-sale securities 
  
Net investment gains (losses)$16,932
 Realized investment gains (losses): All other investments
Impairments recognized in earnings(967) Net impairment losses recognized in earnings
 15,965
 Total before tax
 (5,588) Tax (expense) or benefit
 $10,377
 Net of tax


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Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
Successor Company
Amount
Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
 
Affected Line Item in the
Consolidated Condensed Statements of Income
Amount
Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
 
Affected Line Item in the
Consolidated Condensed Statements of Income
For The Six Months Ended June 30, 2016 
For the Three Months Ended September 30, 2016
Amount
Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
 
Affected Line Item in the
Consolidated Condensed Statements of Income
(Dollars In Thousands)  
Unrealized gains and losses on available-for-sale securities 
   
  
Net investment gains (losses)$22,468
 Realized investment gains (losses): All other investments$1,665
 Realized investment gains (losses): All other investments
Impairments recognized in earnings(3,584) Net impairment losses recognized in earnings(3,308) Net impairment losses recognized in earnings
18,884
 Total before tax(1,643) Total before tax
(6,610) Tax (expense) or benefit575
 Tax (expense) or benefit
$12,274
 Net of tax$(1,068) Net of tax
 

Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
 
Successor Company
Amount
Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
 Affected Line Item in the
Consolidated Condensed Statements of Income
Amount
Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
 
Affected Line Item in the
Consolidated Condensed Statements of Income
For The Three Months Ended June 30, 2015 
(Dollars In Thousands) 
Gains and losses on derivative instruments 
  
Net settlement (expense)/benefit(1)
$(41) Benefits and settlement expenses, net of reinsurance ceded
(41) Total before tax
14
 Tax (expense) or benefit
For the Nine Months Ended September 30, 2016
Amount
Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
 
Affected Line Item in the
Consolidated Condensed Statements of Income
$(27) Net of tax 
Unrealized gains and losses on available-for-sale securities 
   
  
Net investment gains (losses)$3,350
 Realized investment gains (losses): All other investments$24,133
 Realized investment gains (losses): All other investments
Impairments recognized in earnings(5,734) Net impairment losses recognized in earnings(6,892) Net impairment losses recognized in earnings
(2,384) Total before tax17,241
 Total before tax
834
 Tax (expense) or benefit(6,035) Tax (expense) or benefit
$(1,550) Net of tax$11,206
 Net of tax

(1) See Note 8, Derivative Financial Instruments for additional information.

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Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
 
Successor Company
Amount
Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
 Affected Line Item in the
Consolidated Condensed Statements of Income
Amount
Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
 Affected Line Item in the
Consolidated Condensed Statements of Income
February 1, 2015 to June 30, 2015 
(Dollars In Thousands) 
Gains and losses on derivative instruments 
  
Net settlement (expense)/benefit(1)
$(131) Benefits and settlement expenses, net of reinsurance ceded
(131) Total before tax
45
 Tax (expense) or benefit
For The Three Months Ended September 30, 2015
Amount
Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
 Affected Line Item in the
Consolidated Condensed Statements of Income
$(86) Net of tax 
Unrealized gains and losses on available-for-sale securities 
   
  
Net investment gains (losses)$3,723
 Realized investment gains (losses): All other investments$(1,253) Realized investment gains (losses): All other investments
Impairments recognized in earnings(5,734) Net impairment losses recognized in earnings(10,064) Net impairment losses recognized in earnings
(2,011) Total before tax(11,317) Total before tax
703
 Tax (expense) or benefit3,961
 Tax (expense) or benefit
$(1,308) Net of tax$(7,356) Net of tax




Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
Successor Company
Amount
Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
 Affected Line Item in the
Consolidated Condensed Statements of Income
February 1, 2015 to September 30, 2015 
 (Dollars In Thousands)  
Gains and losses on derivative instruments 
  
Net settlement (expense)/benefit(1)
$(131) Benefits and settlement expenses, net of reinsurance ceded
 (131) Total before tax
 45
 Tax (expense) or benefit
 $(86) Net of tax
Unrealized gains and losses on available-for-sale securities 
  
Net investment gains (losses)$2,470
 Realized investment gains (losses): All other investments
Impairments recognized in earnings(15,798) Net impairment losses recognized in earnings
 (13,328) Total before tax
 4,664
 Tax (expense) or benefit
 $(8,664) Net of tax

(1) See Note 8, Derivative Financial Instruments for additional information.

Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
 
Predecessor Company
January 1, 2015 to January 31, 2015
Amount
Reclassified
from Accumulated
Other Comprehensive
Income (Loss)
 
Affected Line Item in the
Consolidated Condensed Statements of Income
 (Dollars In Thousands)  
Gains and losses on derivative instruments 
  
Net settlement (expense)/benefit(1)
$(36) Benefits and settlement expenses, net of reinsurance ceded
 (36) Total before tax
 13
 Tax (expense) or benefit
 $(23) Net of tax
Unrealized gains and losses on available-for-sale securities 
  
Net investment gains (losses)$6,891
 Realized investment gains (losses): All other investments
Impairments recognized in earnings(481) Net impairment losses recognized in earnings
 6,410
 Total before tax
 (2,244) Tax (expense) or benefit
 $4,166
 Net of tax
 
(1) See Note 8, Derivative Financial Instruments for additional information.


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16.                              INCOME TAXES
 
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
As of
June 30, 2016
 February 1, 2015
to
December 31, 2015
 January 1, 2015
to
January 31, 2015
As of
September 30, 2016
 February 1, 2015
to
December 31, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Balance, beginning of period$8,937
 $105,850
 $168,076
$8,937
 $105,850
 $168,076
Additions for tax positions of the current year1,218
 2,213
 (5,010)2,085
 2,213
 (5,010)
Additions for tax positions of prior years
 1,812
 1,149
1,031
 1,812
 1,149
Reductions of tax positions of prior years:0
  
  
0
  
  
Changes in judgment
 (644) (58,365)(687) (644) (58,365)
Settlements during the period(710) (100,294) 
(1,546) (100,294) 
Lapses of applicable statute of limitations
 
 

 
 
Balance, end of period$9,445
 $8,937
 $105,850
$9,820
 $8,937
 $105,850
 
In 2012, the IRS proposed favorable and unfavorable adjustments to the Company's 2003 through 2007 reported taxable income. The Company protested certain unfavorable adjustments and sought resolution at the IRS' Appeals Division. In October 2015, Appeals accepted the Company's earlier proposed settlement offer. In September of 2015, the IRS proposed favorable and unfavorable adjustments to the Company's 2008 through 2011 reported taxable income. The Company agreed to these adjustments. The resulting net adjustment to the Company's current income taxes for the years 2003 through 2011 will not materially affect the Company or its effective tax rate. The Company is currently under audit by

In July 2016, the IRS forproposed favorable and unfavorable adjustments to the years 2012 and 2013. The audit adjustments received as of June 30, 2016 related to theCompany's 2012 and 2013 years willreported taxable income. The Company agreed to these adjustments. The resulting settlement paid in September 2016 did not materially impact the Company or its effective tax rate.

These agreements with the IRS are the primary cause for the reductions of unrecognized tax benefits shown in the chart above.

The Company believes that it is possible in the next 12 months, approximately $0.5 millionnone of thesethe unrecognized tax benefits at September 30, 2016 will be reduced due to time lapse and the closure of the statute of limitations.reduced.

In general, the Company is no longer subject to income tax examinations by taxing authorities for tax years that began before 2012.2013. Nevertheless, certain of these pre-2012pre-2013 years have pending U.S. tax refunds. Due to their size, these refunds are being reviewed by Congress' Joint Committee on Taxation. Furthermore, due to the aforementioned IRS adjustments to the Company's pre-2012pre-2013 taxable income, the Company is amending certain of its 2003 through 20112013 state income tax returns. Such amendments will cause such years to remain open, pending the states' acceptances of the returns. At this time, the Company believes that the Joint Committee's review of its U.S. tax refunds and the states' acceptance of its amending returns will be completed thisnext year. The underlying statutes of limitations are expected to close in due course on or before June 30,December 31, 2017.

During the sixnine months ended JuneSeptember 30, 2016 (Successor Company), the Company entered into a reinsurance transaction, as discussed in Note 3, Reinsurance and Financing Transactions. This transaction is expected to generate an operating loss on the Company’s consolidated 2016 US income tax return. The Company has evaluated its ability to carry this loss back to receive refunds of previously-paid taxes, plus utilize the remaining loss in future years. The Company expects to receive refunds for substantially all of the US income taxes that it paid in 2014 and 2015, as well as fully utilize the remaining operating loss carryforward during the carryforward period. Based on the Company’s current assessment of future taxable income, including available tax planning opportunities, the Company anticipates that it is more likely than not that it will generate sufficient taxable income to realize all of its material deferred tax assets. The Company did not record a valuation allowance against its material deferred tax assets as of JuneSeptember 30, 2016.

The Company used its respective estimates of its annual 2016 and 2015 incomes in computing its effective income tax rates for the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company), the three months ended JuneSeptember 30, 2015 (Successor Company), the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company), and the period of January 1, 2015 to January 31, 2015 (Predecessor Company). The effective tax rates for the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company), the three months Juneended September 30, 2015 (Successor Company), the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company), and the period of January 1, 2015 to January 31, 2015 (Predecessor Company) were 22.2%, 31.4%, 33.7%27.3%, 33.1%, 28.1%, 17.0%28.0%, and 32.8%, respectively.
 
17.                              OPERATING SEGMENTS
 
The Company has several operating segments, each having a strategic focus. An operating segment is distinguished by products, channels of distribution, and/or other strategic distinctions. The Company periodically evaluates its operating segments, as prescribed in the ASC Segment Reporting Topic, and makes adjustments to its segment reporting as needed. There were no


changes to the Company’s operating segments made or required to be made as a result of the Merger on February 1, 2015. A brief description of each segment follows.
 

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The Life Marketing segment markets fixed universal life (“UL”), indexed universal life ("IUL"), variable universal life (“VUL”), bank-owned life insurance (“BOLI”), and level premium term insurance (“traditional”) products on a national basis primarily through networks of independent insurance agents and brokers, broker-dealers, financial institutions, independent marketing organizations, and affinity groups.
 
The Acquisitions segment focuses on acquiring, converting, and servicing policies acquired from other companies. The segment’s primary focus is on life insurance policies and annuity products that were sold to individuals. The level of the segment’s acquisition activity is predicated upon many factors, including available capital, operating capacity, potential return on capital, and market dynamics. Policies acquired through the Acquisitions segment are typically blocks of business where no new policies are being marketed. Therefore earnings and account values are expected to decline as the result of lapses, deaths, and other terminations of coverage unless new acquisitions are made.
 
The Annuities segment markets fixed and VA products. These products are primarily sold through broker-dealers, financial institutions, and independent agents and brokers.
 
The Stable Value Products segment sells fixed and floating rate funding agreements directly to the trustees of municipal bond proceeds, money market funds, bank trust departments, and other institutional investors. TheThis segment also issues funding agreements to the FHLB, and markets guaranteed investment contracts (“GICs”) to 401(k) and other qualified retirement savings plans. The Company also has an unregistered funding agreement-backed notes program which provides for offers of notes to both domestic and international institutional investors.
 
The Asset Protection segment markets extended service contracts and credit life and disability insurance to protect consumers’ investments in automobiles and recreational vehicles. In addition, the segment markets a guaranteed asset protection (“GAP”) product. GAP coverage covers the difference between the loan pay-off amount and an asset’s actual cash value in the case of a total loss.
 
The Corporate and Other segment primarily consists of net investment income on assets supporting our equity capital, unallocated corporate overhead and expenses not attributable to the segments above. This segment includes earnings from several non-strategic or runoff lines of business, various investment-related transactions, the operations of several small subsidiaries, and the repurchase of non-recourse funding obligations.

     The Company usesCompany's management and PLC's Board of Directors analyzes and assesses the same accounting policies and procedures to measureoperating performance of each segment using "pre-tax operating income (loss) and assets as it uses to measure consolidated net income and assets. Segment". Consistent with GAAP accounting guidance for segment reporting, pre-tax operating income (loss) is the Company's measure of segment performance. Pre-tax operating income (loss) is calculated by adjusting "income (loss) before income tax," by excluding the following items:

realized gains and losses on investments and derivatives, net of the amortization related to DAC, VOBA, and benefits and settlement expenses. Operating earnings exclude
changes in the GMWB embedded derivatives (excludingexclusive of the portion attributedattributable to the economic cost), cost of the GMWB,
actual GMWB incurred claims, and
the related amortization of DAC/DAC, VOBA, attributed to eachand certain policy liabilities that is impacted by the exclusion of these items.

SegmentThese items are important to understanding the overall results of operations. Pre-tax operating income (loss) representsis not a substitute for net income (loss), and may not be comparable to similarly titled measures reported by other companies. The Company believes that pre-tax operating income (loss) enhances management's and the basis on which the performanceBoard of Directors' understanding of the Company’s business is internally assessed by management. Premiumsongoing operations, the underlying profitability of each segment, and helps facilitate the allocation of resources.

In determining the components of the pre-tax operating income (loss) for each segment, premiums and policy fees, other income, benefits and settlement expenses, and amortization of DAC/DAC and VOBA are attributed directly to each operating segment. Net investment income is allocated based on directly related assets required for transacting the business of that segment. Realized investment gains (losses) and other operating expenses are allocated to the segments in a manner that most appropriately reflects the operations of that segment. Investments and other assets are allocated based on statutory policy liabilities net of associated statutory policy assets, while DAC/VOBA and goodwill are shown in the segments to which they are attributable.
 
There were no significant intersegment transactions during the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company), the three months ended JuneSeptember 30, 2015 (Successor Company), the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company), and the period of January 1, 2015 to January 31, 2015 (Predecessor Company).


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The following tables summarize financial information for the Company’s segments (Predecessor and Successor periods are not comparable):
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three Months Ended June 30, 2016 For The Three Months Ended June 30, 2015 For The Six Months Ended June 30, 2016 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Revenues 
      
  
 
      
  
Life Marketing$384,823
 $347,691
 $765,897
 $602,613
 $133,361
$382,224
 $358,194
 $1,148,121
 $960,807
 $133,361
Acquisitions453,848
 363,985
 878,655
 622,774
 139,761
391,017
 352,141
 1,269,672
 974,915
 139,761
Annuities188,597
 43,468
 407,113
 92,812
 130,918
139,265
 200,798
 546,378
 293,610
 130,918
Stable Value Products26,237
 16,656
 56,139
 26,998
 8,181
27,380
 17,065
 83,519
 44,063
 8,181
Asset Protection76,419
 77,625
 150,098
 126,921
 24,566
79,030
 77,476
 229,128
 204,397
 24,566
Corporate and Other44,918
 13,528
 76,842
 31,796
 22,859
34,872
 997
 111,714
 32,793
 22,859
Total revenues$1,174,842
 $862,953
 $2,334,744
 $1,503,914
 $459,646
$1,053,788
 $1,006,671
 $3,388,532
 $2,510,585
 $459,646
Segment Operating Income (Loss) 
      
  
Pre-tax Operating Income (Loss) 
      
  
Life Marketing$25,098
 5,672
 38,224
 $9,953
 $(2,271)$(512) 18,758
 37,712
 $28,711
 $(2,271)
Acquisitions45,285
 37,876
 113,938
 73,946
 20,134
70,157
 59,016
 184,095
 132,962
 20,134
Annuities47,480
 40,513
 92,756
 71,886
 11,363
43,033
 37,090
 135,789
 108,976
 11,363
Stable Value Products15,178
 9,349
 29,626
 15,464
 4,529
14,700
 12,785
 44,326
 28,249
 4,529
Asset Protection4,141
 4,880
 8,397
 8,523
 1,907
4,099
 4,415
 12,496
 12,938
 1,907
Corporate and Other(30,248) (36,374) (64,990) (50,331) (16,662)(46,509) (34,557) (111,499) (84,888) (16,662)
Total segment operating income106,934
 61,916
 217,951
 129,441
 19,000
Pre-tax operating income84,968
 97,507
 302,919
 226,948
 19,000
Realized investment (losses) gains - investments(1)
100,889
 (115,716) 184,031
 (158,649) 89,414
(688) 8,586
 183,343
 (150,063) 89,414
Realized investment (losses) gains - derivatives52,757
 18,233
 93,577
 18,177
 24,433
9,987
 50,028
 103,564
 68,205
 24,433
Income tax (expense) benefit(87,787) 9,991
 (164,149) 1,875
 (44,325)
Net income (loss)$172,793
 $(25,576) $331,410
 $(9,156) $88,522
Income before income tax94,267
 156,121
 589,826
 145,090
 132,847
Income tax expense(20,965) (42,542) (185,114) (40,667) (44,325)
Net income$73,302
 $113,579
 $404,712
 $104,423
 $88,522
                  
All other investment gains (losses)$87,816
 $(108,081) $166,908
 $(143,137) $80,672
$20,844
 $(4,755) $187,752
 $(147,892) $80,672
Less: amortization related to DAC/VOBA and benefits and settlement expenses(13,073) 7,635
 (17,123) 15,512
 (8,742)21,532
 (13,341) 4,409
 2,171
 (8,742)
Realized investment gains (losses) - investments$100,889
 $(115,716) $184,031
 $(158,649) $89,414
$(688) $8,586
 $183,343
 $(150,063) $89,414
                  
Derivative financial instruments gains (losses)$43,548
 $10,566
 $75,456
 $5,618
 $22,031
$532
 $41,895
 $75,988
 $47,513
 $22,031
Less: VA GMWB economic cost(9,209) (7,667) (18,121) (12,559) (2,402)(9,455) (8,133) (27,576) (20,692) (2,402)
Realized investment gains (losses) - derivatives$52,757
 $18,233
 $93,577
 $18,177
 $24,433
$9,987
 $50,028
 $103,564
 $68,205
 $24,433
 
(1) Includes credit related other-than-temporary impairmentsimpairments of $1.0$3.3 million, $3.6$6.9 million $5.7, $10.1 million, $5.7$15.8 million, and $0.5 million for the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company), the three months ended JuneSeptember 30, 2015 (Successor Company), the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company), and for the period of January 1, 2015 to January 31, 2015 (Predecessor Company), respectively.



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Operating Segment Assets
As of June 30, 2016 (Successor Company)
Operating Segment Assets
As of September 30, 2016 (Successor Company)
(Dollars In Thousands)(Dollars In Thousands)
Life
Marketing
 Acquisitions Annuities 
Stable Value
Products
Life
Marketing
 Acquisitions Annuities 
Stable Value
Products
Investments and other assets$13,916,859
 $20,052,484
 $19,873,357
 $2,711,452
$14,171,442
 $19,986,370
 $20,166,335
 $3,283,420
Deferred policy acquisition costs and value of business acquired1,134,643
 93,983
 625,628
 4,353
1,155,759
 82,803
 634,820
 5,919
Other intangibles310,141
 38,380
 190,116
 9,056
305,403
 37,741
 186,781
 8,889
Goodwill200,274
 14,524
 336,677
 113,813
200,274
 14,524
 336,677
 113,813
Total assets$15,561,917
 $20,199,371
 $21,025,778
 $2,838,674
$15,832,878
 $20,121,438
 $21,324,613
 $3,412,041
 
Asset
Protection
 
Corporate
and Other
 
Total
Consolidated
Asset
Protection
 
Corporate
and Other
 
Total
Consolidated
Investments and other assets$812,678
 $13,755,465
 $71,122,295
$828,946
 $13,876,152
 $72,312,665
Deferred policy acquisition costs and value of business acquired36,559
 
 1,895,166
35,087
 
 1,914,388
Other intangibles76,782
 
 624,475
75,333
 
 614,147
Goodwill67,155
 
 732,443
67,155
 
 732,443
Total assets$993,174
 $13,755,465
 $74,374,379
$1,006,521
 $13,876,152
 $75,573,643
 
 
 Operating Segment Assets
As of December 31, 2015 (Successor Company)
 (Dollars In Thousands)
 
Life
Marketing
 Acquisitions Annuities 
Stable Value
Products
Investments and other assets$13,258,639
 $19,879,988
 $19,715,901
 $2,006,263
Deferred policy acquisition costs and value of business acquired1,119,515
 (178,662) 578,742
 2,357
Other intangibles319,623
 39,658
 196,780
 9,389
Goodwill200,274
 14,524
 336,677
 113,813
Total assets$14,898,051
 $19,755,508
 $20,828,100
 $2,131,822
 
 
Asset
Protection
 
Corporate
and Other
 
Total
Consolidated
Investments and other assets$766,294
 $9,464,906
 $65,091,991
Deferred policy acquisition costs and value of business acquired40,421
 
 1,562,373
Other intangibles79,681
 
 645,131
Goodwill67,155
 
 732,443
Total assets$953,551
 $9,464,906
 $68,031,938
 
18.                              SUBSEQUENT EVENTS
 
The Company has evaluated the effects of events subsequent to JuneSeptember 30, 2016 (Successor Company), and through the date we filed our consolidated condensed financial statements with the United States Securities and Exchange Commission. All accounting and disclosure requirements related to subsequent events are included in our consolidated condensed financial statements.

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Item 2.        Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our consolidated condensed financial statements included under Part I, Item 1, Financial Statements (Unaudited), of this Quarterly Report on Form 10-Q and our audited consolidated financial statements for the year ended December 31, 2015 (Successor Company), included in our Annual Report on Form 10-K.
 
For a more complete understanding of our business and current period results, please read the following MD&A in conjunction with our latest Annual Report on Form 10-K and other filings with the United States Securities and Exchange Commission (the “SEC”).
 
Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior period amounts comparable to those of the current period. Such reclassifications had no effect on previously reported net income or shareowner’s equity.

FORWARD-LOOKING STATEMENTS — CAUTIONARY LANGUAGE
 
This report reviews our financial condition and results of operations, including our liquidity and capital resources. Historical information is presented and discussed, and where appropriate, factors that may affect future financial performance are also identified and discussed. Certain statements made in this report include “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include any statement that may predict, forecast, indicate, or imply future results, performance, or achievements instead of historical facts and may contain words like “believe,” “expect,” “estimate,” “project,” “budget,” “forecast,” “anticipate,” “plan,” “will,” “shall,” “may,” and other words, phrases, or expressions with similar meaning. Forward-looking statements involve risks and uncertainties, which may cause actual results to differ materially from the results contained in the forward-looking statements, and we cannot give assurances that such statements will prove to be correct. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future developments or otherwise. For more information about the risks, uncertainties, and other factors that could affect our future results, please refer to Part I, Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 1A, Risk Factors, of this report, as well as Part I, Item 1A, Risk Factors, of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (Successor Company).

IMPORTANT INVESTOR INFORMATION
 
We file reports with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and other reports as required. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. We are an electronic filer and the SEC maintains an internet site at www.sec.gov that contains these reports and other information filed electronically by us. We make available through our website, www.protective.com, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after such materials are electronically filed with or furnished to the SEC. We will furnish such documents to anyone who requests such copies in writing. Requests for copies should be directed to: Financial Information, Protective Life Corporation,Insurance Company, P. O. Box 2606, Birmingham, Alabama 35202, Telephone (205) 268-3912, Fax (205) 268-3642.
 
We also make available to the public current information, including financial information, regarding the Company and our affiliates on the Financial Information page of our website, www.protective.com. We encourage investors, the media and others interested in us and our affiliates to review the information we post on our website. The information found on our website is not part of this or any other report filed with or furnished to the SEC.

OVERVIEW
 
Our businessBusiness
 
We are a wholly owned subsidiary of Protective Life Corporation (“PLC”). Founded in 1907, we are the largest operating subsidiary of PLC. On February 1, 2015, PLC became a wholly owned subsidiary of The Dai-ichi Life Insurance Company, Limited, a kabushiki kaisha organized under the laws of Japan (“Dai-ichi Life”), when DL Investment (Delaware), Inc., a wholly owned subsidiary of Dai-ichi Life, merged with and into PLC (the “Merger”). Prior to February 1, 2015, PLC’s stock was publicly traded on the New York Stock Exchange. Subsequent to the Merger, PLC and the Company remain an SEC registrants for financial reporting purposes in the United States. We provide financial services through the production, distribution, and administration of insurance and investment products. Unless the context otherwise requires, the “Company,” “we,” “us,” or “our” refers to the consolidated group of Protective Life Insurance Company and our subsidiaries.
 
We have several operating segments, each having a strategic focus. An operating segment is distinguished by products, channels of distribution, and/or other strategic distinctions. We periodically evaluate our operating segments as prescribed in the Accounting Standards Codification (“ASC”) Segment Reporting Topic, and make adjustments to our segment reporting as needed. There were no changes to our operating segments made or required to be made as a result of the Merger on February 1, 2015.
 

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Our operating segments are Life Marketing, Acquisitions, Annuities, Stable Value Products, Asset Protection, and Corporate and Other.
 
Life Marketing - We market fixed universal life (“UL”), indexed universal life (“IUL”), variable universal life (“VUL”), bank-owned life insurance (“BOLI”), and level premium term insurance (“traditional”) products on a national basis primarily through networks of independent insurance agents and brokers, broker-dealers, financial institutions, independent marketing organizations, and affinity groups.
 
Acquisitions - We focus on acquiring, converting, and servicing policies from other companies. This segment’s primary focus is on life insurance policies and annuity products that were sold to individuals. The level of the segment’s acquisition activity is predicated upon many factors, including available capital, operating capacity, potential return on capital, and market dynamics. Policies acquired through the Acquisitions segment are typically blocks of business where no new policies are being marketed. Therefore earnings and account values are expected to decline as the result of lapses, deaths, and other terminations of coverage unless new acquisitions are made.
 
Annuities - We market fixed and variable annuity (“VA”) products. These products are primarily sold through broker-dealers, financial institutions, and independent agents and brokers.
 
Stable Value Products - We sell fixed and floating rate funding agreements directly to the trustees of municipal bond proceeds, money market funds, bank trust departments, and other institutional investors. The segment also issues funding agreements to the Federal Home Loan Bank (“FHLB”), and markets guaranteed investment contracts (“GICs”) to 401(k) and other qualified retirement savings plans. We also have an unregistered funding agreement-backed notes program which provides for offers of notes to both domestic and international institutional investors.
 
Asset Protection - We market extended service contracts and credit life and disability insurance to protect consumers’ investments in automobiles and recreational vehicles. In addition, this segment markets a guaranteed asset protection (“GAP”) product. GAP coverage covers the difference between the loan pay-off amount and an asset’s actual cash value in the case of a total loss.

Corporate and Other - This segment primarily consists of net investment income on assets supporting our equity capital, unallocated corporate overhead, and expenses not attributable to the segments above. This segment includes earnings from several non-strategic or runoff lines of business, various investment-related transactions, the operations of several small subsidiaries, and the repurchase of non-recourse funding obligations.

RECENT DEVELOPMENTS
 
On January 15, 2016, we completed the transaction contemplated by the Master Agreement, dated September 30, 2015 (the “Master Agreement”), with Genworth Life and Annuity Insurance Company (“GLAIC”), as previously reported in our Current Reports on Form 8-K filed October 1, 2015 and January 15, 2016. Pursuant to the Master Agreement, effective January 1, 2016, we entered into a reinsurance agreement (the “Reinsurance Agreement”) under the terms of which we coinsure certain term life insurance business of GLAIC (the “GLAIC Block”). In connection with the reinsurance transaction, on January 15, 2016, Golden Gate Captive Insurance Company (“Golden Gate”), a wholly owned subsidiary of the Company, and Steel City, LLC (“Steel City”City���), a newly formed wholly owned subsidiary of PLC, entered into an 18-year transaction to finance $2.188 billion of “XXX” reserves related to the acquired GLAIC Block and the other term life insurance business reinsured to Golden Gate by PLICOthe Company and West Coast Life Insurance Company (“WCL”), a direct wholly owned subsidiary of the Company. Steel City issued notes with an aggregate initial principal amount of $2.188 billion to Golden Gate in exchange for a surplus note issued by Golden Gate with an initial principal amount of $2.188 billion. Through the structure, Hannover Life Reassurance Company of America (Bermuda) Ltd., The Canada Life Assurance Company (Barbados Branch) and Nomura Americas Re Ltd. (collectively, the “Risk-Takers”) provide credit enhancement to the Steel City notes for the 18-year term in exchange for credit enhancement fees. The transaction is “non-recourse” to PLC, WCL and the Company, meaning that none of these companies are liable to reimburse the Risk-Takers for any credit enhancement payments required to be made. In connection with the transaction, PLC has entered into certain support agreements under which it guarantees or otherwise supports certain obligations of Golden Gate or Steel City, including a guarantee of the fees to the Risk-Takers. The estimated average annual expense of the credit enhancement under generally accepted accounting principles is approximately $3.1 million, after-tax. As a result of the financing transaction described above, the $800 million of Golden Gate Series A Surplus Notes held by PLC were contributed to the Company and then subsequently contributed to Golden Gate, which resulted in the extinguishment of these notes. Also on January 15, 2016, Golden Gate paid an extraordinary dividend of $300 million to the Company as approved by the Vermont Department of Regulation.

In August 2016, PLC reached an agreement through the Company to acquire USWC Holding Company and its affiliated operating subsidiaries ("USWC") via a stock purchase agreement (the "Acquisition"). The Acquisition is subject to receipt of standard regulatory approvals and satisfaction of customary closing conditions. USWC, whose primary operating subsidiary is United States Warranty Corp., currently markets vehicle service contracts, GAP coverage, and a suite of ancillary automotive maintenance and protection products nationwide. The Acquisition is expected to provide the combined entities with expanded market reach, enhanced product and operational capabilities, and higher collective growth potential.

RISKS AND UNCERTAINTIES
 
The factors which could affect our future results include, but are not limited to, general economic conditions and the following risks and uncertainties:


 
General

exposure to the risks of natural and man-made disasters and catastrophes, diseases, epidemics, pandemics, malicious acts, cyber-attacks, terrorist acts and climate change could adversely affect our operations and results;
a disruption affecting the electronic systems of the Company or those on whom the Company relies could adversely affect our business, financial condition and results of operations;

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confidential information maintained in the systems of the Company or other parties upon which the Company relies could be compromised or misappropriated, damaging our business and reputation and adversely affecting our financial condition and results of operations;
our results and financial condition may be negatively affected should actual experience differ from management’s assumptions and estimates;
we may not realize our anticipated financial results from our acquisitions strategy;
assets allocated to the MONY Closed Block benefit only the holders of certain policies; adverse performance of Closed Block assets or adverse experience of Closed Block liabilities may negatively affect us;
we are dependent on the performance of others;
our risk management policies, practices, and procedures could leave us exposed to unidentified or unanticipated risks, which could negatively affect our business or result in losses;
our strategies for mitigating risks arising from our day-to-day operations may prove ineffective resulting in a material adverse effect on our results of operations and financial condition;

Financial Environment

interest rate fluctuations and sustained periods of low interest rates could negatively affect our interest earnings and spread income, or otherwise impact our business;
our investments are subject to market and credit risks, which could be heightened during periods of extreme volatility or disruption in financial and credit markets;
equity market volatility could negatively impact our business;
our use of derivative financial instruments within our risk management strategy may not be effective or sufficient;
credit market volatility or disruption could adversely impact our financial condition or results from operations;
our ability to grow depends in large part upon the continued availability of capital;
we could be adversely affected by a ratings downgrade or other negative action by a ratings organization;
we could be forced to sell investments at a loss to cover policyholder withdrawals;
disruption of the capital and credit markets could negatively affect our ability to meet our liquidity and financing needs;
difficult general economic conditions could materially adversely affect our business and results of operations;
we may be required to establish a valuation allowance against our deferred tax assets, which could materially adversely affect our results of operations, financial condition, and capital position;
we could be adversely affected by an inability to access our credit facility;
we could be adversely affected by an inability to access FHLB lending;
our financial condition or results of operations could be adversely impacted if our assumptions regarding the fair value and future performance of our investments differ from actual experience;
adverse actions of certain funds or their advisers could have a detrimental impact on our ability to sell our variable life and annuity products, or maintain current levels of assets in those products;
the amount of statutory capital or risk-based capital that we have and the amount of statutory capital or risk-based capital that we must hold to maintain our financial strength and credit ratings and meet other requirements can vary significantly from time to time and is sensitive to a number of factors outside of our control;

Industry and Regulation

we are highly regulated and are subject to routine audits, examinations, and actions by regulators, law enforcement agencies, and self-regulatory organizations;
we may be subject to regulations influenced by or related to international regulatory authorities or initiatives;
NAIC actions, pronouncements and initiatives may affect our product profitability, reserve and capital requirements, financial condition or results of operations;
regulatory actions, interpretations and pronouncements related to Actuarial Guidelines XXXVIII may have an adverse effect on our ability to sell certain universal life products and reserving requirements;
our use of captive reinsurance companies to finance statutory reserves related to our term and universal life products and to reduce volatility affecting our variable annuity products, may be limited or adversely affected by regulatory action, pronouncements and interpretations;
laws, regulations and initiatives related to unreported deaths and unclaimed property and death benefits may result in operational burdens, fines, unexpected payments or escheatments;
we are subject to insurance guaranty fund and insurable interest laws, and the laws, rules and regulations of state, federal and foreign regulators that could adversely affect our financial condition or results of operations;
the Healthcare Act and related regulations could adversely affect our results of operations or financial condition;
laws, rules and regulations promulgated in connection with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act may adversely affect our results of operations or financial condition;
regulations issued by the Department of Labor on April 6, 2016, expanding the definition of "investment advice fiduciary" under ERISA and creating and revising several prohibited transactions exemptions for investment activities


in light of that expanded definition, may have a material adverse impact on our ability to sell annuities and other products, to retain in-force business and on our financial condition or results of operations;
we may be subject to regulation, investigations, enforcement actions, fines and penalties imposed by the SEC, FINRA and other federal and international regulators in connection with our business operations;
changes to tax law or interpretations of existing tax law could adversely affect our ability to compete with non-insurance products or reduce the demand for certain insurance products;
financial services companies are frequently the targets of legal proceedings, including class action litigation, which could result in substantial judgments;

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the financial services and insurance industries are sometimes the target of law enforcement investigations and the focus of increased regulatory scrutiny;
new accounting rules, changes to existing accounting rules, or the grant of permitted accounting practices to competitors could negatively impact us;
if our business does not perform well, we may be required to recognize an impairment of our goodwill and indefinite lived intangible assets which could adversely affect our results of operations or financial condition;
use of reinsurance introduces variability in our statements of income;
our reinsurers could fail to meet assumed obligations, increase rates, terminate agreements, or be subject to adverse developments that could affect us;
our policy claims fluctuate from period to period resulting in earnings volatility;
we operate in a mature, highly competitive industry, which could limit our ability to gain or maintain our position in the industry and negatively affect profitability;
our ability to maintain competitive unit costs is dependent upon the level of new sales and persistency of existing business; and
we may not be able to protect our intellectual property and may be subject to infringement claims.
 
For more information about the risks, uncertainties, and other factors that could affect our future results, please see Part II, Item 1A of this report and our Annual Report on Form 10-K.

CRITICAL ACCOUNTING POLICIES
 
Our accounting policies require the use of judgments relating to a variety of assumptions and estimates, including, but not limited to expectations of current and future mortality, morbidity, persistency, expenses, and interest rates, as well as expectations around the valuations of securities. Because of the inherent uncertainty when using the assumptions and estimates, the effect of certain accounting policies under different conditions or assumptions could be materially different from those reported in the consolidated condensed financial statements. For a complete listing of our critical accounting policies, refer to our Annual Report on Form 10-K for the year ended December 31, 2015 (Successor Company).

RESULTS OF OPERATIONS
 
We useOur management and PLC's Board of Directors analyzes and assesses the same accounting policies and procedures to measureoperating performance of each segment using "pre-tax operating income (loss) and assets as we use to measure consolidated net income and assets. Segment". Consistent with GAAP accounting guidance for segment reporting, pre-tax operating income (loss) is our measure of segment performance. Pre-tax operating income (loss) is calculated by adjusting "income (loss) before income tax," by excluding the following items:

realized gains and losses on investments and derivatives, net of the amortization related to DAC, VOBA, and benefits and settlement expenses. Segment operating income (loss) also excludes
changes in the GMWB embedded derivatives (excludingexclusive of the portion attributedattributable to the economic cost), cost of the GMWB,
actual GMWB incurred claims, and
the related amortization of DAC, attributed to eachVOBA, and certain policy liabilities that is impacted by the exclusion of these items.

SegmentThese items are important to understanding the overall results of operations. Pre-tax operating income (loss) representsis not a substitute for net income (loss), and may not be comparable to similarly titled measures reported by other companies. Our belief is that pre-tax operating income (loss) enhances management's and the basis on whichBoard of Directors' understanding of the performanceongoing operations, the underlying profitability of our business is internally assessed by management. Premiumseach segment, and helps facilitate the allocation of resources.

In determining the components of the pre-tax operating income (loss) for each segment, premiums and policy fees, other income, benefits and settlement expenses, and amortization of DAC/DAC and VOBA are attributed directly to each operating segment. Net investment income is allocated based on directly related assets required for transacting the business of that segment. Realized investment gains (losses) and other operating expenses are allocated to the segments in a manner that most appropriately reflects the operations of that segment. Investments and other assets are allocated based on statutory policy liabilities net of associated statutory policy assets, while DAC/VOBA and goodwill are shown in the segments to which they are attributable.

However, segment operating income (loss) should not be viewed as a substitute for net income calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”). In addition, our segment operating income (loss) measures may not be comparable to similarly titled measures reported by other companies.

We periodically review and update as appropriate our key assumptions onused to measure certain balances related to insurance products, using the ASC Financial Services-Insurance Topic, including future mortality, expenses, lapses, premium persistency, benefit utilization, investment yields, interest spreads,rates, and equity market returns. Changes to these assumptions result in adjustments which increase or decrease DAC/DAC and VOBA amortization and/or benefits and expenses. The periodic review and updating of assumptions is referred to as “unlocking”. When referring to DAC/VOBA amortization unlocking on products covered under the ASC Financial Services-Insurance Topic, the reference is to changes in all balance sheet components amortized over estimated gross profits or revenues.


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The following table presents a summary of results and reconciles segmentpre-tax operating income (loss) to consolidated net income (Predecessor and Successor periods are not comparable):
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Segment Operating Income (Loss) 
      
  
Pre-tax Operating Income (Loss) 
      
  
Life Marketing$25,098
 $5,672
 $38,224
 $9,953
 $(2,271)$(512) $18,758
 $37,712
 $28,711
 $(2,271)
Acquisitions45,285
 37,876
 113,938
 73,946
 20,134
70,157
 59,016
 184,095
 132,962
 20,134
Annuities47,480
 40,513
 92,756
 71,886
 11,363
43,033
 37,090
 135,789
 108,976
 11,363
Stable Value Products15,178
 9,349
 29,626
 15,464
 4,529
14,700
 12,785
 44,326
 28,249
 4,529
Asset Protection4,141
 4,880
 8,397
 8,523
 1,907
4,099
 4,415
 12,496
 12,938
 1,907
Corporate and Other(30,248) (36,374) (64,990) (50,331) (16,662)(46,509) (34,557) (111,499) (84,888) (16,662)
Total segment operating income106,934
 61,916
 217,951
 129,441
 19,000
Pre-tax operating income84,968
 97,507
 302,919
 226,948
 19,000
Realized investment gains (losses) - investments (1)
100,889
 (115,716) 184,031
 (158,649) 89,414
(688) 8,586
 183,343
 (150,063) 89,414
Realized investment gains (losses) - derivatives52,757
 18,233
 93,577
 18,177
 24,433
9,987
 50,028
 103,564
 68,205
 24,433
Income tax (expense) benefit(87,787) 9,991
 (164,149) 1,875
 (44,325)
Net income (loss)$172,793
 $(25,576) $331,410
 $(9,156) $88,522
Income before income tax94,267
 156,121
 589,826
 145,090
 132,847
Income tax expense(20,965) (42,542) (185,114) (40,667) (44,325)
Net income$73,302
 $113,579
 $404,712
 $104,423
 $88,522
                  
All other investment gains (losses)$87,816
 $(108,081) $166,908
 $(143,137) $80,672
$20,844
 $(4,755) $187,752
 $(147,892) $80,672
Less: amortization related to DAC/VOBA and benefits and settlement expenses(13,073) 7,635
 (17,123) 15,512
 (8,742)21,532
 (13,341) 4,409
 2,171
 (8,742)
Realized investment gains (losses) - investments$100,889
 $(115,716) $184,031
 $(158,649) $89,414
$(688) $8,586
 $183,343
 $(150,063) $89,414
                  
Derivative financial instruments gains (losses)$43,548
 $10,566
 $75,456
 $5,618
 $22,031
$532
 $41,895
 $75,988
 $47,513
 $22,031
Less: VA GMWB economic cost(9,209) (7,667) (18,121) (12,559) (2,402)(9,455) (8,133) (27,576) (20,692) (2,402)
Realized investment gains (losses) - derivatives$52,757
 $18,233
 $93,577
 $18,177
 $24,433
$9,987
 $50,028
 $103,564
 $68,205
 $24,433

(1)  Includes credit related other-than-temporary impairmentsimpairments of $1.0 $3.3 million, $3.6$6.9 million, $5.7$10.1 million, $5.7$15.8 million, and $0.5 million for the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company), for the three months ended JuneSeptember 30, 2015 (Successor Company), for the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company), and for the period of January 1, 2015 to January 31, 2015 (Predecessor Company), respectively.


 For The Three Months Ended JuneSeptember 30, 2016 as compared to The Three Months Ended JuneSeptember 30, 2015 (Successor Company)

Net income was $172.8$73.3 million and pre-tax operating income was $106.9$85.0 million for the three months ended JuneSeptember 30, 2016.

We experienced net realized gains of $131.4$21.4 million for the three months ended JuneSeptember 30, 2016. The gains realized were primarily related to $53.4 million of gains related to the net activity of the modified coinsurance portfolio, $16.9$1.7 million of gains related to investment securities sale activity, $13.7$13.4 million of gains related to the derivatives with PLC, net gains of $50.5$8.1 million of derivatives related to variable annuity contracts, and net gains of $0.2$8.8 million of derivatives related to IUL contracts, andcontracts. Partially offsetting these gains were $3.3 million of other-than-temporary impairment


credit-related losses, net gainslosses of $2.1$5.7 million of derivatives related to FIA contracts. Partially offsetting these gains were $1.0 million of other-than-temporary impairment credit-related losses andcontracts, net losses of $4.4$1.5 million loss related to other investment and derivative activity.activity, and $0.2 million of losses related to the net activity of the modified coinsurance portfolio.

Life Marketing segment pre-tax operating incomeloss was $25.1$0.5 million for the three months ended JuneSeptember 30, 2016, representing an increasea decrease of $19.4$19.3 million from the three months ended JuneSeptember 30, 2015. The increasedecrease was primarily due to higher universal life policy feesthe impact of prospective unlocking during the current quarter and higher investment income. These increases were partially offset byunfavorable traditional mortality. The segment recorded an increase in reserves from growth in retained universal life insurance in-force.unfavorable $18.3 million of prospective unlocking for the three months ended September 30, 2016, as compared to an unfavorable $2.3 million of prospective unlocking for th three months ended September 30, 2015.
 

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Acquisitions segment pre-tax operating income was $45.3$70.2 million for the three months ended JuneSeptember 30, 2016, an increase of $7.4$11.1 million as compared to the three months ended JuneSeptember 30, 2015, primarily due to the addition of the GLAIC reinsurance transaction completed on January 15, 2016. The GLAIC transaction added $9.0$16.7 million to segmentpre-tax operating income for the three months ended JuneSeptember 30, 2016. This was partly offset byFor the expected runoffthree months ended September 30, 2016, the segment recorded favorable prospective unlocking of $1.2 million as compared to favorable $0.3 million of prospective unlocking for the in-force blocks of business.three months ended September 30, 2015.
 
Annuities segment pre-tax operating income was $47.5$43.0 million for the three months ended JuneSeptember 30, 2016, as compared to $40.5$37.1 million for the three months ended JuneSeptember 30, 2015, an increase of $7.0$5.9 million, or 17.2%16.0%. This variance was primarily the result of lower credited interest, and favorable single premium immediate annuities (“SPIA”) mortality offset by lowerhigher investment income, and lower feehigher fees and other income fromon the variable annuities ("VA") line of business.business offset by unfavorable single premium immediate annuities (“SPIA”) mortality. Segment results were positively impacted by $5.7 million of favorable unlocking for the three months ended September 30, 2016 as compared to $0.9 million of favorable unlocking for the three months ended September 30, 2015.

Stable Value Products segment pre-tax operating income was $15.2$14.7 million and increased $5.8$1.9 million, or 62.3%15.0%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015. The increase in operating earnings primarily resulted from an increaseincreased average account values and other income offset by a decrease in participating mortgage income higherand lower operating spreads, and increased average account values.spreads. Participating mortgage income for the three months ended JuneSeptember 30, 2016 was $3.9$1.3 million as compared to $0.5$1.8 million for the three months ended JuneSeptember 30, 2015. The adjusted operating spread, which excludes participating income and other income, decreased by 445 basis points for the three months ended JuneSeptember 30, 2016 over the prior year, due primarily to an increase in credited interest.

Asset Protection segment pre-tax operating income was $4.1 million, representing a decrease of $0.7$0.3 million, or 15.1%7.2%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015. Service contract earnings increased $1.7 million primarily due to favorable loss ratios. Earnings from the guaranteed asset protection (“GAP”) product line decreased $0.7$1.5 million primarily resulting from higher losses. Credit insurance earnings decreased $0.3$0.5 million primarily due to lower underwriting income. Service contract earnings increased $0.3 million primarily due to favorable underwriting income.higher losses.

The Corporate and Other segment pre-tax operating loss was $30.2$46.5 million for the three months ended JuneSeptember 30, 2016, as compared to an operating loss of $36.4$34.6 million for the three months ended JuneSeptember 30, 2015. The decrease was primarily due to a $19.0$11.3 million increase in interest expense. Partially offsetting these decreases was a $2.2 million increase in net investment income, partially offset by a $10.9 million increase in interest expense.income.

For The SixNine Months Ended JuneSeptember 30, 2016 (Successor Company)

Net income was $331.4$404.7 million and pre-tax operating income was $218.0$302.9 million for the sixnine months ended JuneSeptember 30, 2016.

We experienced net realized gains of $242.4$263.7 million for the sixnine months ended JuneSeptember 30, 2016. The gains realized were primarily related to $73.2$73.0 million of gains related to the net activity of the modified coinsurance portfolio, $22.5$24.1 million of gains related to investment securities sale activity, $17.7$31.1 million related to derivatives with PLC, net gains of $8.1 million of derivatives related to IUL contracts, and $144.1$152.2 million of derivatives related to variable annuity contracts. Partially offsetting these gains were $3.6$6.9 million of other-than-temporary impairment credit-related losses, net losses of $6.4$7.9 million loss related to other investment and derivative activity, net losses of $0.8 million of derivatives related to IUL contracts, and net losses of $4.2$9.9 million of derivatives related to FIA contracts. 

Life Marketing segment pre-tax operating income was $38.2$37.7 million which consisted of universal life operating income of $39.4$39.0 million, traditional life operating income of $5.0$7.8 million, and an operating loss of $6.2$9.1 million in other lines.
 
Acquisitions segment pre-tax operating income was $113.9$184.1 million. This included expected runoff of the in-force blocks of business and $17.8$34.5 million in operating income associated with the GLAIC reinsurance transaction that was completed on January 15, 2016. In addition, the increase included a $0.9 million favorable variance related to prospective unlocking. For the nine months ended September 30, 2016, the segment recorded favorable prospective unlocking of $1.2 million.
 
Annuities segment pre-tax operating income was $92.8$135.8 million which included $42.0$82.3 million of fixed annuity operating earnings, $67.1 million of variable annuity operating earnings, $59.5 million of fixed annuity operating earnings, and a $8.7$13.6 million loss in other annuity


earnings. The fixed annuitySegment operating results were positively impacted by $11.3$6.7 million of favorable unlocking and $6.3 million of favorable SPIA mortality.

Stable Value Products segment pre-tax operating income of $29.6$44.3 million was primarily due to activity in average account values, operating spread, and participating mortgage income, and operating spread.income. Participating mortgage income was $9.2$10.5 million and the adjusted operating spread, which excludes participating income other income, was 177178 basis points.

Asset Protection segment pre-tax operating income was $8.4$12.5 million which consisted of service contract earnings of $5.9$8.9 million, GAP product earnings of $1.6$2.3 million, and credit insurance earnings of $0.9$1.3 million.

The Corporate and Other segment’s $65.0$111.5 million pre-tax operating loss was primarily due to $119.0$179.7 million of other operating expense which is primarily interest expense and corporate overhead expenses. These expenses were partially offset by $55.3$71.4 million of investment income which represents income on assets supporting our equity capital and held-to-maturity notes.

For The Period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company)
 
Net lossincome was $9.2$104.4 million and pre-tax operating income was $129.4$226.9 million for the period of February 1, 2015 to JuneSeptember 30, 2015.

We experienced net realized losses of $137.5$100.4 million for the period of February 1, 2015 to JuneSeptember 30, 2015. The losses realized were primarily related to $5.7 million of other-than-temporary impairment credit-related losses, net losses of $138.2

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$73.6 million of derivatives related to variable annuity contracts, $0.6$15.8 million of other-than-temporary impairment credit-related losses, $16.1 million of losses related to derivatives with PLC, $2.0 million of losses related to the net activity of the modified coinsurance portfolio, and $3.1net losses of $1.0 million of losses related to other investment and derivative activity. The impact of derivatives with PLC.related to VA contracts in addition to capital market impacts were affected by the lowering of assumed lapses used to value the GMWB embedded derivatives. Partially offsetting these losses were $3.7 million of gains related to investment securities sale activity, net gains of $3.6 million of derivatives related to FIA contracts, net gains of $1.9$2.1 million related to IUL contracts, and net$2.4 million of gains of $0.9 million related to other investment and derivativesecurities sale activity.

Life Marketing segment pre-tax operating income was $10.0$28.7 million which consisted of universal life earningsoperating income of $19.8$23.4 million, a traditional life operating lossincome of $2.5$8.8 million, and an operating loss of $7.3$3.5 million in other lines.

Acquisitions segment pre-tax operating income was $73.9$133.0 million. This included expected runoff of the in force blocks of business.

Annuities segment pre-tax operating income was $71.9$109.0 million which included $44.4$63.9 million of fixed annuity operating earnings, and $34.2$56.1 million of variable annuity operating earnings, and a $11.0 million loss in other annuity earnings. The fixed annuity results were positively impacted by $4.8$1.8 million of favorable SPIA mortality. The segment recorded $1.3 million of favorable unlocking.

Stable Value Products segment pre-tax operating income of $15.5$28.2 million was primarily due to activity in average account values, operating spread, and participating mortgage income. Participating mortgage income was $1.7$3.5 million and the adjusted operating spread, which excludes participating income and other income, was 171190 basis points.

Asset Protection segment pre-tax operating income was $8.5$12.9 million which consisted of service contract earnings of $4.8$6.1 million, GAP product earnings of $2.6$4.8 million, and credit insurance earnings of $1.1$2.0 million.

The Corporate and Other segment’s $50.3$84.9 million pre-tax operating loss was primarily due to $77.7$126.0 million of other operating expense which is primarily interest expense and corporate overhead expenses. These expenses were partially offset by $26.9$40.8 million of investment income which represents income on assets supporting our equity capital.
 
For The Period of January 1, 2015 to January 31, 2015 (Predecessor Company)
 
Net income was $88.5 million and pre-tax operating income was $19.0 million for the period of January 1, 2015 to January 31, 2015.
 
We experienced net realized gains of $102.7 million for the period of January 1, 2015 to January 31, 2015. The gains realized for the period of January 1, 2015 to January 31, 2015, were primarily related to net gains of $75.9 million of derivatives related to variable annuity contracts, $15.9 million of gains related to derivatives with PLC, $6.9 million of gains related to investment securities sale activity, $5.0 million of gains related to the net activity of the modified coinsurance portfolio, and net gains of $1.2 million related to other investment and derivative activity. Partially offsetting these gains were net losses of $1.0 million of derivatives related to FIA contracts, net losses of $0.6 million of derivatives related to IUL contracts, and $0.5 million for other-than-temporary impairment credit-related losses.
 
Life Marketing segment pre-tax operating loss was $2.3 million. Included in that amount was a traditional life operating loss of $3.4 million, universal life earnings of $1.2 million, and operating earnings of $0.1 million in other lines.
 


Acquisitions segment pre-tax operating income was $20.1 million. This included expected runoff of the in force blocks of business.
 
Annuities segment pre-tax operating income was $11.4 million for the period of January 1, 2015 to January 31, 2015. Included in that amount was $2.8 million of favorable SPIA mortality results and $2.6 million of unfavorable unlocking.
 
Stable Value Products segment pre-tax operating income of $4.5 million was primarily due activity in average account values, operating spread, and participating mortgage income. Participating mortgage income was $0.1 million and the adjusted operating spread, which excludes participating income and other income, was 276 basis points.
 
Asset Protection segment pre-tax operating income was $1.9 million which consisted of $0.8 million in service contract earnings, $0.9 million in GAP product earnings, and credit insurance earnings of $0.2 million.

The Corporate and Other segment’s $16.7 million pre-tax operating loss was primarily due to $18.3 million of total benefits and expenses offset by $0.3 million of net investment income and $1.3 million of premiums and policy fees.

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Life Marketing
 
Segment Results of Operations
 
Segment results were as follows: 
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
REVENUES 
      
  
 
      
  
Gross premiums and policy fees$448,991
 $439,717
 $889,740
 $683,395
 $136,068
$439,290
 $415,673
 $1,329,030
 $1,099,068
 $136,068
Reinsurance ceded(204,157) (211,296) (387,881) (279,679) (51,142)(198,301) (175,652) (586,182) (455,331) (51,142)
Net premiums and policy fees244,834
 228,421
 501,859
 403,716
 84,926
240,989
 240,021
 742,848
 643,737
 84,926
Net investment income131,340
 120,326
 259,602
 198,259
 47,622
131,603
 122,344
 391,205
 320,603
 47,622
Other income769
 (209) 1,100
 940
 414
703
 397
 1,803
 1,337
 414
Total operating revenues376,943
 348,538
 762,561
 602,915
 132,962
373,295
 362,762
 1,135,856
 965,677
 132,962
Realized gains (losses) - investments7,687
 (2,315) 4,127
 (2,182) 997
85
 (4,762) 4,212
 (6,944) 997
Realized gains (losses) - derivatives193
 1,468
 (791) 1,880
 (598)8,844
 194
 8,053
 2,074
 (598)
Total revenues384,823
 347,691
 765,897
 602,613
 133,361
382,224
 358,194
 1,148,121
 960,807
 133,361
BENEFITS AND EXPENSES 
      
  
 
      
  
Benefits and settlement expenses303,136
 291,619
 623,979
 514,349
 123,525
325,947
 298,981
 949,926
 813,330
 123,525
Amortization of deferred policy acquisition costs and value of business acquired31,024
 33,428
 63,740
 53,575
 4,584
33,560
 27,060
 97,300
 80,635
 4,584
Other operating expenses17,685
 17,819
 36,618
 25,038
 7,124
14,300
 17,963
 50,918
 43,001
 7,124
Operating benefits and settlement expenses351,845
 342,866
 724,337
 592,962
 135,233
373,807
 344,004
 1,098,144
 936,966
 135,233
Amortization related to benefits and settlement expenses3,331
 1,110
 (1,840) 1,519
 (346)6,122
 120
 4,282
 1,639
 (346)
Amortization of DAC/VOBA related to realized gains (losses) - investments284
 10
 30
 41
 229
401
 (264) 431
 (223) 229
Total benefits and expenses355,460
 343,986
 722,527
 594,522
 135,116
380,330
 343,860
 1,102,857
 938,382
 135,116
INCOME (LOSS) BEFORE INCOME TAX29,363
 3,705
 43,370
 8,091
 (1,755)1,894
 14,334
 45,264
 22,425
 (1,755)
Less: realized gains (losses)7,880
 (847) 3,336
 (302) 399
8,929
 (4,568) 12,265
 (4,870) 399
Less: amortization related to benefits and settlement expenses(3,331) (1,110) 1,840
 (1,519) 346
(6,122) (120) (4,282) (1,639) 346
Less: related amortization of DAC/VOBA(284) (10) (30) (41) (229)(401) 264
 (431) 223
 (229)
OPERATING INCOME (LOSS)$25,098
 $5,672
 $38,224
 $9,953
 $(2,271)
PRE-TAX OPERATING INCOME (LOSS)$(512) $18,758
 $37,712
 $28,711
 $(2,271)


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The following table summarizes key data for the Life Marketing segment:
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Sales By Product 
      
  
 
      
  
Traditional life$268
 $101
 $671
 $211
 $42
$221
 $226
 $892
 $437
 $42
Universal life41,770
 39,860
 81,277
 63,346
 11,473
40,871
 40,272
 122,148
 103,618
 11,473
BOLI
 15
 
 15
 

 
 
 15
 
$42,038
 $39,976
 $81,948
 $63,572
 $11,515
$41,092
 $40,498
 $123,040
 $104,070
 $11,515
Sales By Distribution Channel 
      
  
 
      
  
Traditional brokerage$36,541
 $33,267
 $70,742
 $52,791
 $9,724
$35,314
 $33,549
 $106,056
 $86,340
 $9,724
Institutional3,884
 4,990
 8,015
 8,268
 1,472
4,026
 5,412
 12,041
 13,680
 1,472
Direct1,613
 1,719
 3,191
 2,513
 319
1,752
 1,537
 4,943
 4,050
 319
$42,038
 $39,976
 $81,948
 $63,572
 $11,515
$41,092
 $40,498
 $123,040
 $104,070
 $11,515
Average Life Insurance In-force(1)
 
      
  
 
      
  
Traditional$366,712,353
 $384,532,759
 $371,454,097
 $387,972,086
 $391,411,413
$361,945,424
 $380,319,124
 $366,723,972
 $384,496,436
 $391,411,413
Universal life205,932,631
 166,142,960
 195,945,075
 159,730,340
 153,317,720
215,270,993
 176,507,856
 204,771,980
 167,136,110
 153,317,720
$572,644,984
 $550,675,719
 $567,399,172
 $547,702,426
 $544,729,133
$577,216,417
 $556,826,980
 $571,495,952
 $551,632,546
 $544,729,133
Average Account Values 
      
  
 
      
  
Universal life$7,410,278
 $7,287,291
 $7,382,726
 $7,269,132
 $7,250,973
$7,443,908
 $7,317,345
 $7,415,471
 $7,290,874
 $7,250,973
Variable universal life597,855
 599,483
 586,026
 586,870
 574,257
620,071
 581,420
 604,555
 582,183
 574,257
$8,008,133
 $7,886,774
 $7,968,752
 $7,856,002
 $7,825,230
$8,063,979
 $7,898,765
 $8,020,026
 $7,873,057
 $7,825,230

 (1) Amounts are not adjusted for reinsurance ceded.
 
Operating expenses detail
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Insurance companies: 
      
  
 
      
  
First year commissions$48,216
 $42,757
 $96,343
 $71,421
 $14,108
$46,553
 $45,672
 $142,896
 $117,093
 $14,108
Renewal commissions9,325
 8,544
 18,067
 13,396
 2,513
9,645
 8,335
 27,713
 21,732
 2,513
First year ceding allowances(939) (927) (1,788) (1,435) (49)(875) (831) (2,663) (2,267) (49)
Renewal ceding allowances(40,347) (39,288) (78,556) (68,140) (12,364)(39,160) (39,316) (117,716) (107,457) (12,364)
General & administrative53,529
 52,788
 105,936
 84,761
 17,466
50,087
 52,506
 156,022
 137,268
 17,466
Taxes, licenses, and fees8,234
 7,736
 15,665
 12,910
 2,509
8,316
 7,675
 23,981
 20,585
 2,509
Other operating expenses incurred78,018
 71,610
 155,667
 112,913
 24,183
74,566
 74,041
 230,233
 186,954
 24,183
Less: commissions, allowances & expenses capitalized(60,333) (53,791) (119,049) (87,875) (17,059)(60,266) (56,078) (179,315) (143,953) (17,059)
Other operating expenses$17,685
 $17,819
 $36,618
 $25,038
 $7,124
$14,300
 $17,963
 $50,918
 $43,001
 $7,124



For The Three Months Ended JuneSeptember 30, 2016 as compared to The Three Months Ended JuneSeptember 30, 2015 (Successor Company)

SegmentPre-tax operating income (loss)

Operating incomePre-tax operating loss was $25.1$0.5 million for the three months ended JuneSeptember 30, 2016, representing an increasea decrease of $19.4$19.3 million from the three months ended JuneSeptember 30, 2015. The increasedecrease was primarily due to higher universal life policy feesthe impact of prospective unlocking during the current quarter and higher investment income. These increases were partially offset byunfavorable traditional mortality. The segment recorded an increase in reserves from growth in retained universal life insurance in-force.


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Tableunfavorable $18.3 million of Contents
prospective unlocking for the three months ended September 30, 2016, as compared to an unfavorable $2.3 million of prospective unlocking for the three months ended September 30,2015.

Operating revenues

Total operating revenues for the three months ended JuneSeptember 30, 2016, increased $28.4$10.5 million, or 8.1%3.0%, as compared to the three months ended JuneSeptember 30, 2015. This increase was driven by higher premiums and policy fees due to continued growth in the universal life block. Higher investment income due to increases in net in-force reserves also contributed to the increase.and yields.

Net premiums and policy fees

Net premiums and policy fees increased by $16.4$1.0 million, or 7.2%0.4%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015, due to an increase in policy fees associated with continued growth in universal life business. This increase is partiallyalmost entirely offset by a decrease in traditional life premiums.

Net investment income

Net investment income in the segment increased $11.0$9.3 million, or 9.2%7.6%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015. Of the increase in net investment income, $7.1$5.8 million was the result of a netan increase in universal life due to higher yields and universal life reserves. Traditional life investment income increased $3.3$2.8 million primarily due to lower reserve funding costs and higher reserves.yields.

Other income

Other income increased $1.0$0.3 million for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015, primarily due to fees on variable universal life funds.

Benefits and settlement expenses

Benefits and settlement expenses increased by $11.5$27.0 million, or 3.9%9.0%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015, due mostly to the impact of prospective unlocking and an increase in reserves and claims from growth in retained universal life insurance in-force, partly offset by a smaller increasedecrease in traditional reserves. For the three months ended September 30, 2016, universal life and BOLI prospective unlocking increased policy benefits and settlement expenses $20.5 million, as compared to an increase of $3.3 million for the three months ended September 30, 2015. Unlocking in 2016 was largely driven by assumption changes to reinsurance and yields. Assumption changes to lapses and yields contributed to the unlocking in 2015.

Amortization of DAC/VOBA

DAC/VOBA amortization decreased $2.4increased $6.5 million, or 7.2%24.0%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015, due to higher VOBA amortization in traditional business as a result of higher lapses, partially due tooffset by the impact of prospective unlocking. For the three months ended JuneSeptember 30, 2016, universal life and BOLI prospective unlocking decreased amortization $0.6$2.2 million, as compared to a decrease of $0.1$1.1 million for the three months ended JuneSeptember 30, 2015.

Other operating expenses

Other operating expenses decreased $0.1$3.7 million for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015. This decrease reflects higher ceded allowances,lower new business costs after capitalization and lower general and administrative expenses of $2.4 million, largely offset by higher general administrative expensesrenewal commissions of $0.7$1.3 million along with an increase in taxes, licenseslicense and fees of $0.5$0.6 million.

Sales

Sales for the segment increased $2.1$0.6 million for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015. Universal life sales increased $1.9$0.6 million primarily due to an expansion in distribution partners and focused efforts with existing partners.



For The SixNine Months Ended JuneSeptember 30, 2016 (Successor Company)

SegmentPre-tax operating income

OperatingPre-tax operating income was $38.2$37.7 million which consisted of universal life operating income of $39.4$39.0 million, traditional life operating income of $5.0$7.8 million, and an operating loss of $6.2$9.1 million in other lines.

Net premiums and policy fees

Net premiums and policy fees were $501.9$742.8 million for the sixnine months ended JuneSeptember 30, 2016. Included in this amount are traditional life net premiums of $213.2$307.4 million and universal life policy fees of $288.2$434.5 million.

Net investment income

Net investment income was $259.9$391.2 million for the sixnine months ended JuneSeptember 30, 2016. Included in this amount is traditional life net investment income of $38.5$58.0 million and universal life investment income of $214.2$322.7 million.

Other income

Other income was $1.1$1.8 million for the sixnine months ended JuneSeptember 30, 2016, primarily due to fees on variable universal life funds.

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Benefits and settlement expenses

Benefit and settlement expenses were $624.0$949.9 million for the sixnine months ended JuneSeptember 30, 2016. This amount includes traditional life benefit and settlement expenses of $172.4$247.6 million and universal life benefit and settlement expenses of $447.4$702.9 million, including $154.9$233.9 million of interest on funds for universal life policies. For the nine months ended September 30, 2016, universal life and BOLI prospective unlocking increased policy benefits and settlement expenses $20.5 million and was largely driven by assumption changes to yields and reinsurance.

Amortization of DAC and VOBA

DAC and VOBA amortization was $63.7$97.3 million for the sixnine months ended JuneSeptember 30, 2016. For the nine months ended September 30, 2016, universal life and BOLI prospective unlocking decreased amortization $2.2 million.

Other operating expenses

Other operating expenses were $36.6$50.9 million for the sixnine months ended JuneSeptember 30, 2016. Other operating expenses for the insurance companies reflect commissions of $114.4$170.6 million, general and administrative expenses of $106.0$156.0 million, and taxes, licenses, and fees of $15.7$24.0 million, partly offset by ceding allowances of $80.3$120.4 million and capitalization of $119.1$179.3 million.

Sales

Sales for the segment were $81.9$123.0 million for the sixnine months ended JuneSeptember 30, 2016, comprised primarily of universal life sales.
 
For The Period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company)

SegmentPre-tax operating income

Segmentpre-tax operating income was $10.0$28.7 million which consisted of universal life earningsoperating income of $19.8$23.4 million, a traditional life operating lossincome of $2.5$8.8 million, and an operating loss of $7.3$3.5 million in other lines.
    
Net premiums and policy fees

Net premiums and policy fees were $403.7$643.7 million for the period of February 1, 2015 to JuneSeptember 30, 2015. Included in this amount are traditional life net premiums of $212.9$328.1 million and universal life policy fees of $190.6$315.2 million.

Net investment income

Net investment income was $198.3$320.6 million for the period of February 1, 2015 to JuneSeptember 30, 2015. Included in this amount is traditional life net investment income of $26.0$42.6 million and universal life investment income of $167.4$270.1 million.

Other income

Other income was $0.9$1.3 million for the period of February 1, 2015 to JuneSeptember 30, 2015, primarily due to fees on variable universal life funds.



Benefits and settlement expenses

Benefit and settlement expenses were $514.3$813.3 million for the period of February 1, 2015 to JuneSeptember 30, 2015. This amount includes traditional life benefit and settlement expenses of $182.6$268.3 million and universal life benefit and settlement expenses of $331.5$544.1 million, including $131.6$212.7 million of interest on funds for universal life policies. For the period of February 1, 2015 to September 30, 2015, universal life and BOLI unlocking increased policy benefits and settlement expenses $1.3 million and was largely driven by assumption changes to lapses and yields.

Amortization of DAC and VOBA

DAC and VOBA amortization was $53.6$80.6 million for the period of February 1, 2015 to JuneSeptember 30, 2015. For the period of February 1, 2015 to September 30, 2015, universal life and BOLI unlocking decreased amortization $1.6 million.

Other operating expenses

Other operating expenses were $25.0$43.0 million for the period of February 1, 2015 to JuneSeptember 30, 2015. Other operating expenses for the insurance companies reflect commissions of $84.8$138.8 million, general and administrative expenses of $84.8$137.3 million, and taxes, licenses, and fees of $12.9$20.6 million, partly offset by ceding allowances of $69.6$109.7 million and capitalization of $87.9$144.0 million.

Sales

Sales for the segment were $63.6$104.1 million for the period of February 1, 2015 to JuneSeptember 30, 2015, comprised primarily of universal life sales.

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For The Period of January 1, 2015 to January 31, 2015 (Predecessor Company)

SegmentPre-tax operating income

Segmentpre-tax operating loss was $2.3 million. Included in that amount was a traditional life operating loss of $3.4 million, universal life earnings of $1.2 million, and an operating loss of $0.1 million in other lines.
 
Net premiums and policy fees
 
Net premiums and policy fees were $84.9 million for the period of January 1, 2015 to January 31, 2015. This amount is comprised of traditional life net premiums of $41.8 million and universal life policy fees of $43.1 million.
 
Net investment income
 
Net investment income was $47.6 million for the period of January 1, 2015 to January 31, 2015. Included in this amount is traditional life net investment income of $6.3 million and universal life investment income of $40.1 million.
 
Other income
 
Other income was $0.4 million for the period of January 1, 2015 to January 31, 2015 primarily due to fees on variable universal life funds.
 
Benefits and settlement expenses
 
Benefit and settlement expenses were $123.5 million for the period of January 1, 2015 to January 31, 2015. This amount includes traditional life benefit and settlement expenses of $44.7 million, including an elevated level of claims and universal life benefit and settlement expenses of $77.7 million, partly comprised of $25.7 million of interest on funds for universal life policies.
 
Amortization of DAC and VOBA
 
DAC and VOBA amortization was $4.6 million for the period of January 1, 2015 to January 31, 2015.
 
Other operating expenses
 
Other operating expenses were $7.1 million for the period of January 1, 2015 to January 31, 2015. Other operating expenses for the insurance companies reflect commissions of $16.6 million, general and administrative expenses of $17.5 million, and taxes of $2.5 million, partly offset by ceding allowances of $12.4 million and capitalization of $17.1 million. 
 
Sales
 
Sales for the segment were $11.5 million for the period of January 1, 2015 to January 31, 2015, almost entirely comprised of universal life sales.
 
Reinsurance


 
Currently, the Life Marketing segment reinsures significant amounts of its life insurance in-force. Pursuant to the underlying reinsurance contracts, reinsurers pay allowances to the segment as a percentage of both first year and renewal premiums. Reinsurance allowances represent the amount the reinsurer is willing to pay for reimbursement of acquisition costs incurred by the direct writer of the business. A portion of reinsurance allowances received is deferred as part of DAC and a portion is recognized immediately as a reduction of other operating expenses. As the non-deferred portion of allowances reduces operating expenses in the period received, these amounts represent a net increase to operating income during that period.
 
Reinsurance allowances do not affect the methodology used to amortize DAC or the period over which such DAC is amortized. However, they do affect the amounts recognized as DAC amortization. DAC on universal life-type, limited-payment long duration, and investment contracts business is amortized based on the estimated gross profits of the policies in-force. Reinsurance allowances are considered in the determination of estimated gross profits, and therefore, impact DAC amortization on these lines of business. Deferred reinsurance allowances on level term business are recorded as ceded DAC, which is amortized over estimated ceded premiums of the policies in-force. Thus, deferred reinsurance allowances may impact DAC amortization. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (Successor Company).
 

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Impact of reinsurance
 
Reinsurance impacted the Life Marketing segment line items as shown in the following table:
 
Life Marketing Segment
Line Item Impact of Reinsurance
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
REVENUES 
      
  
 
      
  
Reinsurance ceded$(204,157) $(211,296) $(387,881) $(279,679) $(51,142)$(198,301) $(175,652) $(586,182) $(455,331) $(51,142)
BENEFITS AND EXPENSES 
      
  
 
      
  
Benefits and settlement expenses(172,367) (188,990) (375,732) (250,725) (58,501)(180,232) (152,744) (555,964) (403,470) (58,501)
Amortization of DAC/VOBA(1,735) (1,389) (3,380) (2,183) (3,766)(1,230) (1,662) (4,610) (3,845) (3,766)
Other operating expenses (1)
(39,425) (38,066) (76,111) (66,104) (11,728)(38,149) (37,953) (114,260) (104,057) (11,728)
Total benefits and expenses(213,527) (228,445) (455,223) (319,012) (73,995)(219,611) (192,359) (674,834) (511,372) (73,995)
                  
NET IMPACT OF REINSURANCE$9,370
 $17,149
 $67,342
 $39,333
 $22,853
$21,310
 $16,707
 $88,652
 $56,041
 $22,853
                  
Allowances received$(41,286) $(40,214) $(80,344) $(69,576) $(12,413)$(40,035) $(40,148) $(120,379) $(109,724) $(12,413)
Less: Amount deferred1,861
 2,148
 4,233
 3,472
 685
1,886
 2,195
 6,119
 5,667
 685
Allowances recognized (ceded other operating expenses)(1)
$(39,425) $(38,066) $(76,111) $(66,104) $(11,728)$(38,149) $(37,953) $(114,260) $(104,057) $(11,728)
 
(1) Other operating expenses ceded per the income statement are equal to reinsurance allowances recognized after capitalization.
 
The table above does not reflect the impact of reinsurance on our net investment income. By ceding business to the assuming companies, we forgo investment income on the reserves ceded. Conversely, the assuming companies will receive investment income on the reserves assumed, which will increase the assuming companies’ profitability on the business that we cede. The net investment income impact to us and the assuming companies has not been quantified. The impact of including foregone investment income would be to substantially reduce the favorable net impact of reinsurance reflected above. We estimate that the impact of foregone investment income would be to reduce the net impact of reinsurance presented in the table above by 100% to 340%. The Life Marketing segment’s reinsurance programs do not materially impact the “other income” line of our income statement.

As shown above, reinsurance had a favorable impact on the Life Marketing segment’s operating income for the periods presented above. The impact of reinsurance is largely due to our quota share coinsurance program in place prior to mid-2005. Under that program, generally 90% of the segment’s traditional new business was ceded to reinsurers. Since mid-2005, a much smaller percentage of overall term business has been ceded due to a change in reinsurance strategy on traditional business. In addition, since 2012, a much smaller percentage of the segment’s new universal life business has been ceded. As a result of that change, the relative impact of reinsurance on the Life Marketing segment’s overall results is expected to decrease over time. While the significance of reinsurance is expected to decline over time, the overall impact of reinsurance for a given period may fluctuate due to variations in mortality and unlocking of balances.

For The Three Months Ended JuneSeptember 30, 2016 as compared to The Three Months Ended JuneSeptember 30, 2015 (Successor Company)

The lowerhigher ceded premium and policy fees for 2016 as compared to 2015 was caused primarily by lower ceded traditional life premiums of $10.0 million and higher universal life policy fees of $3.3 million. Ceded traditional premium for the three months ended June 30, 2016, decreased from the three months ended June 30, 2015, primarily due to fluctuations in the number of policies entering their post level period. Ceded universal life policy fees for three months ended June 30, 2016, increased from the three months ended June 30, 2015, with the increase in the direct universal life policy fees.

Ceded benefits and settlement expenses were lower for the three months ended JuneSeptember 30, 2016 as compared to the three months ended JuneSeptember 30, 2015 due to a smaller increase inwas caused primarily by higher ceded reserves, partly offset bytraditional life premiums of $18.2 million and higher universal life ceded claims. Traditional ceded benefits decreased $9.7 millionpolicy fees of $5.3 million. Ceded traditional life premiums for the three months ended JuneSeptember 30, 2016, increased from the three months ended September 30, 2015, primarily due to post level activity.



Ceded benefits and settlement expenses were higher for the three months ended September 30, 2016, as compared to the three months ended JuneSeptember 30, 2015, primarily due to a smaller increase in post level ceded reserves and lower ceded death benefits. Universalhigher universal life ceded claims, partially offset by net decreases in ceded reserves. Traditional ceded benefits decreased $6.4increased $5.5 million for the three months ended June 30, 2016, as compared to the three months ended

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June 30, 2015, due to a smaller increase in ceded reserves, partly offset by an increase in ceded claims. Ceded universal life claims were $9.1 million higher for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015, primarily due to an increase in post level ceded reserves, partially offset by lower ceded death benefits. Universal life ceded benefits increased $22.0 million for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, due to an increase in ceded claims, partially offset by a decrease in ceded reserves. Ceded universal life claims were $33.9 million higher for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015.

Ceded amortization of DAC and VOBA increaseddecreased for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015, primarily due to the differences in unlocking between the two periods.

Ceded other operating expenses reflect the impact of reinsurance allowances on net income.

For The SixNine Months Ended JuneSeptember 30, 2016 (Successor Company)

The ceded premiums were primarily comprised of ceded traditional life premiums of $181.8$274.3 million and universal life premiums of $204.8$310.6 million.

Ceded benefits and settlement expenses were $375.7$556.0 million for the sixnine months ended JuneSeptember 30, 2016. This amount is driven by ceded claims. Traditional life ceded benefits activity of $186.7$290.2 million was due to ceded death benefits, slightly offset by ceded reserves. Universal life ceded benefits of $189.8$266.8 million were largely comprised of $186.1$277.9 million in ceded universal life claims during the period.

Ceded amortization of DAC and VOBA activity was $3.4$4.6 million for the sixnine months ended JuneSeptember 30, 2016.

Ceded other operating expenses reflect the impact of reinsurance allowances on net income.

Ceded other operating expenses reflect the impact of reinsurance allowances on net income.
 
For The Period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company)

The ceded premiums were primarily comprised of ceded traditional life premiums of $113.7$188.0 million and universal life premiums of $165.5$266.0 million.

Ceded benefits and settlement expenses were $250.7$403.5 million for the period of February 1, 2015 to JuneSeptember 30, 2015. This amount is driven by ceded claims, partly offset by change in ceded reserves. Traditional life ceded benefits activity of $105.5$203.4 million was due to ceded death benefits, partly offset by ceded reserves. Universal life ceded benefits of $145.6$200.5 million were largely comprised of $124.0$181.9 million in ceded universal life claims during the period.

Ceded amortization of DAC and VOBA activity was $2.2$3.8 million for the period of February 1, 2015 to JuneSeptember 30, 2015.
 
For The Period of January 1, 2015 to January 31, 2015 (Predecessor Company)
 
The ceded premiums were primarily comprised of ceded traditional life premiums of $22.6 million and universal life premiums of $27.2 million. Traditional life ceded premiums for the period January 1, 2015 to January 31, 2015 were impacted by runoff and a number of policies with post level activity.
 
Ceded benefits and settlement expenses were $58.5 million for the period of January 1, 2015 to January 31, 2015.  This amount is driven by ceded claims, partly offset by change in ceded reserves. Traditional life ceded benefits activity of $29.3 million was due to ceded death benefits, partly offset by ceded reserves. Universal life ceded benefits of $30.0 million were mainly comprised of $30.4 million in ceded universal life claims during the period.
 
Ceded amortization of DAC and VOBA activity was $3.8 million for the period of January 1, 2015 to January 31, 2015.
 
Ceded other operating expenses reflect the impact of reinsurance allowances on net income.

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Acquisitions
 
Segment Results of Operations
 
Segment results were as follows:
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
REVENUES 
      
  
 
      
  
Gross premiums and policy fees$296,109
 $280,570
 $596,617
 $472,472
 $88,855
$280,598
 $269,715
 $877,215
 $742,187
 $88,855
Reinsurance ceded(91,405) (96,158) (177,827) (144,718) (26,512)(81,457) (91,358) (259,284) (236,076) (26,512)
Net premiums and policy fees204,704
 184,412
 418,790
 327,754
 62,343
199,141
 178,357
 617,931
 506,111
 62,343
Net investment income189,014
 175,815
 376,669
 289,507
 71,088
190,890
 175,928
 567,559
 465,435
 71,088
Other income2,721
 3,173
 5,452
 5,364
 1,240
2,771
 2,218
 8,223
 7,582
 1,240
Total operating revenues396,439
 363,400
 800,911
 622,625
 134,671
392,802
 356,503
 1,193,713
 979,128
 134,671
Realized gains (losses) - investments81,478
 (107,997) 159,603
 (140,624) 73,601
22,825
 4,575
 182,428
 (136,049) 73,601
Realized gains (losses) - derivatives(24,069) 108,582
 (81,859) 140,773
 (68,511)(24,610) (8,937) (106,469) 131,836
 (68,511)
Total revenues453,848
 363,985
 878,655
 622,774
 139,761
391,017
 352,141
 1,269,672
 974,915
 139,761
BENEFITS AND EXPENSES 
      
  
 
      
  
Benefits and settlement expenses312,194
 300,336
 619,728
 506,183
 100,693
293,616
 274,470
 913,344
 780,653
 100,693
Amortization of value of business acquired10,185
 968
 9,092
 838
 4,803
Amortization of VOBA(836) (967) 8,256
 (129) 4,803
Other operating expenses28,775
 24,220
 58,153
 41,658
 9,041
29,865
 23,984
 88,018
 65,642
 9,041
Operating benefits and expenses351,154
 325,524
 686,973
 548,679
 114,537
322,645
 297,487
 1,009,618
 846,166
 114,537
Amortization related to benefits and settlement expenses2,957
 4,859
 5,688
 7,268
 1,233
2,807
 2,752
 8,495
 10,020
 1,233
Amortization of VOBA related to realized gains (losses) - investments2
 (18) 4
 (28) 230
(44) (2) (40) (30) 230
Total benefits and expenses354,113
 330,365
 692,665
 555,919
 116,000
325,408
 300,237
 1,018,073
 856,156
 116,000
INCOME BEFORE INCOME TAX99,735
 33,620
 185,990
 66,855
 23,761
65,609
 51,904
 251,599
 118,759
 23,761
Less: realized gains (losses)57,409
 585
 77,744
 149
 5,090
(1,785) (4,362) 75,959
 (4,213) 5,090
Less: amortization related to benefits and settlement expenses(2,957) (4,859) (5,688) (7,268) (1,233)(2,807) (2,752) (8,495) (10,020) (1,233)
Less: related amortization of VOBA(2) 18
 (4) 28
 (230)44
 2
 40
 30
 (230)
OPERATING INCOME$45,285
 $37,876
 $113,938
 $73,946
 $20,134
PRE-TAX OPERATING INCOME$70,157
 $59,016
 $184,095
 $132,962
 $20,134



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The following table summarizes key data for the Acquisitions segment:
 

Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Average Life Insurance In-Force(1)
 
      
  
 
      
  
Traditional$245,874,701
 $176,915,702
 $227,143,714
 $178,507,100
 $182,177,575
$241,585,970
 $173,787,595
 $231,957,799
 $176,933,932
 $182,177,575
Universal life29,853,251
 32,315,549
 30,094,770
 32,693,540
 33,413,557
29,401,602
 31,683,397
 29,863,714
 32,356,826
 33,413,557
$275,727,952
 $209,231,251
 $257,238,484
 $211,200,640
 $215,591,132
$270,987,572
 $205,470,992
 $261,821,513
 $209,290,758
 $215,591,132
Average Account Values 
      
  
 
      
  
Universal life$4,272,980
 $4,457,553
 $4,293,031
 $4,473,467
 $4,486,843
$4,253,363
 $4,392,446
 $4,279,809
 $4,446,460
 $4,486,843
Fixed annuity(2)
3,567,836
 3,653,446
 3,575,371
 3,674,635
 3,712,578
3,550,366
 3,624,609
 3,567,036
 3,657,960
 3,712,578
Variable annuity1,173,275
 1,383,149
 1,190,594
 1,396,888
 1,396,587
1,174,310
 1,289,074
 1,185,166
 1,360,950
 1,396,587
$9,014,091
 $9,494,148
 $9,058,996
 $9,544,990
 $9,596,008
$8,978,039
 $9,306,129
 $9,032,011
 $9,465,370
 $9,596,008
Interest Spread - UL & Fixed Annuities 
      
  
 
      
  
Net investment income yield4.44% 4.30% 4.44% 4.32% 5.73%4.42% 4.37% 4.43% 4.34% 5.73%
Interest credited to policyholders4.00% 4.09% 4.02% 4.04% 4.05%3.97% 4.06% 4.00% 4.05% 4.05%
Interest spread(3)
0.44% 0.21% 0.42% 0.28% 1.68%0.45% 0.31% 0.43% 0.29% 1.68%

 (1) Amounts are not adjusted for reinsurance ceded.
(2) Includes general account balances held within variable annuity products and is net of coinsurance ceded.
(3) Earned rates exclude portfolios supporting modified coinsurance and crediting rates exclude 100% cessions.
 
For The Three Months Ended JuneSeptember 30, 2016 as compared to The Three Months Ended JuneSeptember 30, 2015 (Successor Company)

SegmentPre-tax operating income

OperatingPre-tax operating income was $45.3$70.2 million for the three months ended JuneSeptember 30, 2016, an increase of $7.4$11.1 million as compared to the three months ended JuneSeptember 30, 2015, primarily due to the addition of the GLAIC reinsurance transaction completed on January 15, 2016. The GLAIC transaction added $9.0$16.7 million to segmentpre-tax operating income for the three months ended JuneSeptember 30, 2016. This was partly offset byFor the expected runoffthree months ended September 30, 2016, the segment recorded favorable prospective unlocking of $1.2 million as compared to favorable $0.3 million of prospective unlocking for the in-force blocks of business.three months ended September 30, 2015.

Operating revenues

Net premiums and policy fees increased $20.3$20.8 million, or 11.0%11.7%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015, primarily due to the premiums associated with the GLAIC reinsurance transaction more than offsetting expected runoff related to other blocks of business. Net investment income increased $13.2$15.0 million, or 7.5%8.5%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015, primarily due to the $14.2$14.1 million impact of the GLAIC reinsurance transaction, partly offset by expected runoff of the in-force business.transaction.

Total benefits and expenses

Total benefits and expenses increased $23.7$25.2 million, or 7.2%8.4%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015. The increase was primarily due to the GLAIC reinsurance transaction, which increased operating benefits and expenses $36.4$29.4 million. This was partly offset by expected runoff of the in-force business.

For The SixNine Months Ended JuneSeptember 30, 2016 (Successor Company)

SegmentPre-tax operating income

OperatingPre-tax operating income was $113.9$184.1 million. This included expected runoff of the in-force blocks of business and $17.8$34.5 million in operating income associated with the GLAIC reinsurance transaction that was completed on January 15, 2016. In


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Tableaddition, the increase included a $0.9 million favorable variance related to prospective unlocking. For the nine months ended September 30, 2016, the segment recorded favorable prospective unlocking of Contents
$1.2 million.

Operating revenues

Operating revenues for the segment were $800.9 million$1.2 billion and included net premiums and policy fees of $418.8$617.9 million, net investment income of $376.7$567.6 million, and other income of $5.5$8.2 million. The segment experienced expected runoff in the current period.

Operating revenues from the GLAIC transaction were $94.8$140.9 million and included net premiums and policy fees of $66.1$98.0 million and net investment income of $28.7$42.9 million.

     Total benefits and expenses

Total benefits and expenses were $692.7 million, primarily due to operating$1.0 billion. Operating benefits and expenses of $687.0 million. Operating benefits and expenses$1.0 billion included benefits and settlement expenses of $619.7$913.3 million, amortization of VOBA of $9.1$8.3 million, and other operating expenses of $58.2$88.0 million. The net impact of amortization related to benefits and settlement expenses and amortization of VOBA related to realized gains (losses) on investments contributed $5.7$8.5 million to total benefits and expenses.

Total benefits and expenses from the GLAIC transaction were $77.1$106.4 million. Operating benefits and expenses included benefits and settlement expenses of $61.7$84.6 million, amortization of VOBA of $6.5$8.6 million, and other operating expenses of $8.9$13.3 million from this transaction.
 
For The Period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company)

SegmentPre-tax operating income

OperatingPre-tax operating income was $73.9$133.0 million. This included expected runoff of the in forcein-force blocks of business.

Operating revenues

Operating revenues for the segment were $622.6$979.1 million and included net premiums and policy fees of $327.8$506.1 million, net investment income of $289.5$465.4 million, and other income of $5.4$7.6 million. The segment experienced expected runoff in the current period.

Total benefits and expenses

Total benefits and expenses were $555.9$856.2 million, primarily due to operating benefits and expenses of $548.7$846.2 million. Operating benefits and expenses included benefits and settlement expenses of $506.2$780.7 million, amortization of VOBA of $0.8$(0.1) million, and other operating expenses of $41.7$65.6 million. The net impact of amortization related to benefits and settlement expenses and amortization of VOBA related to realized gains (losses) on investments contributed $7.2$10.0 million to total benefits and expenses.

 For The Period of January 1, 2015 to January 31, 2015 (Predecessor Company)
 
SegmentPre-tax operating income

OperatingPre-tax operating income was $20.1 million. This included expected runoff of the in force blocks of business.

Operating revenues
 
Operating revenues for the segment were $134.7 million and included net premiums and policy fees of $62.3 million, net investment income of $71.1 million, and other income of $1.2 million. The segment experienced expected runoff in the current period.
 
Total benefits and expenses
 
Total benefits and expenses were $116.0 million, primarily due to operating benefits and expenses of $114.5 million. Operating benefits and expenses included benefits and settlement expenses of $100.7 million, amortization of VOBA of $4.8 million, and other operating expenses of $9.0 million. The net impact of amortization related to benefits and settlement expenses and amortization of VOBA related to realized gains (losses) on investments contributed $1.5 million to total benefits and expenses.
 
Reinsurance
 
The Acquisitions segment currently reinsures portions of both its life and annuity in-force. The cost of reinsurance to the segment is reflected in the chart shown below. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (Successor Company).


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Impact of reinsurance
 
Reinsurance impacted the Acquisitions segment line items as shown in the following table:
 
AcquisitionsAmortization of DAC and VOBA

DAC and VOBA amortization was $97.3 million for the nine months ended September 30, 2016. For the nine months ended September 30, 2016, universal life and BOLI prospective unlocking decreased amortization $2.2 million.

Other operating expenses

Other operating expenses were $50.9 million for the nine months ended September 30, 2016. Other operating expenses for the insurance companies reflect commissions of $170.6 million, general and administrative expenses of $156.0 million, and taxes, licenses, and fees of $24.0 million, partly offset by ceding allowances of $120.4 million and capitalization of $179.3 million.

Sales

Sales for the segment were $123.0 million for the nine months ended September 30, 2016, comprised primarily of universal life sales.
For The Period of February 1, 2015 to September 30, 2015 (Successor Company)

Pre-tax operating income
Segment pre-tax operating income was $28.7 million which consisted of universal life operating income of $23.4 million, traditional life operating income of $8.8 million, and an operating loss of $3.5 million in other lines.
Net premiums and policy fees

Net premiums and policy fees were $643.7 million for the period of February 1, 2015 to September 30, 2015. Included in this amount are traditional life net premiums of $328.1 million and universal life policy fees of $315.2 million.

Net investment income

Net investment income was $320.6 million for the period of February 1, 2015 to September 30, 2015. Included in this amount is traditional life net investment income of $42.6 million and universal life investment income of $270.1 million.

Other income

Other income was $1.3 million for the period of February 1, 2015 to September 30, 2015, primarily due to fees on variable universal life funds.



Benefits and settlement expenses

Benefit and settlement expenses were $813.3 million for the period of February 1, 2015 to September 30, 2015. This amount includes traditional life benefit and settlement expenses of $268.3 million and universal life benefit and settlement expenses of $544.1 million, including $212.7 million of interest on funds for universal life policies. For the period of February 1, 2015 to September 30, 2015, universal life and BOLI unlocking increased policy benefits and settlement expenses $1.3 million and was largely driven by assumption changes to lapses and yields.

Amortization of DAC and VOBA

DAC and VOBA amortization was $80.6 million for the period of February 1, 2015 to September 30, 2015. For the period of February 1, 2015 to September 30, 2015, universal life and BOLI unlocking decreased amortization $1.6 million.

Other operating expenses

Other operating expenses were $43.0 million for the period of February 1, 2015 to September 30, 2015. Other operating expenses for the insurance companies reflect commissions of $138.8 million, general and administrative expenses of $137.3 million, and taxes, licenses, and fees of $20.6 million, partly offset by ceding allowances of $109.7 million and capitalization of $144.0 million.

Sales

Sales for the segment were $104.1 million for the period of February 1, 2015 to September 30, 2015, comprised primarily of universal life sales.

For The Period of January 1, 2015 to January 31, 2015 (Predecessor Company)

Pre-tax operating income

Segment pre-tax operating loss was $2.3 million. Included in that amount was a traditional life operating loss of $3.4 million, universal life earnings of $1.2 million, and an operating loss of $0.1 million in other lines.
Net premiums and policy fees
Net premiums and policy fees were $84.9 million for the period of January 1, 2015 to January 31, 2015. This amount is comprised of traditional life net premiums of $41.8 million and universal life policy fees of $43.1 million.
Net investment income
Net investment income was $47.6 million for the period of January 1, 2015 to January 31, 2015. Included in this amount is traditional life net investment income of $6.3 million and universal life investment income of $40.1 million.
Other income
Other income was $0.4 million for the period of January 1, 2015 to January 31, 2015 primarily due to fees on variable universal life funds.
Benefits and settlement expenses
Benefit and settlement expenses were $123.5 million for the period of January 1, 2015 to January 31, 2015. This amount includes traditional life benefit and settlement expenses of $44.7 million, including an elevated level of claims and universal life benefit and settlement expenses of $77.7 million, partly comprised of $25.7 million of interest on funds for universal life policies.
Amortization of DAC and VOBA
DAC and VOBA amortization was $4.6 million for the period of January 1, 2015 to January 31, 2015.
Other operating expenses
Other operating expenses were $7.1 million for the period of January 1, 2015 to January 31, 2015. Other operating expenses for the insurance companies reflect commissions of $16.6 million, general and administrative expenses of $17.5 million, and taxes of $2.5 million, partly offset by ceding allowances of $12.4 million and capitalization of $17.1 million. 
Sales
Sales for the segment were $11.5 million for the period of January 1, 2015 to January 31, 2015, almost entirely comprised of universal life sales.
Reinsurance


Currently, the Life Marketing segment reinsures significant amounts of its life insurance in-force. Pursuant to the underlying reinsurance contracts, reinsurers pay allowances to the segment as a percentage of both first year and renewal premiums. Reinsurance allowances represent the amount the reinsurer is willing to pay for reimbursement of acquisition costs incurred by the direct writer of the business. A portion of reinsurance allowances received is deferred as part of DAC and a portion is recognized immediately as a reduction of other operating expenses. As the non-deferred portion of allowances reduces operating expenses in the period received, these amounts represent a net increase to operating income during that period.
Reinsurance allowances do not affect the methodology used to amortize DAC or the period over which such DAC is amortized. However, they do affect the amounts recognized as DAC amortization. DAC on universal life-type, limited-payment long duration, and investment contracts business is amortized based on the estimated gross profits of the policies in-force. Reinsurance allowances are considered in the determination of estimated gross profits, and therefore, impact DAC amortization on these lines of business. Deferred reinsurance allowances on level term business are recorded as ceded DAC, which is amortized over estimated ceded premiums of the policies in-force. Thus, deferred reinsurance allowances may impact DAC amortization. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (Successor Company).


Impact of reinsurance
Reinsurance impacted the Life Marketing segment line items as shown in the following table:
Life Marketing Segment
Line Item Impact of Reinsurance
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
REVENUES 
      
  
 
      
  
Reinsurance ceded$(91,405) $(96,158) $(177,827) $(144,718) $(26,512)$(198,301) $(175,652) $(586,182) $(455,331) $(51,142)
BENEFITS AND EXPENSES 
      
  
 
      
  
Benefits and settlement expenses(69,700) (87,775) (134,223) (122,064) (25,832)(180,232) (152,744) (555,964) (403,470) (58,501)
Amortization of value of business acquired(77) (76) (195) (85) (233)
Amortization of DAC/VOBA(1,230) (1,662) (4,610) (3,845) (3,766)
Other operating expenses(1)(10,902) (11,312) (21,989) (19,597) (3,647)(38,149) (37,953) (114,260) (104,057) (11,728)
Total benefits and expenses(80,679) (99,163) (156,407) (141,746) (29,712)(219,611) (192,359) (674,834) (511,372) (73,995)
                  
NET IMPACT OF REINSURANCE (1)
$(10,726) $3,005
 $(21,420) $(2,972) $3,200
$21,310
 $16,707
 $88,652
 $56,041
 $22,853
         
Allowances received$(40,035) $(40,148) $(120,379) $(109,724) $(12,413)
Less: Amount deferred1,886
 2,195
 6,119
 5,667
 685
Allowances recognized (ceded other operating expenses)(1)
$(38,149) $(37,953) $(114,260) $(104,057) $(11,728)

(1) Assumes no investmentOther operating expenses ceded per the income on reinsurance. Foregone investment income would substantially reduce the favorable impact of reinsurance.statement are equal to reinsurance allowances recognized after capitalization.
 
The segment’stable above does not reflect the impact of reinsurance programs do not materially impact the other income line of the income statement. In addition,on our net investment income generally has no direct impact on reinsurance cost. However, byincome. By ceding business to the assuming companies, we forgo investment income on the reserves ceded to the assuming companies.ceded. Conversely, the assuming companies will receive investment income on the reserves assumed, which will increase the assuming companies’ profitability on the business assumed from the Company. For business ceded under modified coinsurance arrangements, the amount of investment income attributable to the assuming company is included as part of the overall change in policy reserves and, as such, is reflected in benefit and settlement expenses.that we cede. The net investment income impact to us and the assuming companies has not been quantified as it is not fully reflected in our consolidated financial statements.
quantified. The impact of including foregone investment income would be to substantially reduce the favorable net impact of reinsurance reflected above. We estimate that the impact of foregone investment income would be to reduce the net impact of reinsurance presented in the table above by 100% to 340%. The Life Marketing segment’s reinsurance programs do not materially impact the “other income” line of our income statement.

As shown above, reinsurance had a favorable impact on the Life Marketing segment’s operating income for the periods presented above. The impact of reinsurance is less favorable by $13.7 millionlargely due to our quota share coinsurance program in place prior to mid-2005. Under that program, generally 90% of the segment’s traditional new business was ceded to reinsurers. Since mid-2005, a much smaller percentage of overall term business has been ceded due to a change in reinsurance strategy on traditional business. In addition, since 2012, a much smaller percentage of the segment’s new universal life business has been ceded. As a result of that change, the relative impact of reinsurance on the Life Marketing segment’s overall results is expected to decrease over time. While the significance of reinsurance is expected to decline over time, the overall impact of reinsurance for a given period may fluctuate due to variations in mortality and unlocking of balances.

For The Three Months Ended September 30, 2016 as compared to The Three Months Ended September 30, 2015 (Successor Company)

The higher ceded premium and policy fees for the three months ended JuneSeptember 30, 2016 as compared to the three months ended JuneSeptember 30, 2015 was caused primarily by higher ceded traditional life premiums of $18.2 million and higher universal life policy fees of $5.3 million. Ceded traditional life premiums for the three months ended September 30, 2016, increased from the three months ended September 30, 2015, primarily due to lower ceded claims. In the three months ended June 30, 2016, ceded revenues decreased by $4.8 million, while ceded benefits and expenses decreased by $18.5 million primarily due to lower claims.post level activity.

The net impact of reinsurance activity for the six months ended June 30, 2016 (Successor Company) was primarily due to ceded premiums in relation to ceded benefits and settlement expenses.

Ceded benefits and settlement expenses were higher for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, due to higher universal life ceded claims, partially offset by net decreases in ceded reserves. Traditional ceded benefits increased $5.5 million for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, primarily due to an increase in post level ceded reserves, partially offset by lower ceded death benefits. Universal life ceded benefits increased $22.0 million for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, due to an increase in ceded claims, partially offset by a decrease in ceded reserves. Ceded universal life claims were $33.9 million higher for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015.

Ceded amortization of DAC and VOBA decreased for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, primarily due to the differences in unlocking between the two periods.

Ceded other operating expenses reflect the impact of reinsurance allowances on net income.

For The Nine Months Ended September 30, 2016 (Successor Company)

The ceded premiums were primarily comprised of ceded traditional life premiums of $274.3 million and universal life premiums of $310.6 million.

Ceded benefits and settlement expenses were $556.0 million for the nine months ended September 30, 2016. This amount is driven by ceded claims. Traditional life ceded benefits activity of $290.2 million was due to ceded death benefits, slightly offset by ceded reserves. Universal life ceded benefits of $266.8 million were largely comprised of $277.9 million in ceded universal life claims during the period.

The netCeded amortization of DAC and VOBA activity was $4.6 million for the nine months ended September 30, 2016.

Ceded other operating expenses reflect the impact of reinsurance activityallowances on net income.

Ceded other operating expenses reflect the impact of reinsurance allowances on net income.
For The Period of February 1, 2015 to September 30, 2015 (Successor Company)

The ceded premiums were primarily comprised of ceded traditional life premiums of $188.0 million and universal life premiums of $266.0 million.

Ceded benefits and settlement expenses were $403.5 million for the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company)2015. This amount is driven by ceded claims, partly offset by change in ceded reserves. Traditional life ceded benefits activity of $203.4 million was primarily due to ceded premiums in relation todeath benefits, partly offset by ceded reserves. Universal life ceded benefits of $200.5 million were largely comprised of $181.9 million in ceded universal life claims during the period.

Ceded amortization of DAC and settlement expenses. VOBA activity was $3.8 million for the period of February 1, 2015 to September 30, 2015.
For The Period of January 1, 2015 to January 31, 2015 (Predecessor Company)
The ceded premiums were primarily comprised of ceded traditional life premiums of $22.6 million and universal life premiums of $27.2 million. Traditional life ceded premiums for the period January 1, 2015 to January 31, 2015 were impacted by runoff and a number of policies with post level activity.
Ceded benefits and settlement expenses were primarily driven by ceded claims.
The net impact of reinsurance activity$58.5 million for the period of January 1, 2015 to January 31, 2015 (Predecessor Company)2015.  This amount is driven by ceded claims, partly offset by change in ceded reserves. Traditional life ceded benefits activity of $29.3 million was primarily due to ceded premiums in relation todeath benefits, partly offset by ceded reserves. Universal life ceded benefits and settlement expenses. Ceded benefits and settlement expensesof $30.0 million were primarily driven bymainly comprised of $30.4 million in ceded claims.universal life claims during the period.
 

Ceded amortization of DAC and VOBA activity was $3.8 million for the period of January 1, 2015 to January 31, 2015.
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TableCeded other operating expenses reflect the impact of Contents
reinsurance allowances on net income.


AnnuitiesAcquisitions
 
Segment Results of Operations
 
Segment results were as follows:
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
REVENUES 
      
  
 
      
  
Gross premiums and policy fees$36,455
 $38,272
 $72,011
 $63,219
 $12,473
$280,598
 $269,715
 $877,215
 $742,187
 $88,855
Reinsurance ceded(19,964) (20,167) (40,094) (34,584) (6,118)(81,457) (91,358) (259,284) (236,076) (26,512)
Net premiums and policy fees16,491
 18,105
 31,917
 28,635
 6,355
199,141
 178,357
 617,931
 506,111
 62,343
Net investment income79,169
 82,853
 157,921
 133,785
 37,189
190,890
 175,928
 567,559
 465,435
 71,088
Realized gains (losses) - derivatives(9,209) (7,667) (18,121) (12,559) (2,402)
Other income39,516
 40,298
 77,165
 66,972
 12,690
2,771
 2,218
 8,223
 7,582
 1,240
Total operating revenues125,967
 133,589
 248,882
 216,833
 53,832
392,802
 356,503
 1,193,713
 979,128
 134,671
Realized gains (losses) - investments871
 (1,427) 298
 (2,032) (145)22,825
 4,575
 182,428
 (136,049) 73,601
Realized gains (losses) - derivatives, net of economic cost61,759
 (88,694) 157,933
 (121,989) 77,231
Realized gains (losses) - derivatives(24,610) (8,937) (106,469) 131,836
 (68,511)
Total revenues188,597
 43,468
 407,113
 92,812
 130,918
391,017
 352,141
 1,269,672
 974,915
 139,761
BENEFITS AND EXPENSES 
      
  
 
      
  
Benefits and settlement expenses47,570
 62,931
 97,536
 95,379
 26,919
293,616
 274,470
 913,344
 780,653
 100,693
Amortization of deferred policy acquisition costs and value of business acquired(3,212) (3,320) (8,298) (5,724) 6,217
Amortization of VOBA(836) (967) 8,256
 (129) 4,803
Other operating expenses34,129
 33,465
 66,888
 55,292
 9,333
29,865
 23,984
 88,018
 65,642
 9,041
Operating benefits and expenses78,487
 93,076
 156,126
 144,947
 42,469
322,645
 297,487
 1,009,618
 846,166
 114,537
Amortization related to benefits and settlement expenses3,228
 (737) 2,970
 (1,349) 3,128
2,807
 2,752
 8,495
 10,020
 1,233
Amortization of DAC/VOBA related to realized gains (losses) - investments(22,875) 2,411
 (23,975) 8,061
 (13,216)
Amortization of VOBA related to realized gains (losses) - investments(44) (2) (40) (30) 230
Total benefits and expenses58,840
 94,750
 135,121
 151,659
 32,381
325,408
 300,237
 1,018,073
 856,156
 116,000
INCOME (LOSS) BEFORE INCOME TAX129,757
 (51,282) 271,992
 (58,847) 98,537
Less: realized gains (losses) - investments871
 (1,427) 298
 (2,032) (145)
Less: realized gains (losses) - derivatives, net of economic cost61,759
 (88,694) 157,933
 (121,989) 77,231
INCOME BEFORE INCOME TAX65,609
 51,904
 251,599
 118,759
 23,761
Less: realized gains (losses)(1,785) (4,362) 75,959
 (4,213) 5,090
Less: amortization related to benefits and settlement expenses(3,228) 737
 (2,970) 1,349
 (3,128)(2,807) (2,752) (8,495) (10,020) (1,233)
Less: related amortization of DAC/VOBA22,875
 (2,411) 23,975
 (8,061) 13,216
OPERATING INCOME$47,480
 $40,513
 $92,756
 $71,886
 $11,363
Less: related amortization of VOBA44
 2
 40
 30
 (230)
PRE-TAX OPERATING INCOME$70,157
 $59,016
 $184,095
 $132,962
 $20,134



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The following tables summarizetable summarizes key data for the AnnuitiesAcquisitions segment:
 

Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Sales 
      
  
Fixed annuity$171,231
 $111,131
 $380,536
 $153,607
 $28,335
Average Life Insurance In-Force(1)
 
      
  
Traditional$241,585,970
 $173,787,595
 $231,957,799
 $176,933,932
 $182,177,575
Universal life29,401,602
 31,683,397
 29,863,714
 32,356,826
 33,413,557
$270,987,572
 $205,470,992
 $261,821,513
 $209,290,758
 $215,591,132
Average Account Values 
      
  
Universal life$4,253,363
 $4,392,446
 $4,279,809
 $4,446,460
 $4,486,843
Fixed annuity(2)
3,550,366
 3,624,609
 3,567,036
 3,657,960
 3,712,578
Variable annuity151,583
 361,559
 325,097
 545,706
 59,115
1,174,310
 1,289,074
 1,185,166
 1,360,950
 1,396,587
$322,814
 $472,690
 $705,633
 $699,313
 $87,450
$8,978,039
 $9,306,129
 $9,032,011
 $9,465,370
 $9,596,008
Average Account Values 
      
  
Fixed annuity(1)
$8,210,847
 $8,285,451
 $8,245,283
 $8,255,571
 $8,171,438
Variable annuity12,282,904
 12,711,950
 12,305,789
 12,658,770
 12,365,217
$20,493,751
 $20,997,401
 $20,551,072
 $20,914,341
 $20,536,655
Interest Spread - Fixed Annuities(2)
 
      
  
Interest Spread - UL & Fixed Annuities 
      
  
Net investment income yield3.65% 3.78% 3.64% 3.67% 5.22%4.42% 4.37% 4.43% 4.34% 5.73%
Interest credited to policyholders2.65
 2.86
 2.68
 2.88
 3.17
3.97% 4.06% 4.00% 4.05% 4.05%
Interest spread1.00% 0.92% 0.96% 0.79% 2.05%
Interest spread(3)
0.45% 0.31% 0.43% 0.29% 1.68%

(1) Amounts are not adjusted for reinsurance ceded.
(2) Includes general account balances held within VA products.variable annuity products and is net of coinsurance ceded.
(2)(3) Interest spread on average general account values.
 Successor Company Predecessor Company
 
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 February 1, 2015
to
June 30, 2015
 January 1, 2015
to
January 31, 2015
 (Dollars In Thousands) (Dollars In Thousands)
Derivatives related to VA contracts: 
      
  
Interest rate futures - VA$31,266
 $(14,183) $69,067
 $(14,231) $1,413
Equity futures - VA(21,328) (5,267) (24,556) (37,736) 9,221
Currency futures - VA11,112
 (8,709) 4,954
 (2,572) 7,778
Equity options - VA(3,232) (3,550) 13,072
 (25,324) 3,047
Interest rate swaptions - VA(749) 2,547
 (2,983) (8,781) 9,268
Interest rate swaps - VA81,554
 (121,167) 207,147
 (175,958) 122,710
Embedded derivative - GMWB(1)
(66,019) 45,969
 (132,695) 81,839
 (68,503)
Funds withheld derivative17,850
 6,335
 10,052
 44,571
 (9,073)
Total derivatives related to VA contracts50,454
 (98,025) 144,058
 (138,192) 75,861
Derivatives related to FIA contracts: 
      
  
Embedded derivative - FIA710
 290
 (1,452) (2,293) 1,769
Equity futures - FIA651
 123
 2,033
 307
 (184)
Volatility futures - FIA
 25
 
 29
 
Equity options - FIA735
 1,226
 (4,827) 5,601
 (2,617)
Total derivatives related to FIA contracts2,096
 1,664
 (4,246) 3,644
 (1,032)
VA GMWB economic cost(2)
9,209
 7,667
 18,121
 12,559
 2,402
Realized gains (losses) - derivatives, net of economic cost$61,759
 $(88,694) $157,933
 $(121,989) $77,231



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Table of Contents

(1)  Includes impact of nonperformance risk of $0.1 million, $10.9 million, $2.3 million, $(1.4) million,Earned rates exclude portfolios supporting modified coinsurance and $3.1 million for the three and six months ended June 30, 2016 (Successor Company), the three months ended June 30, 2015 (Successor Company), for the period of February 1, 2015 to June 30, 2015 (Successor Company), and for the period of January 1, 2015 to January 31, 2015 (Predecessor Company), respectively.
(2)  Economic cost is the long-term expected average cost of providing the product benefit over the life of the policy based on product pricing assumptions. These include assumptions about the economic/market environment, and elective and non-elective policy owner behavior (e.g. lapses, withdrawal timing, mortality, etc.).crediting rates exclude 100% cessions.
 
 Successor Company
 
As of
June 30, 2016
 
As of
December 31, 2015
 (Dollars In Thousands)
GMDB - Net amount at risk(1)
$158,462
 $166,765
GMDB Reserves26,118
 26,646
GMWB and GMAB Reserves151,218
 18,522
Account value subject to GMWB rider9,306,967
 9,306,644
GMWB Benefit Base10,468,569
 10,304,939
GMAB Benefit Base4,124
 4,323
S&P 500® Index2,099
 2,044
(1) Guaranteed benefits in excess of contract holder account balance.

For The Three Months Ended JuneSeptember 30, 2016 as compared to The Three Months Ended JuneSeptember 30, 2015 (Successor Company)

SegmentPre-tax operating income

OperatingPre-tax operating income was $47.5$70.2 million for the three months ended JuneSeptember 30, 2016, an increase of $11.1 million as compared to $40.5the three months ended September 30, 2015, primarily due to the addition of the GLAIC reinsurance transaction completed on January 15, 2016. The GLAIC transaction added $16.7 million to pre-tax operating income for the three months ended JuneSeptember 30, 2015, an increase2016. For the three months ended September 30, 2016, the segment recorded favorable prospective unlocking of $7.0$1.2 million or 17.2%. This variance was primarilyas compared to favorable $0.3 million of prospective unlocking for the result of lower credited interest and favorable SPIA mortality offset by lower investment income and lower fee and other income from the VA line of business.three months ended September 30, 2015.

Operating revenues

Segment operating revenues decreased $7.6Net premiums and policy fees increased $20.8 million, or 5.7%11.7%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015, primarily due to decreases in policy fees andthe premiums associated with the GLAIC reinsurance transaction more than offsetting expected runoff related to other income from the VA lineblocks of business and decreases inbusiness. Net investment income from the market value adjusted (“MVA”) and single premium deferred annuity (“SPDA”) lines of business. Those decreases were partially offset by increased investment income in the fixed indexed annuity (“FIA”) line of business. Average fixed account balances decreased 0.9% and average variable account balances decreased 4.7%$15.0 million, or 8.5%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015.2015, primarily due to the $14.1 million impact of the GLAIC reinsurance transaction.

BenefitsTotal benefits and settlement expenses

BenefitsTotal benefits and settlement expenses decreased $15.4increased $25.2 million, or 24.4%8.4%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015. This decreaseThe increase was primarily the result of lower credited interest and a $9.8 million favorable change in SPIA mortality results.

Amortization of DAC and VOBA

DAC and VOBA amortization unfavorably changed by $0.1 million, or 3.3%, for the three months ended June 30, 2016, as compareddue to the three months ended June 30, 2015.

OtherGLAIC reinsurance transaction, which increased operating expenses

Other operatingbenefits and expenses increased $0.7 million, or 2.0%, for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015. Increases in non-deferred acquisition, maintenance, and overhead expenses were$29.4 million. This was partly offset by lower non-deferred commission expense.

Sales

Total sales decreased $149.9 million, or 31.7%, forexpected runoff of the three months ended June 30, 2016, as compared to the three months ended June 30, 2015. Sales of variable annuities decreased $210.0 million, or 58.1% for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015. Sales of fixed annuities increased by $60.1 million, or 54.1%, for the three months ended June 30, 2016, as compared to the three months ended June 30, 2015, driven by an increase in FIA sales.


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in-force business.

For The SixNine Months Ended JuneSeptember 30, 2016 (Successor Company)

SegmentPre-tax operating income

OperatingPre-tax operating income was $92.8$184.1 million. This included expected runoff of the in-force blocks of business and $34.5 million whichin operating income associated with the GLAIC reinsurance transaction that was completed on January 15, 2016. In


addition, the increase included $42.0a $0.9 million favorable variance related to prospective unlocking. For the nine months ended September 30, 2016, the segment recorded favorable prospective unlocking of variable annuity operating earnings, $59.5 million of fixed annuity operating earnings, and a $8.7 million loss in other annuity earnings. The fixed annuity results were positively impacted by $11.3 million of favorable SPIA mortality.$1.2 million.

Operating revenues

Segment operatingOperating revenues were $248.9 million for the six months ended June 30, 2016. Operating revenue consistedsegment were $1.2 billion and included net premiums and policy fees of $157.9$617.9 million, of net investment income $31.9of $567.6 million, and other income of $8.2 million. The segment experienced expected runoff in the current period.

Operating revenues from the GLAIC transaction were $140.9 million and included net premiums and policy fees $77.2of $98.0 million and net investment income of other income, and $18.1 million of losses related to GMWB economic cost from the VA line of business.$42.9 million.

BenefitsTotal benefits and settlement expenses

BenefitsTotal benefits and expenses were $1.0 billion. Operating benefits and expenses of $1.0 billion included benefits and settlement expenses were $97.5of $913.3 million, for the six months ended June 30, 2016. Included in that amount was $11.3 millionamortization of favorable SPIA mortality results and $0.8 millionVOBA of favorable unlocking.

Amortization of DAC and VOBA

DAC and VOBA amortization was $8.3 million, favorable for the six months ended June 30, 2016 due to negative VOBA assigned to some of the products within the segment. There was $0.2 million of favorable unlocking recorded by the segment during the six months ended June 30, 2016.

Other operating expenses

Otherand other operating expenses were $66.9 million for the six months ended June 30, 2016. Operating expenses consisted of $17.5 million in acquisition expenses, $25.9 million in maintenance$88.0 million. The net impact of amortization related to benefits and overheadsettlement expenses and $23.5amortization of VOBA related to realized gains (losses) on investments contributed $8.5 million in commissionto total benefits and expenses.

Sales

Total salesbenefits and expenses from the GLAIC transaction were $705.6$106.4 million. Operating benefits and expenses included benefits and settlement expenses of $84.6 million, for the six months ended June 30, 2016. Fixed annuity sales were $380.5amortization of VOBA of $8.6 million, and variable annuity sales were $325.1 million.other operating expenses of $13.3 million from this transaction.
 
For The Period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company)

SegmentPre-tax operating income

SegmentPre-tax operating income was $71.9 million which$133.0 million. This included $44.4 millionexpected runoff of fixed annuity operating earnings and $34.2 millionthe in-force blocks of variable annuity operating earnings. The fixed annuity results were positively impacted by $4.8 million of favorable SPIA mortality.business.

Operating revenues

Segment operatingOperating revenues were $216.8 million for the periodsegment were $979.1 million and included net premiums and policy fees of February$506.1 million, net investment income of $465.4 million, and other income of $7.6 million. The segment experienced expected runoff in the current period.

Total benefits and expenses

Total benefits and expenses were $856.2 million, primarily due to operating benefits and expenses of $846.2 million. Operating benefits and expenses included benefits and settlement expenses of $780.7 million, amortization of VOBA of $(0.1) million, and other operating expenses of $65.6 million. The net impact of amortization related to benefits and settlement expenses and amortization of VOBA related to realized gains (losses) on investments contributed $10.0 million to total benefits and expenses.

For The Period of January 1, 2015 to June 30, 2015. Operating revenue consistedJanuary 31, 2015 (Predecessor Company)
Pre-tax operating income

Pre-tax operating income was $20.1 million. This included expected runoff of $133.8 million of net investment income, $63.2 million of policy fees, $34.6 million of ceded premiums, $67.0 millionthe in other income, and $12.6 million related to GMWB economic cost from the VA lineforce blocks of business.

BenefitsOperating revenues
Operating revenues for the segment were $134.7 million and included net premiums and policy fees of $62.3 million, net investment income of $71.1 million, and other income of $1.2 million. The segment experienced expected runoff in the current period.
Total benefits and expenses
Total benefits and expenses were $116.0 million, primarily due to operating benefits and expenses of $114.5 million. Operating benefits and expenses included benefits and settlement expenses

Benefits of $100.7 million, amortization of VOBA of $4.8 million, and other operating expenses of $9.0 million. The net impact of amortization related to benefits and settlement expenses were $95.4and amortization of VOBA related to realized gains (losses) on investments contributed $1.5 million to total benefits and expenses.
Reinsurance
The Acquisitions segment currently reinsures portions of both its life and annuity in-force. The cost of reinsurance to the segment is reflected in the chart shown below. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the period of February 1,fiscal year ended December 31, 2015 to June 30, 2015. Included in that amount was $4.8 million of favorable SPIA mortality results, which was partially offset by an increase in guaranteed benefit reserves of $1.6 million from the VA line of business.(Successor Company).



Impact of reinsurance
Reinsurance impacted the Acquisitions segment line items as shown in the following table:
Amortization of DAC and VOBA

DAC and VOBA amortization was $97.3 million for the nine months ended September 30, 2016. For the nine months ended September 30, 2016, universal life and BOLI prospective unlocking decreased amortization $2.2 million.

Other operating expenses

Other operating expenses were $50.9 million for the nine months ended September 30, 2016. Other operating expenses for the insurance companies reflect commissions of $170.6 million, general and administrative expenses of $156.0 million, and taxes, licenses, and fees of $24.0 million, partly offset by ceding allowances of $120.4 million and capitalization of $179.3 million.

Sales

Sales for the segment were $123.0 million for the nine months ended September 30, 2016, comprised primarily of universal life sales.
For The Period of February 1, 2015 to September 30, 2015 (Successor Company)

Pre-tax operating income
Segment pre-tax operating income was $28.7 million which consisted of universal life operating income of $23.4 million, traditional life operating income of $8.8 million, and an operating loss of $3.5 million in other lines.
Net premiums and policy fees

Net premiums and policy fees were $643.7 million for the period of February 1, 2015 to September 30, 2015. Included in this amount are traditional life net premiums of $328.1 million and universal life policy fees of $315.2 million.

Net investment income

Net investment income was $320.6 million for the period of February 1, 2015 to September 30, 2015. Included in this amount is traditional life net investment income of $42.6 million and universal life investment income of $270.1 million.

Other income

Other income was $1.3 million for the period of February 1, 2015 to September 30, 2015, primarily due to fees on variable universal life funds.



Benefits and settlement expenses

Benefit and settlement expenses were $813.3 million for the period of February 1, 2015 to September 30, 2015. This amount includes traditional life benefit and settlement expenses of $268.3 million and universal life benefit and settlement expenses of $544.1 million, including $212.7 million of interest on funds for universal life policies. For the period of February 1, 2015 to September 30, 2015, universal life and BOLI unlocking increased policy benefits and settlement expenses $1.3 million and was largely driven by assumption changes to lapses and yields.

Amortization of DAC and VOBA

DAC and VOBA amortization was $80.6 million for the period of February 1, 2015 to September 30, 2015. For the period of February 1, 2015 to September 30, 2015, universal life and BOLI unlocking decreased amortization $1.6 million.

Other operating expenses

Other operating expenses were $43.0 million for the period of February 1, 2015 to September 30, 2015. Other operating expenses for the insurance companies reflect commissions of $138.8 million, general and administrative expenses of $137.3 million, and taxes, licenses, and fees of $20.6 million, partly offset by ceding allowances of $109.7 million and capitalization of $144.0 million.

Sales

Sales for the segment were $104.1 million for the period of February 1, 2015 to September 30, 2015, comprised primarily of universal life sales.

For The Period of January 1, 2015 to January 31, 2015 (Predecessor Company)

Pre-tax operating income

Segment pre-tax operating loss was $2.3 million. Included in that amount was a traditional life operating loss of $3.4 million, universal life earnings of $1.2 million, and an operating loss of $0.1 million in other lines.
Net premiums and policy fees
Net premiums and policy fees were $84.9 million for the period of January 1, 2015 to January 31, 2015. This amount is comprised of traditional life net premiums of $41.8 million and universal life policy fees of $43.1 million.
Net investment income
Net investment income was $47.6 million for the period of January 1, 2015 to January 31, 2015. Included in this amount is traditional life net investment income of $6.3 million and universal life investment income of $40.1 million.
Other income
Other income was $0.4 million for the period of January 1, 2015 to January 31, 2015 primarily due to fees on variable universal life funds.
Benefits and settlement expenses
Benefit and settlement expenses were $123.5 million for the period of January 1, 2015 to January 31, 2015. This amount includes traditional life benefit and settlement expenses of $44.7 million, including an elevated level of claims and universal life benefit and settlement expenses of $77.7 million, partly comprised of $25.7 million of interest on funds for universal life policies.
Amortization of DAC and VOBA
DAC and VOBA amortization was $4.6 million for the period of January 1, 2015 to January 31, 2015.
Other operating expenses
Other operating expenses were $7.1 million for the period of January 1, 2015 to January 31, 2015. Other operating expenses for the insurance companies reflect commissions of $16.6 million, general and administrative expenses of $17.5 million, and taxes of $2.5 million, partly offset by ceding allowances of $12.4 million and capitalization of $17.1 million. 
Sales
Sales for the segment were $11.5 million for the period of January 1, 2015 to January 31, 2015, almost entirely comprised of universal life sales.
Reinsurance


Currently, the Life Marketing segment reinsures significant amounts of its life insurance in-force. Pursuant to the underlying reinsurance contracts, reinsurers pay allowances to the segment as a percentage of both first year and renewal premiums. Reinsurance allowances represent the amount the reinsurer is willing to pay for reimbursement of acquisition costs incurred by the direct writer of the business. A portion of reinsurance allowances received is deferred as part of DAC and a portion is recognized immediately as a reduction of other operating expenses. As the non-deferred portion of allowances reduces operating expenses in the period received, these amounts represent a net increase to operating income during that period.
Reinsurance allowances do not affect the methodology used to amortize DAC or the period over which such DAC is amortized. However, they do affect the amounts recognized as DAC amortization. DAC on universal life-type, limited-payment long duration, and investment contracts business is amortized based on the estimated gross profits of the policies in-force. Reinsurance allowances are considered in the determination of estimated gross profits, and therefore, impact DAC amortization on these lines of business. Deferred reinsurance allowances on level term business are recorded as ceded DAC, which is amortized over estimated ceded premiums of the policies in-force. Thus, deferred reinsurance allowances may impact DAC amortization. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (Successor Company).


Impact of reinsurance
Reinsurance impacted the Life Marketing segment line items as shown in the following table:
Life Marketing Segment
Line Item Impact of Reinsurance
 Successor Company Predecessor Company
 For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
 (Dollars In Thousands) (Dollars In Thousands)
REVENUES 
      
  
Reinsurance ceded$(198,301) $(175,652) $(586,182) $(455,331) $(51,142)
BENEFITS AND EXPENSES 
      
  
Benefits and settlement expenses(180,232) (152,744) (555,964) (403,470) (58,501)
Amortization of DAC/VOBA(1,230) (1,662) (4,610) (3,845) (3,766)
Other operating expenses (1)
(38,149) (37,953) (114,260) (104,057) (11,728)
Total benefits and expenses(219,611) (192,359) (674,834) (511,372) (73,995)
          
NET IMPACT OF REINSURANCE$21,310
 $16,707
 $88,652
 $56,041
 $22,853
          
Allowances received$(40,035) $(40,148) $(120,379) $(109,724) $(12,413)
Less: Amount deferred1,886
 2,195
 6,119
 5,667
 685
Allowances recognized (ceded other operating expenses)(1)
$(38,149) $(37,953) $(114,260) $(104,057) $(11,728)
(1) Other operating expenses ceded per the income statement are equal to reinsurance allowances recognized after capitalization.
The table above does not reflect the impact of reinsurance on our net investment income. By ceding business to the assuming companies, we forgo investment income on the reserves ceded. Conversely, the assuming companies will receive investment income on the reserves assumed, which will increase the assuming companies’ profitability on the business that we cede. The net investment income impact to us and the assuming companies has not been quantified. The impact of including foregone investment income would be to substantially reduce the favorable net impact of reinsurance reflected above. We estimate that the impact of foregone investment income would be to reduce the net impact of reinsurance presented in the table above by 100% to 340%. The Life Marketing segment’s reinsurance programs do not materially impact the “other income” line of our income statement.

As shown above, reinsurance had a favorable impact on the Life Marketing segment’s operating income for the periods presented above. The impact of reinsurance is largely due to our quota share coinsurance program in place prior to mid-2005. Under that program, generally 90% of the segment’s traditional new business was ceded to reinsurers. Since mid-2005, a much smaller percentage of overall term business has been ceded due to a change in reinsurance strategy on traditional business. In addition, since 2012, a much smaller percentage of the segment’s new universal life business has been ceded. As a result of that change, the relative impact of reinsurance on the Life Marketing segment’s overall results is expected to decrease over time. While the significance of reinsurance is expected to decline over time, the overall impact of reinsurance for a given period may fluctuate due to variations in mortality and unlocking of balances.

For The Three Months Ended September 30, 2016 as compared to The Three Months Ended September 30, 2015 (Successor Company)

The higher ceded premium and policy fees for the three months ended September 30, 2016 as compared to the three months ended September 30, 2015 was caused primarily by higher ceded traditional life premiums of $18.2 million and higher universal life policy fees of $5.3 million. Ceded traditional life premiums for the three months ended September 30, 2016, increased from the three months ended September 30, 2015, primarily due to post level activity.



Ceded benefits and settlement expenses were higher for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, due to higher universal life ceded claims, partially offset by net decreases in ceded reserves. Traditional ceded benefits increased $5.5 million for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, primarily due to an increase in post level ceded reserves, partially offset by lower ceded death benefits. Universal life ceded benefits increased $22.0 million for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, due to an increase in ceded claims, partially offset by a decrease in ceded reserves. Ceded universal life claims were $33.9 million higher for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015.

Ceded amortization of DAC and VOBA decreased for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, primarily due to the differences in unlocking between the two periods.

Ceded other operating expenses reflect the impact of reinsurance allowances on net income.

For The Nine Months Ended September 30, 2016 (Successor Company)

The ceded premiums were primarily comprised of ceded traditional life premiums of $274.3 million and universal life premiums of $310.6 million.

Ceded benefits and settlement expenses were $556.0 million for the nine months ended September 30, 2016. This amount is driven by ceded claims. Traditional life ceded benefits activity of $290.2 million was due to ceded death benefits, slightly offset by ceded reserves. Universal life ceded benefits of $266.8 million were largely comprised of $277.9 million in ceded universal life claims during the period.

Ceded amortization of DAC and VOBA activity was $4.6 million for the nine months ended September 30, 2016.

Ceded other operating expenses reflect the impact of reinsurance allowances on net income.

Ceded other operating expenses reflect the impact of reinsurance allowances on net income.
For The Period of February 1, 2015 to September 30, 2015 (Successor Company)

The ceded premiums were primarily comprised of ceded traditional life premiums of $188.0 million and universal life premiums of $266.0 million.

Ceded benefits and settlement expenses were $403.5 million for the period of February 1, 2015 to September 30, 2015. This amount is driven by ceded claims, partly offset by change in ceded reserves. Traditional life ceded benefits activity of $203.4 million was due to ceded death benefits, partly offset by ceded reserves. Universal life ceded benefits of $200.5 million were largely comprised of $181.9 million in ceded universal life claims during the period.

Ceded amortization of DAC and VOBA activity was $3.8 million for the period of February 1, 2015 to September 30, 2015.
For The Period of January 1, 2015 to January 31, 2015 (Predecessor Company)
The ceded premiums were primarily comprised of ceded traditional life premiums of $22.6 million and universal life premiums of $27.2 million. Traditional life ceded premiums for the period January 1, 2015 to January 31, 2015 were impacted by runoff and a number of policies with post level activity.
Ceded benefits and settlement expenses were $58.5 million for the period of January 1, 2015 to January 31, 2015.  This amount is driven by ceded claims, partly offset by change in ceded reserves. Traditional life ceded benefits activity of $29.3 million was due to ceded death benefits, partly offset by ceded reserves. Universal life ceded benefits of $30.0 million were mainly comprised of $30.4 million in ceded universal life claims during the period.
Ceded amortization of DAC and VOBA activity was $3.8 million for the period of January 1, 2015 to January 31, 2015.
Ceded other operating expenses reflect the impact of reinsurance allowances on net income.


Acquisitions
Segment Results of Operations
Segment results were as follows:
 Successor Company Predecessor Company
 For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
 (Dollars In Thousands) (Dollars In Thousands)
REVENUES 
      
  
Gross premiums and policy fees$280,598
 $269,715
 $877,215
 $742,187
 $88,855
Reinsurance ceded(81,457) (91,358) (259,284) (236,076) (26,512)
Net premiums and policy fees199,141
 178,357
 617,931
 506,111
 62,343
Net investment income190,890
 175,928
 567,559
 465,435
 71,088
Other income2,771
 2,218
 8,223
 7,582
 1,240
Total operating revenues392,802
 356,503
 1,193,713
 979,128
 134,671
Realized gains (losses) - investments22,825
 4,575
 182,428
 (136,049) 73,601
Realized gains (losses) - derivatives(24,610) (8,937) (106,469) 131,836
 (68,511)
Total revenues391,017
 352,141
 1,269,672
 974,915
 139,761
BENEFITS AND EXPENSES 
      
  
Benefits and settlement expenses293,616
 274,470
 913,344
 780,653
 100,693
Amortization of VOBA(836) (967) 8,256
 (129) 4,803
Other operating expenses29,865
 23,984
 88,018
 65,642
 9,041
Operating benefits and expenses322,645
 297,487
 1,009,618
 846,166
 114,537
Amortization related to benefits and settlement expenses2,807
 2,752
 8,495
 10,020
 1,233
Amortization of VOBA related to realized gains (losses) - investments(44) (2) (40) (30) 230
Total benefits and expenses325,408
 300,237
 1,018,073
 856,156
 116,000
INCOME BEFORE INCOME TAX65,609
 51,904
 251,599
 118,759
 23,761
Less: realized gains (losses)(1,785) (4,362) 75,959
 (4,213) 5,090
Less: amortization related to benefits and settlement expenses(2,807) (2,752) (8,495) (10,020) (1,233)
Less: related amortization of VOBA44
 2
 40
 30
 (230)
PRE-TAX OPERATING INCOME$70,157
 $59,016
 $184,095
 $132,962
 $20,134




The following table summarizes key data for the Acquisitions segment:

 Successor Company Predecessor Company
 For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
 (Dollars In Thousands) (Dollars In Thousands)
Average Life Insurance In-Force(1)
 
      
  
Traditional$241,585,970
 $173,787,595
 $231,957,799
 $176,933,932
 $182,177,575
Universal life29,401,602
 31,683,397
 29,863,714
 32,356,826
 33,413,557
 $270,987,572
 $205,470,992
 $261,821,513
 $209,290,758
 $215,591,132
Average Account Values 
      
  
Universal life$4,253,363
 $4,392,446
 $4,279,809
 $4,446,460
 $4,486,843
Fixed annuity(2)
3,550,366
 3,624,609
 3,567,036
 3,657,960
 3,712,578
Variable annuity1,174,310
 1,289,074
 1,185,166
 1,360,950
 1,396,587
 $8,978,039
 $9,306,129
 $9,032,011
 $9,465,370
 $9,596,008
Interest Spread - UL & Fixed Annuities 
      
  
Net investment income yield4.42% 4.37% 4.43% 4.34% 5.73%
Interest credited to policyholders3.97% 4.06% 4.00% 4.05% 4.05%
Interest spread(3)
0.45% 0.31% 0.43% 0.29% 1.68%

(1) Amounts are not adjusted for reinsurance ceded.
(2) Includes general account balances held within variable annuity products and is net of coinsurance ceded.
(3) Earned rates exclude portfolios supporting modified coinsurance and crediting rates exclude 100% cessions.
For The Three Months Ended September 30, 2016 as compared to Three Months Ended September 30, 2015 (Successor Company)

Pre-tax operating income

Pre-tax operating income was $70.2 million for the three months ended September 30, 2016, an increase of $11.1 million as compared to the three months ended September 30, 2015, primarily due to the addition of the GLAIC reinsurance transaction completed on January 15, 2016. The GLAIC transaction added $16.7 million to pre-tax operating income for the three months ended September 30, 2016. For the three months ended September 30, 2016, the segment recorded favorable prospective unlocking of $1.2 million as compared to favorable $0.3 million of prospective unlocking for the three months ended September 30, 2015.

Operating revenues

Net premiums and policy fees increased $20.8 million, or 11.7%, for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, primarily due to the premiums associated with the GLAIC reinsurance transaction more than offsetting expected runoff related to other blocks of business. Net investment income increased $15.0 million, or 8.5%, for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, primarily due to the $14.1 million impact of the GLAIC reinsurance transaction.

Total benefits and expenses

Total benefits and expenses increased $25.2 million, or 8.4%, for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015. The increase was primarily due to the GLAIC reinsurance transaction, which increased operating benefits and expenses $29.4 million. This was partly offset by expected runoff of the in-force business.

For The Nine Months Ended September 30, 2016 (Successor Company)

Pre-tax operating income

Pre-tax operating income was $184.1 million. This included expected runoff of the in-force blocks of business and $34.5 million in operating income associated with the GLAIC reinsurance transaction that was completed on January 15, 2016. In


addition, the increase included a $0.9 million favorable variance related to prospective unlocking. For the nine months ended September 30, 2016, the segment recorded favorable prospective unlocking of $1.2 million.

Operating revenues

Operating revenues for the segment were $1.2 billion and included net premiums and policy fees of $617.9 million, net investment income of $567.6 million, and other income of $8.2 million. The segment experienced expected runoff in the current period.

Operating revenues from the GLAIC transaction were $140.9 million and included net premiums and policy fees of $98.0 million and net investment income of $42.9 million.

Total benefits and expenses

Total benefits and expenses were $1.0 billion. Operating benefits and expenses of $1.0 billion included benefits and settlement expenses of $913.3 million, amortization of VOBA of $8.3 million, and other operating expenses of $88.0 million. The net impact of amortization related to benefits and settlement expenses and amortization of VOBA related to realized gains (losses) on investments contributed $8.5 million to total benefits and expenses.

Total benefits and expenses from the GLAIC transaction were $106.4 million. Operating benefits and expenses included benefits and settlement expenses of $84.6 million, amortization of VOBA of $8.6 million, and other operating expenses of $13.3 million from this transaction.
For The Period of February 1, 2015 to September 30, 2015 (Successor Company)

Pre-tax operating income

Pre-tax operating income was $133.0 million. This included expected runoff of the in-force blocks of business.

Operating revenues

Operating revenues for the segment were $979.1 million and included net premiums and policy fees of $506.1 million, net investment income of $465.4 million, and other income of $7.6 million. The segment experienced expected runoff in the current period.

Total benefits and expenses

Total benefits and expenses were $856.2 million, primarily due to operating benefits and expenses of $846.2 million. Operating benefits and expenses included benefits and settlement expenses of $780.7 million, amortization of VOBA of $(0.1) million, and other operating expenses of $65.6 million. The net impact of amortization related to benefits and settlement expenses and amortization of VOBA related to realized gains (losses) on investments contributed $10.0 million to total benefits and expenses.

For The Period of January 1, 2015 to January 31, 2015 (Predecessor Company)
Pre-tax operating income

Pre-tax operating income was $20.1 million. This included expected runoff of the in force blocks of business.

Operating revenues
Operating revenues for the segment were $134.7 million and included net premiums and policy fees of $62.3 million, net investment income of $71.1 million, and other income of $1.2 million. The segment experienced expected runoff in the current period.
Total benefits and expenses
Total benefits and expenses were $116.0 million, primarily due to operating benefits and expenses of $114.5 million. Operating benefits and expenses included benefits and settlement expenses of $100.7 million, amortization of VOBA of $4.8 million, and other operating expenses of $9.0 million. The net impact of amortization related to benefits and settlement expenses and amortization of VOBA related to realized gains (losses) on investments contributed $1.5 million to total benefits and expenses.
Reinsurance
The Acquisitions segment currently reinsures portions of both its life and annuity in-force. The cost of reinsurance to the segment is reflected in the chart shown below. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (Successor Company).



Impact of reinsurance
Reinsurance impacted the Acquisitions segment line items as shown in the following table:
Acquisitions Segment
Line Item Impact of Reinsurance
 Successor Company Predecessor Company
 For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
 (Dollars In Thousands) (Dollars In Thousands)
REVENUES 
      
  
Reinsurance ceded$(81,457) $(91,358) $(259,284) $(236,076) $(26,512)
BENEFITS AND EXPENSES 
      
  
Benefits and settlement expenses(65,188) (82,259) (199,412) (204,324) (25,832)
Amortization of value of business acquired(130) (84) (325) (168) (233)
Other operating expenses(10,389) (11,491) (32,379) (31,088) (3,647)
Total benefits and expenses(75,707) (93,834) (232,116) (235,580) (29,712)
          
NET IMPACT OF REINSURANCE (1)
$(5,750) $2,476
 $(27,168) $(496) $3,200

(1) Assumes no investment income on reinsurance. Foregone investment income would substantially reduce the favorable impact of reinsurance.
The segment’s reinsurance programs do not materially impact the other income line of the income statement. In addition, net investment income generally has no direct impact on reinsurance cost. However, by ceding business to the assuming companies, we forgo investment income on the reserves ceded to the assuming companies. Conversely, the assuming companies will receive investment income on the reserves assumed which will increase the assuming companies’ profitability on business assumed from the Company. For business ceded under modified coinsurance arrangements, the amount of investment income attributable to the assuming company is included as part of the overall change in policy reserves and, as such, is reflected in benefit and settlement expenses. The net investment income impact to us and the assuming companies has not been quantified as it is not fully reflected in our consolidated financial statements.
The net impact of reinsurance is less favorable by $8.2 million for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, primarily due to lower ceded claims. In the three months ended September 30, 2016, ceded revenues decreased by $9.9 million, while ceded benefits and expenses decreased by $18.1 million primarily due to lower claims.

The net impact of reinsurance activity for the nine months ended September 30, 2016 (Successor Company) was primarily due to ceded premiums in relation to ceded benefits and settlement expenses. Ceded benefits and settlement expenses were primarily driven by ceded claims.
The net impact of reinsurance activity for the period of February 1, 2015 to September 30, 2015 (Successor Company) was primarily due to ceded premiums in relation to ceded benefits and settlement expenses. Ceded benefits and settlement expenses were primarily driven by ceded claims.
The net impact of reinsurance activity for the period of January 1, 2015 to January 31, 2015 (Predecessor Company) was primarily due to ceded premiums in relation to ceded benefits and settlement expenses. Ceded benefits and settlement expenses were primarily driven by ceded claims.


Annuities
Segment Results of Operations
Segment results were as follows:


 Successor Company Predecessor Company
 For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
 (Dollars In Thousands) (Dollars In Thousands)
REVENUES 
      
  
Gross premiums and policy fees$37,560
 $37,836
 $109,571
 $101,055
 $12,473
Reinsurance ceded(20,138) (20,507) (60,232) (55,091) (6,118)
Net premiums and policy fees17,422
 17,329
 49,339
 45,964
 6,355
Net investment income81,747
 80,395
 239,668
 214,180
 37,189
Realized gains (losses) - derivatives(9,455) (8,133) (27,576) (20,692) (2,402)
Other income41,312
 40,222
 118,477
 107,194
 12,690
Total operating revenues131,026
 129,813
 379,908
 346,646
 53,832
Realized gains (losses) - investments(3,655) (1,694) (3,357) (3,726) (145)
Realized gains (losses) - derivatives, net of economic cost11,894
 72,679
 169,827
 (49,310) 77,231
Total revenues139,265
 200,798
 546,378
 293,610
 130,918
BENEFITS AND EXPENSES 
      
  
Benefits and settlement expenses60,199
 66,459
 157,735
 161,838
 26,919
Amortization of DAC/VOBA(6,913) (7,472) (15,211) (13,196) 6,217
Other operating expenses34,707
 33,736
 101,595
 89,028
 9,333
Operating benefits and expenses87,993
 92,723
 244,119
 237,670
 42,469
Amortization related to benefits and settlement expenses220
 (22) 3,190
 (1,371) 3,128
Amortization of DAC/VOBA related to realized gains (losses) - investments12,026
 (15,925) (11,949) (7,864) (13,216)
Total benefits and expenses100,239
 76,776
 235,360
 228,435
 32,381
INCOME BEFORE INCOME TAX39,026
 124,022
 311,018
 65,175
 98,537
Less: realized gains (losses) - investments(3,655) (1,694) (3,357) (3,726) (145)
Less: realized gains (losses) - derivatives, net of economic cost11,894
 72,679
 169,827
 (49,310) 77,231
Less: amortization related to benefits and settlement expenses(220) 22
 (3,190) 1,371
 (3,128)
Less: related amortization of DAC/VOBA(12,026) 15,925
 11,949
 7,864
 13,216
PRE-TAX OPERATING INCOME$43,033
 $37,090
 $135,789
 $108,976
 $11,363



The following tables summarize key data for the Annuities segment:
 Successor Company Predecessor Company
 For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
 (Dollars In Thousands) (Dollars In Thousands)
Sales 
      
  
Fixed annuity$180,889
 $174,864
 $561,425
 $328,470
 $28,335
Variable annuity154,731
 311,336
 479,828
 857,042
 59,115
 $335,620
 $486,200
 $1,041,253
 $1,185,512
 $87,450
Average Account Values 
      
  
Fixed annuity(1)
$8,162,296
 $8,263,278
 $8,202,283
 $8,239,829
 $8,171,438
Variable annuity12,534,520
 12,450,917
 12,261,077
 12,556,869
 12,365,217
 $20,696,816
 $20,714,195
 $20,463,360
 $20,796,698
 $20,536,655
Interest Spread - Fixed Annuities(2)
 
      
  
Net investment income yield3.76% 3.68% 3.69% 3.68% 5.22%
Interest credited to policyholders2.66
 2.88
 2.67
 2.89
 3.17
Interest spread1.10% 0.80% 1.02% 0.79% 2.05%

(1) Includes general account balances held within VA products.
(2) Interest spread on average general account values.


 Successor Company Predecessor Company
 For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 January 1, 2015
to
January 31, 2015
 (Dollars In Thousands) (Dollars In Thousands)
Derivatives related to VA contracts: 
      
  
Interest rate futures - VA$(7,002) $12,140
 $62,065
 $(2,091) $1,413
Equity futures - VA(41,836) 40,951
 (66,392) 3,215
 9,221
Currency futures - VA934
 4,000
 5,888
 1,428
 7,778
Equity options - VA(36,482) 33,519
 (23,410) 8,195
 3,047
Interest rate swaptions - VA(229) (3,618) (3,212) (12,399) 9,268
Interest rate swaps - VA14,737
 101,808
 221,884
 (74,150) 122,710
Embedded derivative - GMWB(1)
24,150
 (71,296) (108,545) 10,543
 (68,503)
Funds withheld derivative53,834
 (52,872) 63,886
 (8,301) (9,073)
Total derivatives related to VA contracts8,106
 64,632
 152,164
 (73,560) 75,861
Derivatives related to FIA contracts: 
      
  
Embedded derivative - FIA(14,486) 11,328
 (15,938) 9,035
 1,769
Equity futures - FIA2,236
 709
 4,269
 1,016
 (184)
Volatility futures - FIA
 (24) 
 6
 
Equity options - FIA6,583
 (12,099) 1,756
 (6,499) (2,617)
Total derivatives related to FIA contracts(5,667) (86) (9,913) 3,558
 (1,032)
VA GMWB economic cost(2)
9,455
 8,133
 27,576
 20,692
 2,402
Realized gains (losses) - derivatives, net of economic cost$11,894
 $72,679
 $169,827
 $(49,310) $77,231

(1)  Includes impact of nonperformance risk of $(1.7) million, $9.2 million, $11.5 million, $10.1 million, and $3.1 million for the three and nine months ended September 30, 2016 (Successor Company), the three months ended September 30, 2015 (Successor Company), for the period of February 1, 2015 to September 30, 2015 (Successor Company), and for the period of January 1, 2015 to January 31, 2015 (Predecessor Company), respectively.
(2)  Economic cost is the long-term expected average cost of providing the product benefit over the life of the policy based on product pricing assumptions. These include assumptions about the economic/market environment, and elective and non-elective policy owner behavior (e.g. lapses, withdrawal timing, mortality, etc.).
 Successor Company
 As of
September 30, 2016
 
As of
December 31, 2015
 (Dollars In Thousands)
GMDB - Net amount at risk(1)
$118,289
 $166,765
GMDB Reserves25,846
 26,646
GMWB and GMAB Reserves128,868
 18,522
Account value subject to GMWB rider9,466,240
 9,306,644
GMWB Benefit Base10,540,731
 10,304,939
GMAB Benefit Base4,007
 4,323
S&P 500® Index2,168
 2,044

(1) Guaranteed benefits in excess of contract holder account balance.



For The Three Months Ended September 30, 2016 as compared to The Three Months Ended September 30, 2015 (Successor Company)

Pre-tax operating income

Pre-tax operating income was $43.0 million for the three months ended September 30, 2016, as compared $37.1 million for the three months ended September 30, 2015, an increase of $5.9 million, or 16.0%. This variance was primarily the result of lower credited interest, higher investment income, and higher fees and other income on the variable annuities (“VA”) line of business offset by unfavorable single premium immediate annuities (“SPIA”) mortality. Segment results were positively impacted by $5.7 million of favorable unlocking for the three months ended September 30, 2016 as compared to $0.9 million of favorable unlocking for the three months ended September 30, 2015.

Operating revenues

Segment operating revenues increased $1.2 million, or 0.9%, for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, primarily due to increases in policy fees and other income from the VA line of business and increases in investment income. Those increases were partially offset by an unfavorable change in the GMWB economic cost. Average fixed account balances decreased 1.2% and average variable account balances increased 0.7% for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015.

Benefits and settlement expenses

Benefits and settlement expenses decreased $6.3 million, or 9.4%, for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015. This decrease was primarily the result of lower credited interest offset by a $2.0 million unfavorable change in SPIA mortality results. Included in benefits and settlement expenses was $0.9 million of unfavorable unlocking for the three months ended September 30, 2016 as compared to $1.9 million of unfavorable unlocking for the three months ended September 30, 2015.

Amortization of DAC and VOBA

DAC and VOBA amortization unfavorably changed by $0.6 million, or 7.5%, for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015. The unfavorable changes in normal DAC and VOBA amortization were offset by a favorable change in unlocking. DAC and VOBA unlocking for the three months ended September 30, 2016 was $6.6 million favorable as compared to $2.9 million favorable for the three months ended September 30, 2015.

Other operating expenses

Other operating expenses increased $1.0 million, or 2.9%, for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015. Increases in non-deferred acquisition, maintenance, and overhead expenses were offset by lower non-deferred commission expense.

Sales

Total sales decreased $150.6 million, or 31.0%, for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015. Sales of variable annuities decreased $156.6 million, or 50.3% for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015 primarily due to disruptions in the broader market driver by the proposed DOL rule changes. Sales of fixed annuities increased by $6.0 million, or 3.4%, for the three months ended September 30, 2016, as compared to the three months ended September 30, 2015, driven by an increase in FIA sales.

For The Nine Months Ended September 30, 2016 (Successor Company)

Pre-tax operating income

Pre-tax operating income was $135.8 million which included $82.3 million of fixed annuity operating earnings, $67.1 million of variable annuity operating earnings, and a $13.6 million loss in other annuity earnings. Segment results were positively impacted by $6.7 million of favorable unlocking and $6.3 million of favorable SPIA mortality.

Operating revenues

Segment operating revenues were $379.9 million for the nine months ended September 30, 2016. Operating revenue consisted of $239.7 million of net investment income, $49.3 million of policy fees, $118.5 million of other income, and $27.6 million of losses related to GMWB economic cost from the VA line of business.

Benefits and settlement expenses

Benefits and settlement expenses were $157.7 million for the nine months ended September 30, 2016. Included in that amount was $6.3 million of favorable SPIA mortality results and $0.1 million of unfavorable unlocking.



Amortization of DAC and VOBA

DAC and VOBA amortization was $15.2 million favorable for the nine months ended September 30, 2016 due to negative VOBA assigned to some of the products within the segment. There was $6.8 million of favorable unlocking recorded by the segment during the nine months ended September 30, 2016.

Other operating expenses

Other operating expenses were $101.6 million for the nine months ended September 30, 2016. Operating expenses consisted of $28.0 million in acquisition expenses, $37.9 million in maintenance and overhead expenses, and $35.7 million in commission expenses.

Sales

Total sales were $1.0 billion for the nine months ended September 30, 2016. Fixed annuity sales were $561.4 million and variable annuity sales were $479.8 million.
For The Period of February 1, 2015 to September 30, 2015 (Successor Company)

Pre-tax operating income

Pre-tax operating income was $109.0 million which included $63.9 million of fixed annuity operating earnings, $56.1 million of variable annuity operating earnings, and a $11.0 million loss in other annuity earnings. The fixed annuity results were positively impacted by $1.8 million of favorable SPIA unlocking. The segment recorded $1.3 million of favorable unlocking.

Operating revenues

Operating revenues were $346.6 million for the period of February 1, 2015 to September 30, 2015. Operating revenue consisted of $214.2 million of net investment income, $101.1 million of policy fees, $55.1 million of ceded premiums, $107.2 million in other income, and $20.7 million related to GMWB economic cost from the VA line of business.

Benefits and settlement expenses

Benefits and settlement expenses were $161.8 million for the period of February 1, 2015 to September 30, 2015. Included in that amount was $1.8 million in favorable SPIA mortality results, an increase in guaranteed benefit reserves of $3.4 million from the VA line of business, and $1.9 million of unfavorable unlocking.

Amortization of DAC and VOBA

DAC and VOBA amortization was $13.2 million favorable for the period of February 1, 2015 to JuneSeptember 30, 2015 due to the allocation of negative VOBA to some of the products within the segment. There was $0.3$3.2 million of favorable unlocking recorded by the segment during the three months ended Juneperiod of February 1, 2015 to September 30, 2015.

Other operating expenses

Other operating expenses were $55.3$89.0 million for the period of February 1, 2015 to JuneSeptember 30, 2015. Operating expenses consisted of $14.1$22.8 million in acquisition expenses, $19.8$32.6 million in maintenance and overhead expenses, and $21.4$33.6 million in commission expenses.

84

Table of Contents


Sales

Total sales were $699.3 million$1.2 billion for the period of February 1, 2015 to JuneSeptember 30, 2015. Fixed annuity sales were $153.6$328.5 million and variable annuity sales were $545.7$857.0 million.

For The Period of January 1, 2015 to January 31, 2015 (Predecessor Company)
 
SegmentPre-tax operating income

Segmentpre-tax operating income was $11.4 million for the period of January 1, 2015 to January 31, 2015. Included in that amount was $2.8 million of favorable SPIA mortality results and $2.6 million of unfavorable unlocking.

Operating revenues
 
Segment operating revenues were $53.8 million for the period of January 1, 2015 to January 31, 2015. Operating revenue consisted of $37.2 million of net investment income, $12.5 million of gross policy fees, $6.1 million of ceded premiums, $12.7 million in other income and $2.4 million of losses related to GMWB economic cost from the VA line of business.



Benefits and settlement expenses

Benefits and settlement expenses were $26.9 million for the period of January 1, 2015 to January 31, 2015. Included in that amount was $2.8 million of unfavorable SPIA mortality results and a $2.1 million increase in guaranteed benefit reserves from the VA line of business.
 
Amortization of DAC and VOBA
 
DAC and VOBA amortization was $6.2 million unfavorable for the period of January 1, 2015 to January 31, 2015.The2015. The segment recorded $2.6 million in unfavorable unlocking.

Other operating expenses

Other operating expenses were $9.3 million for the period of January 1, 2015 to January 31, 2015. Operating expenses consisted of $2.8 million in acquisition expenses, $2.8 million in maintenance and overhead expenses, and $3.7 million in commission expenses.

Sales

Total sales were $87.5 million for the period of January 1, 2015 to January 31, 2015. Fixed annuity sales were $28.3 million and variable annuity sales were $59.1 million.
 
Reinsurance
 
During the year ended December 31, 2012 (Predecessor Company), the Annuity segment began reinsuring certain risks associated with the GMWB and GMDB riders to Shades Creek Captive Insurance Company (“Shades Creek”), a direct wholly owned subsidiary of PLC. The cost of reinsurance to the segment is reflected in the chart shown below. The impact of the Shades Creek reinsurance arrangement for the three month period ending March 31, 2013 was eliminated in consolidation.  Prior to April 1, 2013, we paid as a dividend all of Shades Creek’s outstanding common stock to its parent, PLC. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies of our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (Successor Company).


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Impact of reinsurance
 
Reinsurance impacted the Annuities segment line items as shown in the following table:
 
Annuities Segment
Line Item Impact of Reinsurance
 
Successor Company Predecessor CompanySuccessor Company Predecessor Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 
February 1, 2015
to
June 30, 2015
 
January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
REVENUES 
      
  
 
      
  
Reinsurance ceded$(19,964) $(20,166) $(40,094) $(34,584) $(6,118)$(20,138) $(20,507) $(60,232) $(55,091) $(6,118)
Realized gains (losses) - derivatives11,278
 11,265
 22,536
 18,765
 3,754
11,298
 11,285
 33,834
 30,050
 3,754
Total operating revenues(8,686) (8,901) (17,558) (15,819) (2,364)(8,840) (9,222) (26,398) (25,041) (2,364)
Realized gains (losses) - derivatives, net of economic costs101,955
 (91,618) 192,073
 (138,272) 125,688
(24,268) 118,177
 167,805
 (20,095) 125,688
Total revenues93,269
 (100,519) 174,515
 (154,091) 123,324
(33,108) 108,955
 141,407
 (45,136) 123,324
BENEFITS AND EXPENSES 
      
  
 
      
  
Benefits and settlement expenses(420) (504) (1,404) (975) (567)(8) (574) (1,412) (1,549) (567)
Amortization of DAC/VOBA
 
 
 
 304

 
 
 
 304
Other operating expenses(487) (511) (981) (507) (523)(481) (505) (1,461) (1,011) (523)
Operating benefits and expenses(907) (1,015) (2,385) (1,482) (786)(489) (1,079) (2,873) (2,560) (786)
Amortization of deferred policy acquisition costs related to realized gain (loss) investments
 
 
 
 402

 
 
 
 402
Total benefit and expenses(907) (1,015) (2,385) (1,482) (384)(489) (1,079) (2,873) (2,560) (384)
NET IMPACT OF REINSURANCE$94,176
 $(99,504) $176,900
 $(152,609) $123,708
$(32,619) $110,034
 $144,280
 $(42,576) $123,708
 
The table above does not reflect the impact of reinsurance on our net investment income. The net investment income impact to us and the assumingassuming company has been quantified and is immaterial. The Annuities segment’s reinsurance programs do not materially impact the “other income” line of our income statement.
 
The net impact of reinsurance is favorableunfavorable by $94.2$32.6 million for the three months ended JuneSeptember 30, 2016 (Successor Company), as compared to the unfavorablefavorable net impact of $99.5$110.0 million for the three months ended JuneSeptember 30, 2015 (Successor Company).

The net impact of reinsurance is favorable by $176.9$144.3 million for the sixnine months ended JuneSeptember 30, 2016 (Successor Company).

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Stable Value Products
 
Segment Results of Operations
 
Segment results were as follows:
 
Successor
Company
 
Predecessor
Company
Successor
Company
 
Predecessor
Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 
February 1, 2015
to
June 30, 2015
 
January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
REVENUES 
      
  
 
      
  
Net investment income$25,908
 $15,371
 $48,975
 $25,744
 $6,888
$27,033
 $17,080
 $76,008
 $42,824
 $6,888
Other income
 133
 
 133
 
176
 
 176
 133
 
Total operating revenues25,908
 15,504
 48,975
 25,877
 6,888
27,209
 17,080
 76,184
 42,957
 6,888
Realized gains (losses)329
 1,152
 7,164
 1,121
 1,293
171
 (15) 7,335
 1,106
 1,293
Total revenues26,237
 16,656
 56,139
 26,998
 8,181
27,380
 17,065
 83,519
 44,063
 8,181
BENEFITS AND EXPENSES 
      
  
 
      
  
Benefits and settlement expenses9,752
 5,687
 17,720
 9,606
 2,255
11,413
 3,188
 29,133
 12,794
 2,255
Amortization of deferred policy acquisition costs242
 
 354
 
 25
359
 
 713
 
 25
Other operating expenses736
 468
 1,275
 807
 79
737
 1,107
 2,012
 1,914
 79
Total benefits and expenses10,730
 6,155
 19,349
 10,413
 2,359
12,509
 4,295
 31,858
 14,708
 2,359
INCOME BEFORE INCOME TAX15,507
 10,501
 36,790
 16,585
 5,822
14,871
 12,770
 51,661
 29,355
 5,822
Less: realized gains (losses)329
 1,152
 7,164
 1,121
 1,293
171
 (15) 7,335
 1,106
 1,293
OPERATING INCOME$15,178
 $9,349
 $29,626
 $15,464
 $4,529
PRE-TAX OPERATING INCOME$14,700
 $12,785
 $44,326
 $28,249
 $4,529


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The following table summarizes key data for the Stable Value Products segment: 
Successor
Company
 
Predecessor
Company
Successor
Company
 
Predecessor
Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 
February 1, 2015
to
June 30, 2015
 
January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Sales 
      
  
 
      
  
GIC$7,000
 $55,200
 $57,000
 $105,900
 $
$4,800
 $6,800
 $61,800
 $112,700
 $
GFA - Direct Institutional900,000
 50,000
 900,000
 150,000
 
650,000
 150,000
 1,550,000
 300,000
 
$907,000
 $105,200
 $957,000
 $255,900
 $
$654,800
 $156,800
 $1,611,800
 $412,700
 $
                  
Average Account Values$2,513,097
 $1,926,711
 $2,320,707
 $1,901,499
 $1,932,722
$2,928,148
 $1,952,113
 $2,524,249
 $1,921,035
 $1,932,722
Ending Account Values$2,838,674
 $1,861,280
 $2,838,674
 $1,861,280
 $1,911,751
$3,412,041
 $1,914,093
 $3,412,041
 $1,914,093
 $1,911,751
                  
Operating Spread 
      
  
 
      
  
Net investment income yield4.15% 3.23% 4.26% 3.30% 4.28%3.71% 3.53% 4.08% 3.38% 4.28%
Other income yield
 0.02
 
 0.01
 
0.02
 
 0.01
 0.01
 
Interest credited1.56
 1.19
 1.54
 1.23
 1.40
1.56
 0.66
 1.55
 1.04
 1.40
Operating expenses0.16
 0.10
 0.14
 0.11
 0.07
0.15
 0.23
 0.14
 0.15
 0.07
Operating spread2.43% 1.96% 2.58% 1.97% 2.81%2.02% 2.64% 2.40% 2.20% 2.81%
                  
Adjusted operating spread(1)
1.79% 1.83% 1.77% 1.71% 2.76%1.82% 2.27% 1.78% 1.90% 2.76%
 
(1) Excludes participating mortgage loan income and other income.
 
For The Three Months Ended JuneSeptember 30, 2016 as compared to The Three Months Ended JuneSeptember 30, 2015 (Successor Company)

SegmentPre-tax operating income

OperatingPre-tax operating income was $15.2$14.7 million and increased $5.8$1.9 million, or 62.3%15.0%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015. The increase in operating earnings primarily resulted from an increaseincreased average account values and other income offset by a decrease in participating mortgage income higherand lower operating spreads, and increased average account values.spreads. Participating mortgage income for the three months ended JuneSeptember 30, 2016 was $3.9$1.3 million as compared to $0.5$1.8 million for the three months ended JuneSeptember 30, 2015. The adjusted operating spread, which excludes participating income and other income, decreased by 445 basis points for the three months ended JuneSeptember 30, 2016 over the prior year, due primarily to an increase in credited interest.

For The SixNine Months Ended JuneSeptember 30, 2016 (Successor Company)

SegmentPre-tax operating income

OperatingPre-tax operating income of $29.6 million was primarily due to activity in average account values, participating mortgage income, and operating spread. Participating mortgage income was $9.2 million and the adjusted operating spread, which excludes participating income, was 177 basis point.
For The Period of February 1, 2015 to June 30, 2015 (Successor Company)

Segment operating income

Operating income of $15.5$44.3 million was primarily due to activity in average account values, operating spread, and participating mortgage income. Participating mortgage income was $1.7$10.5 million and the adjusted operating spread, which excludes participating income and other income, was 171178 basis points.
For The Period of February 1, 2015 to September 30, 2015 (Successor Company)

Pre-tax operating income

Pre-tax operating income of $28.2 million was primarily due to activity in average account values, operating spread, and participating mortgage income. Participating mortgage income was $3.5 million and the adjusted operating spread, which excludes participating income and other income, was 190 basis points.
 


For The Period of January 1, 2015 to January 31, 2015 (Predecessor Company)
 
SegmentPre-tax operating income
 
OperatingPre-tax operating income of $4.5 million was primarily due to activity in average account values, operating spread, and participating mortgage income. Participating mortgage income was $0.1 million and the adjusted operating spread, which excludes participating income and other income, was 276 basis points.

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Asset Protection
 
Segment Results of Operations
 
Segment results were as follows: 
 
Successor
Company
 
Predecessor
Company
Successor
Company
 
Predecessor
Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 
February 1, 2015
to
June 30, 2015
 
January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
REVENUES 
      
  
 
      
  
Gross premiums and policy fees$68,264
 $65,729
 $136,146
 $108,924
 $21,843
$68,987
 $66,593
 $205,133
 $175,517
 $21,843
Reinsurance ceded(24,986) (23,558) (49,525) (39,011) (7,860)(25,417) (24,619) (74,942) (63,630) (7,860)
Net premiums and policy fees43,278
 42,171
 86,621
 69,913
 13,983
43,570
 41,974
 130,191
 111,887
 13,983
Net investment income4,353
 3,741
 8,513
 6,186
 1,540
4,431
 3,847
 12,944
 10,033
 1,540
Other income28,788
 31,713
 54,964
 50,822
 9,043
31,029
 31,655
 85,993
 82,477
 9,043
Total operating revenues76,419
 77,625
 150,098
 126,921
 24,566
79,030
 77,476
 229,128
 204,397
 24,566
BENEFITS AND EXPENSES 
      
  
 
      
  
Benefits and settlement expenses25,727
 24,209
 51,111
 39,596
 7,447
26,611
 24,785
 77,722
 64,381
 7,447
Amortization of deferred policy acquisition costs and value of business acquired5,414
 6,853
 11,158
 11,595
 1,858
5,152
 6,549
 16,310
 18,144
 1,858
Other operating expenses41,137
 41,683
 79,432
 67,207
 13,354
43,168
 41,727
 122,600
 108,934
 13,354
Total benefits and expenses72,278
 72,745
 141,701
 118,398
 22,659
74,931
 73,061
 216,632
 191,459
 22,659
INCOME BEFORE INCOME TAX4,141
 4,880
 8,397
 8,523
 1,907
4,099
 4,415
 12,496
 12,938
 1,907
OPERATING INCOME$4,141
 $4,880
 $8,397
 $8,523
 $1,907
PRE-TAX OPERATING INCOME$4,099
 $4,415
 $12,496
 $12,938
 $1,907

 


The following table summarizes key data for the Asset Protection segment:
 
Successor
Company
 
Predecessor
Company
Successor
Company
 
Predecessor
Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 
February 1, 2015
to
June 30, 2015
 
January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Sales 
      
  
 
      
  
Credit insurance$5,954
 $7,327
 $11,531
 $11,210
 $2,087
$5,444
 $6,756
 $16,975
 $17,965
 $2,087
Service contracts88,909
 101,374
 166,184
 158,421
 26,551
93,569
 98,062
 259,753
 258,767
 26,551
GAP26,534
 23,716
 52,095
 38,948
 6,318
27,413
 24,605
 79,508
 63,553
 6,318
$121,397
 $132,417
 $229,810
 $208,579
 $34,956
$126,426
 $129,423
 $356,236
 $340,285
 $34,956
Loss Ratios(1)
 
      
  
 
      
  
Credit insurance33.0% 30.8% 32.7% 34.6% 27.9%33.5% 18.2% 32.9% 28.6% 27.9%
Service contracts46.5
 54.2
 45.9
 53.4
 54.4
47.1
 56.6
 46.3
 54.6
 54.4
GAP103.9
 83.2
 105.4
 80.6
 61.5
107.5
 85.6
 106.1
 82.6
 61.5

 (1) Incurred claims as a percentage of earned premiums


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For The Three Months Ended JuneSeptember 30, 2016 as compared to The Three Months Ended JuneSeptember 30, 2015 (Successor Company)

SegmentPre-tax operating income

OperatingPre-tax operating income was $4.1 million, representing a decrease of $0.7$0.3 million, or 15.1%7.2%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015. Service contract earnings increased $1.7 million primarily due to favorable loss ratios. Earnings from the GAP product line decreased $0.7$1.5 million primarily resulting from higher losses. Credit insurance earnings decreased $0.3$0.5 million primarily due to lower underwriting income. Service contract earnings increased $0.3 million primarily due to favorable underwriting income.higher losses.

Net premiums and policy fees

Net premiums and policy fees increased $1.1$1.6 million, or 2.6%3.8%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015. GAP premiums increased $2.8 million primarily due to higher volume. Service contract premiums decreased $1.5$1.0 million primarily due to higher ceded premiums. Creditpremiums and credit insurance premiums decreased $0.3$0.2 million as a result of lower sales. GAP premiums increased $3.0 million primarily due to higher volume.

Other income

Other income decreased $2.9$0.6 million, or 9.2%2.0%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015 primarily due to lower sales volume in the service contract line.

Benefits and settlement expenses

Benefits and settlement expenses increased $1.5$1.8 million, or 6.3%7.4%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015. GAP claims increased $4.6$4.8 million due to a higher loss ratio and increased volume. Credit insurance claims increased $0.4 million due to a higher loss ratio. The increase wasincreases were partially offset by a decrease in service contract claims of $3.1$3.4 million due primarily to lower loss ratios and lower volume. Credit insurance claims remained consistent with the prior year.

Amortization of DAC and VOBA and Other operating expenses

Amortization of DAC and VOBA was $1.4 million, or 21.0%21.3%, lower for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015. Amortization2015, primarily due to decreased amortization of VOBA decreased $1.1 million in the GAP product line due to runoff of in-force VOBA. Amortization of DAC decreased $0.5 millionVOBA and lower volume in the credit line due to lower volume.product line. Other operating expenses were $0.5$1.4 million lowerhigher than the prior year primarily due to lowerhigher sales volume in the service contractGAP product line.

Sales

Total segment sales decreased $11.0$3.0 million, or 8.3%2.3%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015. Service contract sales decreased $12.4$4.5 million. Credit insurance sales decreased $1.4$1.3 million due to decreasing demand for the product. The decreases were partially offset by an increase in GAP sales of $2.8 million.



For The SixNine Months Ended JuneSeptember 30, 2016 (Successor Company)

SegmentPre-tax operating income

OperatingPre-tax operating income was $8.4$12.5 million which consisted of service contract earnings of $5.9$8.9 million, GAP product earnings of $1.6$2.3 million, and credit insurance earnings of $0.9$1.3 million.

Net premiums and policy fees

Net premiums and policy fees were $86.6$130.2 million which consisted of service contract premiums of $59.5$89.1 million, GAP premiums of $20.6$31.4 million, and credit insurance premiums of $6.5$9.7 million.

Other income

Other income activity consisted of $45.1$71.0 million from the service contract line and $9.9$15.0 million from the GAP product line.

Benefits and settlement expenses

Benefits and settlement expenses activity was $27.3$41.2 million in service contract claims, $21.7$33.3 million in GAP claims and $2.1$3.2 million in credit insurance claims.

Amortization of DAC and VOBA and Other operating expenses

Amortization of DAC and VOBA consisted of $6.5$9.6 million in the credit insurance line, $3.6$5.1 million in the GAP line, and $1.0$1.6 million in the service contract line, primarily resulting from amortization of VOBA activity. Other operating expenses were $79.4$122.6 million including activity in all product lines.


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Sales

Total segment sales consisted of $166.2$259.7 million in the service contract line, $52.1$79.5 million in the GAP product line, and credit insurance sales of $11.5$17.0 million.

For The Period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company)

Segment operating income

Operating income was $8.5 million which consisted of service contract earnings of $4.8 million, GAP product earnings of $2.6 million, and credit insurance earnings of $1.1 million.

Net premiums and policy fees

Net premiums and policy fees were $69.9$111.9 million which consisted of service contract premiums of $51.6$82.2 million, GAP premiums of $12.4$20.4 million, and credit insurance premiums of $5.9$9.3 million.

Other income

Other income activity consisted of $42.7$69.3 million from the service contract line and $8.1$13.2 million from the GAP product line.

Benefits and settlement expenses

Benefits and settlement expenses activity was $27.6$44.9 million in service contract claims, $10.0$16.8 million in GAP claims and $2.0$2.7 million in credit insurance claims.

Amortization of DAC and VOBA and Other operating expenses

Amortization of DAC and VOBA consisted of $6.1$9.7 million in the credit insurance line, $4.8$7.4 million in the GAP line, and $0.6$1.0 million in the service contract line, primarily resulting from amortization of VOBA activity. Other operating expenses were $67.2$108.9 million including activity in all product lines.

Sales

Total segment sales consisted of $158.4$258.8 million in the service contract line, $38.9$63.5 million in the GAP product line, and credit insurance sales of $11.2 million$18.0 million.

For The Period of January 1, 2015 to January 31, 2015 (Predecessor Company)
 
SegmentPre-tax operating income

OperatingPre-tax operating income was $1.9 million which consisted of $0.8 million in service contract earnings, $0.9 million in GAP product earnings, and credit insurance earnings of $0.2 million.



Net premiums and policy fees
 
Net premiums and policy fees consisted of service contract premiums of $10.4 million, GAP premiums of $2.4 million, and $1.2 million of credit insurance premiums.
 
Other income
 
Other income consisted of $7.7 million from the service contract line and $1.4 million from the GAP product line.
 
Benefits and settlement expenses
 
Benefits and settlement expenses was primarily due to service contract claims of $5.6 million, GAP claims of $1.5 million, and credit insurance claims of $0.3 million.
 
Amortization of DAC and VOBA and Other operating expenses
 
Amortization of DAC consisted of $1.1 million in the credit insurance line, $0.5 million in the service contract line, and $0.2 million in the GAP line. Other operating expenses were $13.4 million including activity in all product lines.
 
Sales
 
Total segment sales consisted of $26.6 million in the service contract line, $6.3 million in the GAP product line and credit insurance sales of $2.1 million.
 

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Reinsurance
 
The majority of the Asset Protection segment’s reinsurance activity relates to the cession of single premium credit life and credit accident and health insurance, vehicle service contracts, and guaranteed asset protection insurance to producer affiliated reinsurance companies (“PARCs”). These arrangements are coinsurance contracts ceding the business on a first dollar quota share basis at 100% to limit our exposure and allow the PARCs to share in the underwriting income of the product. Reinsurance contracts do not relieve us from our obligations to our policyholders. A more detailed discussion of the components of reinsurance can be found in the Reinsurance section of Note 2, Summary of Significant Accounting Policies to our Annual Report on Form 10-K for the fiscal year ended December 31, 2015 (Successor Company).

Reinsurance impacted the Asset Protection segment line items as shown in the following table:
 
Asset Protection Segment
Line Item Impact of Reinsurance
 
Successor
Company
 
Predecessor
Company
Successor
Company
 
Predecessor
Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 
February 1, 2015
to
June 30, 2015
 
January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
REVENUES 
      
  
 
      
  
Reinsurance ceded$(24,986) $(23,558) $(49,525) $(39,011) $(7,860)$(25,417) $(24,619) $(74,942) $(63,630) $(7,860)
BENEFITS AND EXPENSES 
      
  
 
      
  
Benefits and settlement expenses(16,737) (15,464) (34,379) (24,952) (4,249)(16,717) (16,646) (51,096) (41,598) (4,249)
Amortization of deferred policy acquisition costs and value of business acquired(208) 38
 (397) 74
 (481)
Amortization of DAC/VOBA(272) 4
 (669) 78
 (481)
Other operating expenses(1,471) (2,039) (2,980) (3,441) (653)(1,452) (2,077) (4,432) (5,517) (653)
Total benefits and expenses(18,416) (17,465) (37,756) (28,319) (5,383)(18,441) (18,719) (56,197) (47,037) (5,383)
NET IMPACT OF REINSURANCE (1)
$(6,570) $(6,093) $(11,769) $(10,692) $(2,477)$(6,976) $(5,900) $(18,745) $(16,593) $(2,477)
 
(1) Assumes no investment income on reinsurance. Foregone investment income would substantially change the impact of reinsurance.
 
For The Three Months Ended JuneSeptember 30, 2016 as compared to The Three Months Ended JuneSeptember 30, 2015 (Successor Company)



Reinsurance premiums ceded increased $1.4$0.8 million, or 6.1%3.2%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015. The increase was primarily due to an increase in ceded service contract premiums.

Benefits and settlement expenses ceded increased $1.3$0.1 million, or 8.2%0.4%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015. The increase was primarily due to higher ceded losses in the GAP product line.

Amortization of DAC and VOBA ceded increased $0.2$0.3 million for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015, as the result of ceded activity in all product lines. Other operating expenses ceded decreased $0.6 million for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015, primarily due to ceded activity in the GAP product line.and credit insurance lines.

Net investment income has no direct impact on reinsurance cost. However, by ceding business to the assuming companies, we forgo investment income on the reserves ceded. Conversely, the assuming companies will receive investment income on the reserves assumed which generally will increase the assuming companies’ profitability on business we cede. The net investment income impact to us and the assuming companies has not been quantified as it is not reflected in our consolidated financial statements.
For The SixNine Months Ended JuneSeptember 30, 2016 (Successor Company)

Reinsurance premiums ceded of $49.5$74.9 million consisted of ceded premiums in the service contract line of $31.7$48.4 million, ceded premiums in the GAP product line of $9.9$14.9 million, and ceded premiums in the credit insurance line of $7.9$11.6 million.

Benefits and settlement expenses ceded consisted of $26.2$38.6 million in service contract ceded claims, $6.8$10.1 million in GAP ceded claims, and $1.4$2.4 million in credit insurance ceded claims.


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Amortization of DAC and VOBA ceded of $0.4$0.7 million was mainly due to ceded activity in the service contract and GAP product lines. Other operating expenses ceded of $3.0$4.4 million was mainly due to ceded activity in the credit insurance product line.

Net investment income has no direct impact on reinsurance cost. However, by ceding business to the assuming companies, we forgo investment income on the reserves ceded. Conversely, the assuming companies will receive investment income on the reserves assumed which generally will increase the assuming companies’ profitability on business we cede. The net investment income impact to us and the assuming companies has not been quantified as it is not reflected in our consolidated condensed financial statements.
 
For The Period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company)

Reinsurance premiums ceded of $39.0$63.6 million consisted of ceded premiums in the service contract line of $23.8$39.3 million, ceded premiums in the GAP product line of $8.0$12.7 million, and ceded premiums in the credit insurance line of $7.2$11.6 million.

Benefits and settlement expenses ceded consisted of $20.1$33.2 million in service contract ceded claims, $3.4$5.9 million in GAP ceded claims, and $1.4$2.5 million in credit insurance ceded claims.

Other operating expenses ceded of $3.4$5.5 million were mainly due to ceded activity in the credit insurance and GAP product lines.

Net investment income has no direct impact on reinsurance cost. However, by ceding business to the assuming companies, we forgo investment income on the reserves ceded. Conversely, the assuming companies will receive investment income on the reserves assumed which generally will increase the assuming companies’ profitability on business we cede. The net investment income impact to us and the assuming companies has not been quantified as it is not reflected in our consolidated condensed financial statements.

For The Period of January 1, 2015 to January 31, 2015 (Predecessor Company)

Reinsurance premiums ceded of $7.9 million consisted of ceded premiums in all product lines.

Benefits and settlement expenses ceded of $4.2 million was primarily due to losses on ceded business in the service contract and GAP product lines.

Amortization of DAC ceded of $0.5 million was primarily the result of ceded activity in the GAP and credit product lines. Other operating expenses ceded of $0.7 million waswere mainly due to ceded activity in the credit and GAP product lines.

Net investment income has no direct impact on reinsurance cost. However, by ceding business to the assuming companies, we forgo investment income on the reserves ceded. Conversely, the assuming companies will receive investment income on the reserves assumed which generally will increase the assuming companies’ profitability on business we cede. The net investment income impact to us and the assuming companies has not been quantified as it is not reflected in our consolidated condensed financial statements.


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Corporate and Other
 
Segment Results of Operations
 
Segment results were as follows:
 
Successor
Company
 
Predecessor
Company
Successor
Company
 
Predecessor
Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 
February 1, 2015
to
June 30, 2015
 
January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
REVENUES 
      
  
 
      
  
Gross premiums and policy fees$3,532
 $3,770
 $7,206
 $6,434
 $1,343
$3,400
 $3,755
 $10,606
 $10,189
 $1,343
Reinsurance ceded(82) (17) (141) (17) 
(60) (120) (201) (137) 
Net premiums and policy fees3,450
 3,753
 7,065
 6,417
 1,343
3,340
 3,635
 10,405
 10,052
 1,343
Net investment income28,999
 10,041
 55,332
 26,877
 278
16,114
 13,950
 71,446
 40,827
 278
Other income144
 351
 435
 409
 1
141
 179
 576
 588
 1
Total operating revenues32,593
 14,145
 62,832
 33,703
 1,622
19,595
 17,764
 82,427
 51,467
 1,622
Realized gains (losses) - investments(2,549) 2,583
 (4,284) 653
 4,919
1,418
 (2,859) (2,866) (2,206) 4,919
Realized gains (losses) - derivatives14,874
 (3,200) 18,294
 (2,560) 16,318
13,859
 (13,908) 32,153
 (16,468) 16,318
Total revenues44,918
 13,528
 76,842
 31,796
 22,859
34,872
 997
 111,714
 32,793
 22,859
BENEFITS AND EXPENSES 
      
  
       
  
Benefits and settlement expenses4,752
 3,378
 8,776
 6,265
 1,721
5,404
 4,082
 14,180
 10,347
 1,721
Amortization of deferred policy acquisition costs and value of business acquired
 16
 
 26
 87

 
 
 26
 87
Other operating expenses58,089
 47,125
 119,046
 77,743
 16,476
60,700
 48,239
 179,746
 125,982
 16,476
Total benefits and expenses62,841
 50,519
 127,822
 84,034
 18,284
66,104
 52,321
 193,926
 136,355
 18,284
INCOME (LOSS) BEFORE INCOME TAX(17,923) (36,991) (50,980) (52,238) 4,575
(31,232) (51,324) (82,212) (103,562) 4,575
Less: realized gains (losses) - investments(2,549) 2,583
 (4,284) 653
 4,919
1,418
 (2,859) (2,866) (2,206) 4,919
Less: realized gains (losses) - derivatives14,874
 (3,200) 18,294
 (2,560) 16,318
13,859
 (13,908) 32,153
 (16,468) 16,318
OPERATING INCOME (LOSS)$(30,248) $(36,374) $(64,990) $(50,331) $(16,662)
PRE-TAX OPERATING INCOME (LOSS)$(46,509) $(34,557) $(111,499) $(84,888) $(16,662)

 
For The Three Months Ended JuneSeptember 30, 2016 as compared to The Three Months Ended JuneSeptember 30, 2015 (Successor Company)

SegmentPre-tax operating income (loss)

Corporate and Other segmentPre-tax operating loss was $30.2$46.5 million for the three months ended JuneSeptember 30, 2016, as compared to an operating loss of $36.4$34.6 million for the three months ended JuneSeptember 30, 2015. The decrease was primarily due to a $19.0$11.3 million increase in interest expense. Partially offsetting these decreases was a $2.2 million increase in net investment income, partially offset by a $10.9 million increase in interest expense.income.



Operating revenues

Net investment income for the segment increased $19.0increase $2.2 million or 15.5% for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015. The increase in net investment income was primarily due to $23.6$23.7 million of income related to additional held to maturity securities issued by affiliates of the Company which are considered variable interest entities (“VIE’s”). These securities are collateralized by non-recourse funding obligations issued by captive insurance companies that are wholly owned subsidiaries of the Company. Interest expense related to the non-recourse funding obligations is recognized in an equal and offsetting amount to the investment income. Offsetting this increase was a $4.6$21.5 million decrease in core net investment income.


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Total benefits and expenses

Total benefits and expenses increased $12.3$13.8 million or 24.4%26.3%, for the three months ended JuneSeptember 30, 2016, as compared to the three months ended JuneSeptember 30, 2015, primarily due to $10.0$23.7 million of increased interest expense related to the Golden Gate Captive non-recourse funding obligations.

For The SixNine Months Ended JuneSeptember 30, 2016 (Successor Company)

SegmentPre-tax operating income (loss)

The segment’s $65.0$111.5 million pre-tax operating loss was primarily due to $119.0$179.7 million of other operating expense which is primarily interest expense and corporate overhead expenses. These expenses were partially offset by $55.3$71.4 million of investment income which represents income on assets supporting our equity capital and held-to-maturity notes.

Operating revenues

Operating revenues of $82.4 million were primarily due to $71.4 million of investment income which represents income on assets supporting our equity capital.

Total benefits and expenses

Total benefits and expenses of $193.9 million were primarily due to $179.7 million of other operating expenses which included corporate overhead expenses and $94.3 million of interest expense.
For The Period of February 1, 2015 to September 30, 2015 (Successor Company)

Pre-tax operating income (loss)

The segment’s $84.9 million pre-tax operating loss was primarily due to $126.0 million of other operating expense which is primarily interest expense and corporate overhead expenses. These expenses were partially offset by $40.8 million of investment income which represents income on assets supporting our equity capital.

Operating revenues

Operating revenues of $62.8$51.5 million were primarily due to $55.3$40.8 million of investment income, which represents income on assets supporting our equity capital.

Total benefits and expenses

Total benefits and expenses of $127.8$136.4 million were primarily due to $119.0$126.0 million of other operating expenses which included corporate overhead expenses and $62.1 million of interest expense.
For The Period of February 1, 2015 to June 30, 2015 (Successor Company)

Segment operating income (loss)

The segment’s $50.3 million operating loss was primarily due to $77.7 million of other operating expense which is primarily interest expense and corporate overhead expenses. These expenses were partially offset by $26.9 million of investment income which represents income on assets supporting our equity capital.

Operating revenues

Operating revenues of $33.7 million were primarily due to $26.9 million of investment income which represents income on assets supporting our equity capital.

Total benefits and expenses

Total benefits and expenses of $84.0 million were primarily due to $77.7 million of other operating expenses which included corporate overhead expenses and $34.0$54.8 million of interest expense.
 
For The Period of January 1, 2015 to January 31, 2015 (Predecessor Company)
 
SegmentPre-tax operating income (loss)

The segment’s $16.7 million pre-tax operating loss was primarily due to $18.3 million of total benefits and expenses offset by $0.3 million of net investment income and $1.3 million of premiums and policy fees.

Operating revenues
 
Operating revenues of $1.6 million were primarily due to $1.3 million of premium and policy fees and $0.3 million of net investment income.
 
Total benefits and expenses
 
Total benefits and expenses of $18.3 million was primarily due to $16.5 million of other operating expenses which included corporate overhead expenses and $2.8 million of charitable contributions.
 

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CONSOLIDATED INVESTMENTS
 
As of JuneSeptember 30, 2016 (Successor Company), our investment portfolio was approximately $50.8$51.6 billion. The types of assets in which we may invest are influenced by various state insurance laws which prescribe qualified investment assets. Within the parameters of these laws, we invest in assets giving consideration to such factors as liquidity and capital needs, investment quality, investment return, matching of assets and liabilities, and the overall composition of the investment portfolio by asset type and credit exposure.
 
The following table presents the reported values of our invested assets: 
Successor CompanySuccessor Company
As of
June 30, 2016
 
As of
December 31, 2015
As of
September 30, 2016
 
As of
December 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Publicly issued bonds (amortized cost: 2016 - $30,218,531; 2015 - $29,849,592)$29,686,091
 58.5% $27,396,560
 60.8%
Privately issued bonds (amortized cost: 2016 - $11,779,007; 2015 - $9,065,023)11,700,390
 23.0
 8,636,970
 19.2
Preferred stock (amortized cost: 2016 - $67,941; 2015 - $68,558)68,006
 0.1
 66,882
 0.1
Publicly issued bonds (amortized cost: 2016 - $30,317,541; 2015 - $29,849,592)$30,130,476
 58.4% $27,396,560
 60.8%
Privately issued bonds (amortized cost: 2016 - $11,951,874; 2015 - $9,065,023)11,982,256
 23.2
 8,636,970
 19.2
Preferred stock (amortized cost: 2016 - $98,152; 2015 - $68,558)97,562
 0.2
 66,882
 0.1
Fixed maturities41,454,487
 81.6% 36,100,412
 80.1%42,210,294
 81.8% 36,100,412
 80.1%
Equity securities (cost: 2016 - $681,496; 2015 - $693,147)702,796
 1.4
 699,925
 1.6
Equity securities (cost: 2016 - $680,987; 2015 - $693,147)699,686
 1.4
 699,925
 1.6
Mortgage loans5,748,675
 11.3
 5,662,812
 12.6
5,912,683
 11.5
 5,662,812
 12.6
Investment real estate7,028
 
 11,118
 
8,006
 
 11,118
 
Policy loans1,670,218
 3.3
 1,699,508
 3.8
1,656,083
 3.2
 1,699,508
 3.8
Other long-term investments933,646
 1.8
 594,036
 1.3
950,261
 1.8
 594,036
 1.3
Short-term investments244,363
 0.6
 263,837
 0.6
168,552
 0.3
 263,837
 0.6
Total investments$50,761,213
 100.0% $45,031,648
 100.0%$51,605,565
 100.0% $45,031,648
 100.0%
 
Included in the preceding table are $2.8 billion and $2.7 billion of fixed maturities and $38.2$25.7 million and $61.7 million of short-term investments classified as trading securities as of JuneSeptember 30, 2016 (Successor Company) and December 31, 2015 (Successor Company), respectively. All of the fixed maturities in the trading portfolio are invested assets that are held pursuant to modified coinsurance (“Modco”) arrangements under which the economic risks and benefits of the investments are passed to third party reinsurers. Also included above are $2.8 billion and $593.3 million of securities classified as held-to-maturity as of JuneSeptember 30, 2016 (Successor Company) and December 31, 2015 (Successor Company), respectively.

Fixed Maturity Investments
 
As of JuneSeptember 30, 2016 (Successor Company), our fixed maturity investment holdings were approximately $41.5$42.2 billion. The approximate percentage distribution of our fixed maturity investments by quality rating is as follows: 
 Successor Company Successor Company
 As of As of As of As of
Rating June 30, 2016 December 31, 2015 September 30, 2016 December 31, 2015
 (Dollars In Thousands) (Dollars In Thousands)
AAA $5,336,257
 12.9% $5,223,656
 14.5% $5,224,124
 12.4% $5,223,656
 14.5%
AA 3,282,902
 7.9
 2,864,706
 7.9
 3,565,141
 8.4
 2,864,706
 7.9
A 13,042,347
 31.7
 11,564,843
 32.0
 13,146,654
 31.1
 11,564,843
 32.0
BBB 14,947,440
 36.1
 14,076,212
 39.0
 15,316,964
 36.3
 14,076,212
 39.0
Below investment grade 2,066,261
 4.9
 1,777,681
 4.9
 2,182,181
 5.2
 1,777,681
 4.9
Not rated(1)
 2,779,280
 6.5
 593,314
 1.7
 2,775,230
 6.6
 593,314
 1.7
 $41,454,487
 100.0% $36,100,412
 100.0% $42,210,294
 100.0% $36,100,412
 100.0%
                
(1) Our "not rated" securities are $2.8 billion or 6.5% of our fixed maturity investments, of held-to-maturity securities issued by affiliates of the Company. These securities are collateralized by non-recourse funding obligations issued by captive insurance companies that are wholly owned subsidiaries of the Company.
(1) Our "not rated" securities are $2.8 billion or 6.6% of our fixed maturity investments, of held-to-maturity securities issued by affiliates of the Company. These securities are collateralized by non-recourse funding obligations issued by captive insurance companies that are wholly owned subsidiaries of the Company.(1) Our "not rated" securities are $2.8 billion or 6.6% of our fixed maturity investments, of held-to-maturity securities issued by affiliates of the Company. These securities are collateralized by non-recourse funding obligations issued by captive insurance companies that are wholly owned subsidiaries of the Company.
 

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We use various Nationally Recognized Statistical Rating Organizations’ (“NRSRO”) ratings when classifying securities by quality ratings. When the various NRSRO ratings are not consistent for a security, we use the second-highest convention in


assigning the rating. When there are no such published ratings, we assign a rating based on the statutory accounting rating system if such ratings are available.
 
We do not have material exposure to financial guarantee insurance companies with respect to our investment portfolio.
 
Changes in fair value for our available-for-sale portfolio, net of tax and the related impact on certain insurance assets and liabilities are recorded directly to shareowner’s equity. Declines in fair value that are other-than-temporary are recorded as realized losses in the consolidated condensed statements of income, net of any applicable non-credit component of the loss, which is recorded as an adjustment to other comprehensive income (loss).
 
The distribution of our fixed maturity investments by type is as follows: 
 Successor Company Successor Company
 As of As of As of As of
Type June 30, 2016 December 31, 2015 September 30, 2016 December 31, 2015
 (Dollars In Thousands) (Dollars In Thousands)
Corporate securities $29,675,117
 $27,119,158
 $30,385,533
 $27,119,158
Residential mortgage-backed securities 2,203,807
 2,051,931
 2,150,855
 2,051,931
Commercial mortgage-backed securities 1,735,348
 1,432,607
 1,840,378
 1,432,607
Other asset-backed securities 1,395,682
 1,072,474
 1,465,129
 1,072,474
U.S. government-related securities 1,418,303
 1,770,524
 1,348,057
 1,770,524
Other government-related securities 78,941
 76,567
 79,306
 76,567
States, municipals, and political subdivisions 2,100,003
 1,916,954
 2,068,244
 1,916,954
Preferred stock 68,006
 66,883
 97,562
 66,883
Securities issued by affiliates 2,779,280
 593,314
 2,775,230
 593,314
Total fixed income portfolio $41,454,487
 $36,100,412
 $42,210,294
 $36,100,412
 

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The industry segment composition of our fixed maturity securities is presented in the following table:
 
Successor CompanySuccessor Company
As of
June 30, 2016
 
% Fair
Value
 
As of
December 31, 2015
 
% Fair
Value
As of
September 30, 2016
 
% Fair
Value
 
As of
December 31, 2015
 
% Fair
Value
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Banking$3,725,540
 9.0% $3,359,169
 9.3%$3,811,953
 9.0% $3,359,169
 9.3%
Other finance420,416
 1.0
 482,147
 1.3
425,656
 1.0
 482,147
 1.3
Electric utility4,047,367
 9.8
 3,707,729
 10.3
4,054,833
 9.6
 3,707,729
 10.3
Energy and natural gas4,411,842
 10.6
 3,940,588
 10.9
4,618,954
 10.9
 3,940,588
 10.9
Insurance3,145,164
 7.6
 2,924,523
 8.1
3,245,966
 7.7
 2,924,523
 8.1
Communications1,420,247
 3.4
 1,338,544
 3.7
1,445,210
 3.4
 1,338,544
 3.7
Basic industrial1,620,075
 3.9
 1,480,354
 4.1
1,679,057
 4.0
 1,480,354
 4.1
Consumer noncyclical3,680,392
 8.9
 3,134,732
 8.7
3,781,481
 9.0
 3,134,732
 8.7
Consumer cyclical1,717,327
 4.1
 1,712,862
 4.7
1,706,333
 4.0
 1,712,862
 4.7
Finance companies120,672
 0.3
 118,214
 0.3
122,347
 0.3
 118,214
 0.3
Capital goods1,484,139
 3.5
 1,418,653
 3.9
1,469,917
 3.5
 1,418,653
 3.9
Transportation1,039,257
 2.5
 969,329
 2.7
1,082,890
 2.6
 969,329
 2.7
Other industrial371,246
 0.9
 313,957
 0.9
372,807
 0.9
 313,957
 0.9
Brokerage576,958
 1.4
 546,726
 1.5
631,873
 1.5
 546,726
 1.5
Technology1,538,464
 3.7
 1,315,958
 3.6
1,626,270
 3.9
 1,315,958
 3.6
Real estate173,428
 0.4
 189,955
 0.5
156,364
 0.4
 189,955
 0.5
Other utility250,589
 0.6
 232,601
 0.6
251,184
 0.6
 232,601
 0.6
Commercial mortgage-backed securities1,735,348
 4.2
 1,432,607
 4.0
1,840,378
 4.4
 1,432,607
 4.0
Other asset-backed securities1,395,682
 3.4
 1,072,474
 3.0
1,465,129
 3.5
 1,072,474
 3.0
Residential mortgage-backed non-agency securities1,264,581
 3.1
 1,102,310
 3.1
1,369,709
 3.2
 1,102,310
 3.1
Residential mortgage-backed agency securities939,226
 2.3
 949,621
 2.6
781,146
 1.9
 949,621
 2.6
U.S. government-related securities1,418,303
 3.4
 1,770,524
 4.9
1,348,057
 3.2
 1,770,524
 4.9
Other government-related securities78,941
 0.2
 76,567
 0.2
79,306
 0.2
 76,567
 0.2
State, municipals, and political divisions2,100,003
 5.1
 1,916,954
 5.3
2,068,244
 4.9
 1,916,954
 5.3
Securities issued by affiliates2,779,280
 6.7
 593,314
 1.8
2,775,230
 6.4
 593,314
 1.8
Total$41,454,487
 100.0% $36,100,412
 100.0%$42,210,294
 100.0% $36,100,412
 100.0%

Within our fixed maturity investments, we maintain portfolios classified as “available-for-sale”, “trading”, and “held-to-maturity”. We purchase our available-for-sale investments with the intent to hold to maturity by purchasing investments that match future cash flow needs. However, we may sell any of our available-for-sale and trading investments to maintain proper matching of assets and liabilities. Accordingly, we classified $35.9$36.6 billion, or 86.6%86.8%, of our fixed maturities as “available-for-sale” as of JuneSeptember 30, 2016 (Successor Company). These securities are carried at fair value on our consolidated condensed balance sheets.
 
Fixed maturities with respect to which we have both the positive intent and ability to hold to maturity are classified as “held-to-maturity”. We classified $2.8 billion, or 6.7%6.6%, of our fixed maturities as “held-to-maturity” as of JuneSeptember 30, 2016 (Successor Company). These securities are carried at amortized cost on our consolidated condensed balance sheets.
 

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Trading securities are carried at fair value and changes in fair value are recorded on the income statement as they occur. Our trading portfolio accounted for $2.8 billion, or 6.7%6.6%, of our fixed maturities and $38.2$25.7 million of short-term investments as of JuneSeptember 30, 2016 (Successor Company). Changes in fair value on the Modco trading portfolio, including gains and losses from sales, are passed to the reinsurers through the contractual terms of the reinsurance arrangements. Partially offsetting these amounts are corresponding changes in the fair value of the embedded derivative associated with the underlying reinsurance arrangement. The total Modco trading portfolio fixed maturities by rating is as follows:
 
 Successor Company Successor Company
 As of As of As of As of
Rating June 30, 2016 December 31, 2015 September 30, 2016 December 31, 2015
 (Dollars In Thousands) (Dollars In Thousands) (Dollars In Thousands) (Dollars In Thousands)
AAA $387,609
 $542,080
 $362,879
 $542,080
AA 336,922
 309,852
 361,689
 309,852
A 939,001
 752,419
 885,086
 752,419
BBB 855,219
 771,501
 912,408
 771,501
Below investment grade 270,840
 288,197
 266,379
 288,197
Total Modco trading fixed maturities $2,789,591
 $2,664,049
 $2,788,441
 $2,664,049
 
A portion of our bond portfolio is invested in residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”), and other asset-backed securities (collectively referred to as asset-backed securities or “ABS”). ABS are securities that are backed by a pool of assets. These holdings as of JuneSeptember 30, 2016 (Successor Company), were approximately $5.3$5.5 billion. Mortgage-backed securities (“MBS”) are constructed from pools of mortgages and may have cash flow volatility as a result of changes in the rate at which prepayments of principal occur with respect to the underlying loans. Excluding limitations on access to lending and other extraordinary economic conditions, prepayments of principal on the underlying loans can be expected to accelerate with decreases in market interest rates and diminish with increases in interest rates.


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The following tables include the percentage of our collateral grouped by rating category and categorizes the estimated fair value by year of security origination for our Prime, Non-Prime, Commercial, and Other asset-backed securities as of JuneSeptember 30, 2016 (Successor Company) and December 31, 2015 (Successor Company):
 As of June 30, 2016 (Successor Company) As of September 30, 2016 (Successor Company)
 
Prime(1)
 
Non-Prime(1)
 Commercial Other asset-backed Total 
Prime(1)
 
Non-Prime(1)
 Commercial Other asset-backed Total
 Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized
 Value Cost Value Cost Value Cost Value Cost Value Cost Value Cost Value Cost Value Cost Value Cost Value Cost
 (Dollars In Millions) (Dollars In Millions)
Rating $                                        
AAA $1,789.2
 $1,741.1
 $
 $
 $1,123.5
 $1,105.7
 $716.1
 $745.6
 $3,628.8
 $3,592.4
 $1,748.1
 $1,701.3
 $
 $
 $1,103.8
 $1,085.4
 $735.9
 $744.7
 $3,587.8
 $3,531.4
AA 1.2
 1.2
 
 
 378.3
 372.3
 161.6
 160.9
 541.1
 534.4
 1.1
 1.1
 
 
 449.0
 441.5
 168.4
 163.3
 618.5
 605.9
A 3.1
 3.2
 
 
 221.5
 219.1
 390.5
 392.6
 615.1
 614.9
 3.1
 3.1
 0.5
 0.5
 276.8
 273.6
 424.9
 423.2
 705.3
 700.4
BBB 2.4
 2.4
 2.4
 2.5
 12.0
 12.1
 25.4
 25.5
 42.2
 42.5
 2.3
 2.3
 1.9
 1.9
 10.8
 10.8
 34.9
 34.9
 49.9
 49.9
Below 132.7
 134.5
 272.8
 278.4
 
 
 102.1
 101.9
 507.6
 514.8
 127.1
 126.4
 266.8
 269.5
 
 
 101.0
 100.1
 494.9
 496.0
 $1,928.6
 $1,882.4
 $275.2
 $280.9
 $1,735.3
 $1,709.2
 $1,395.7
 $1,426.5
 $5,334.8
 $5,299.0
 $1,881.7
 $1,834.2
 $269.2
 $271.9
 $1,840.4
 $1,811.3
 $1,465.1
 $1,466.2
 $5,456.4
 $5,383.6
                                        
Rating %                                        
AAA 92.8% 92.5% % % 64.7% 64.7% 51.3% 52.3% 68.0% 67.8% 92.9% 92.8% % % 60.0% 59.9% 50.2% 50.8% 65.5% 65.3%
AA 0.1
 0.1
 
 
 21.8
 21.8
 11.6
 11.3
 10.1
 10.1
 0.1
 0.1
 
 
 24.4
 24.4
 11.5
 11.1
 11.6
 11.5
A 0.2
 0.2
 
 
 12.8
 12.8
 28.0
 27.5
 11.5
 11.6
 0.2
 0.2
 0.2
 0.2
 15.0
 15.1
 29.0
 28.9
 13.0
 13.1
BBB 0.1
 0.1
 0.9
 0.9
 0.7
 0.7
 1.8
 1.8
 0.8
 0.8
 0.1
 0.1
 0.7
 0.7
 0.6
 0.6
 2.4
 2.4
 0.9
 0.9
Below 6.8
 7.1
 99.1
 99.1
 
 
 7.3
 7.1
 9.6
 9.7
 6.7
 6.8
 99.1
 99.1
 
 
 6.9
 6.8
 9.0
 9.2
 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
                                        
Estimated Fair Value of Security by Year of Security Origination
2012 and prior $945.2
 $929.8
 $275.2
 $280.9
 $867.4
 $859.2
 $902.7
 $934.5
 $2,990.5
 $3,004.4
 $907.9
 $894.1
 $269.2
 $271.9
 $848.6
 $841.0
 $891.4
 $898.3
 $2,917.1
 $2,905.3
2013 151.9
 148.2
 
 
 233.6
 231.3
 116.4
 117.0
 501.9
 496.5
 180.4
 174.2
 
 
 226.1
 223.9
 121.1
 120.6
 527.6
 518.7
2014 174.3
 170.7
 
 
 238.9
 238.5
 187.1
 187.4
 600.3
 596.6
 183.9
 177.5
 
 
 240.5
 238.3
 183.8
 182.5
 608.2
 598.3
2015 559.9
 540.0
 
 
 220.1
 210.1
 64.4
 63.9
 844.4
 814.0
 474.3
 456.3
 
 
 222.2
 211.4
 70.6
 68.9
 767.1
 736.6
2016 97.3
 93.7
 
 
 175.3
 170.1
 125.1
 123.7
 397.7
 387.5
 135.2
 132.1
 
 
 303.0
 296.7
 198.2
 195.9
 636.4
 624.7
Total $1,928.6
 $1,882.4
 $275.2
 $280.9
 $1,735.3
 $1,709.2
 $1,395.7
 $1,426.5
 $5,334.8
 $5,299.0
 $1,881.7
 $1,834.2
 $269.2
 $271.9
 $1,840.4
 $1,811.3
 $1,465.1
 $1,466.2
 $5,456.4
 $5,383.6
                                        
(1)Included in Residential Mortgage-Backed securities.

    


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  As of December 31, 2015 (Successor Company)
  
Prime(1)
 
Non-Prime(1)
 Commercial Other asset-backed Total
  Fair Amortized Fair Amortized Fair Amortized Fair Amortized Fair Amortized
  Value Cost Value Cost Value Cost Value Cost Value Cost
  (Dollars In Millions)
Rating $                    
AAA $1,585.4
 $1,589.2
 $
 $
 $1,002.4
 $1,033.9
 $595.2
 $608.3
 $3,183.0
 $3,231.4
AA 1.4
 1.4
 
 
 252.5
 261.0
 197.1
 194.5
 451.0
 456.9
A 3.5
 3.5
 
 
 164.5
 165.9
 153.8
 159.2
 321.8
 328.6
BBB 2.8
 2.8
 2.8
 2.8
 13.2
 13.2
 13.5
 13.5
 32.3
 32.3
Below 152.9
 153.1
 303.1
 306.9
 
 
 112.9
 113.0
 568.9
 573.0
  $1,746.0
 $1,750.0
 $305.9
 $309.7
 $1,432.6
 $1,474.0
 $1,072.5
 $1,088.5
 $4,557.0
 $4,622.2
                     
Rating %                    
AAA 90.8% 90.8% % % 70.0% 70.1% 55.5% 55.9% 69.8% 69.9%
AA 0.1
 0.1
 
 
 17.6
 17.7
 18.4
 17.9
 9.9
 9.9
A 0.2
 0.2
 
 
 11.5
 11.3
 14.3
 14.6
 7.1
 7.1
BBB 0.2
 0.2
 0.9
 0.9
 0.9
 0.9
 1.3
 1.2
 0.7
 0.7
Below 8.7
 8.7
 99.1
 99.1
 
 
 10.5
 10.4
 12.5
 12.4
  100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
                     
Estimated Fair Value of Security by Year of Security Origination
2011 and prior $894.3
 $896.2
 $305.9
 $309.7
 $480.1
 $491.0
 $826.4
 $838.0
 $2,506.7
 $2,534.9
2012 74.2
 75.2
 
 
 369.5
 381.1
 136.6
 138.8
 580.3
 595.1
2013 157.2
 160.3
 
 
 198.2
 203.8
 48.9
 49.9
 404.3
 414.0
2014 161.6
 160.6
 
 
 216.6
 228.3
 43.1
 44.3
 421.3
 433.2
2015 458.7
 457.7
 
 
 168.2
 169.8
 17.5
 17.5
 644.4
 645.0
Total $1,746.0
 $1,750.0
 $305.9
 $309.7
 $1,432.6
 $1,474.0
 $1,072.5
 $1,088.5
 $4,557.0
 $4,622.2
                     
(1) Included in Residential Mortgage-Backed securities

The majority of our RMBS holdings as of JuneSeptember 30, 2016 (Successor Company) were super senior or senior bonds in the capital structure. Our total non-agency portfolio has a weighted-average lifelife of 4.895.0 years. TheThe following table categorizes the weighted-average life for our non-agency portfolio, by category of material holdings, as of JuneSeptember 30, 2016 (Successor Company):
 
  Weighted-Average
Non-agency portfolio Life
   
Prime 5.135.22
Alt-A 3.723.76
Sub-prime 3.263.02
    
Our investments classified as available-for-sale and trading in debt and equity securities are reported at fair value. Our investments classified as held-to-maturity are reported at amortized cost. As of JuneSeptember 30, 2016 (Successor Company), our fixed maturity investments (bonds and redeemable preferred stocks) had a fair value of $41.5$42.2 billion, which was 1.4%0.5% below amortized cost of $42.1$42.4 billion. These assets are invested for terms approximately corresponding to anticipated future benefit payments. Thus, market fluctuations are not expected to adversely affect liquidity.

Fair values for private, non-traded securities are determined as follows: 1) we obtain estimates from independent pricing services and 2) we estimate fair value based upon a comparison to quoted issues of the same issuer or issues of other issuers with similar terms and risk characteristics. We analyze the independent pricing services valuation methodologies and related inputs, including an assessment of the observability of market inputs. Upon obtaining this information related to fair value, management makes a determination as to the appropriate valuation amount.



Mortgage Loans
 
We invest a portion of our investment portfolio in commercial mortgage loans. As of JuneSeptember 30, 2016 (Successor Company), our mortgage loan holdings were approximately $5.7$5.9 billion. We have specialized in making loans on either credit-oriented

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commercial properties or credit-anchored strip shopping centers and apartments. Our underwriting procedures relative to our commercial loan portfolio are based, in our view, on a conservative and disciplined approach. We concentrate on a small number of commercial real estate asset types associated with the necessities of life (retail, multi-family, senior living, professional office buildings, and warehouses). We believe that these asset types tend to weather economic downturns better than other commercial asset classes in which we have chosen not to participate. We believe this disciplined approach has helped to maintain a relatively low delinquency and foreclosure rate throughout our history. The majority of our mortgage loans portfolio was underwritten and funded by us. From time to time, we may acquire loans in conjunction with an acquisition.

Our commercial mortgage loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, and net of valuation allowances. Interest income is accrued on the principal amount of the loan based on the loan’s contractual interest rate. Amortization of premiums and discounts is recorded using the effective yield method. Interest income, amortization of premiums and discounts, and prepayment fees are reported in net investment income.

Certain of the mortgage loans have call options that occur within the next 12 years. However, if interest rates were to significantly increase, we may be unable to exercise the call options on our existing mortgage loans commensurate with the significantly increased market rates. As of JuneSeptember 30, 2016 (Successor Company), assuming the loans are called at their next call dates, approximately $42.7$28.1 million of principal would become due for the remainder of 2016, $922.1$972.7 million in 2017 through 2021, $238.1$235.0 million in 2022 through 2026, and $11.1$11.0 million thereafter.
    
We offer a type of commercial mortgage loan under which we will permit a loan-to-value ratio of up to 85% in exchange for a participating interest in the cash flows from the underlying real estate. As of JuneSeptember 30, 2016 (Successor Company) and December 31, 2015 (Successor Company), approximately $522.8$549.2 million and $449.2 million, respectively, of our total mortgage loans principal balance have this participation feature. Cash flows received as a result of this participation feature are recorded as interest income. During the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company), the three months ended JuneSeptember 30, 2015 (Successor Company), the period of February 1, 2015 to JuneSeptember 30, 2015 (Successor Company), and January 1, 2015 to January 31, 2015 (Predecessor Company), we recognized $5.7$3.3 million, $12.5$15.8 million, $3.3 million, $5.1$8.4 million, and $0.1 million, respectively, of participating mortgage loan income.

We record mortgage loans net of an allowance for credit losses. This allowance is calculated through analysis of specific loans that have indicators of potential impairment based on current information and events. As of JuneSeptember 30, 2016 (Successor Company) there were $3.9$3.4 million of allowances for mortgage loan credit losses and as of December 31, 2015 (Successor Company), there were no allowances for mortgage loan credit losses. While our mortgage loans do not have quoted market values, as of JuneSeptember 30, 2016 (Successor Company), we estimated the fair value of our mortgage loans to be $5.7$5.9 billion (using an internal fair value model which calculates the value of most loans by using the loan's discounted cash flows to the loan's call or maturity date), which was approximately 0.2% less1.0% greater than the amortized cost, less any related loan loss reserve.

At the time of origination, our mortgage lending criteria targets that the loan-to-value ratio on each mortgage is 75% or less. We target projected rental payments from credit anchors (i.e., excluding rental payments from smaller local tenants) of 70% of the property’s projected operating expenses and debt service.

As of JuneSeptember 30, 2016 (Successor Company), approximately $1.0 million of invested assets consisted of nonperforming mortgage loans, restructured mortgage loans, or mortgage loans that were foreclosed and were converted to real estate properties. We do not expect these investments to adversely affect our liquidity or ability to maintain proper matching of assets and liabilities. During the sixnine months ended JuneSeptember 30, 2016 (Successor Company), we did not enter into certainany mortgage loan transactions that werewould have been accounted for as troubled debt restructurings under Topic 310 of the FASB ASC.restructurings. For all mortgage loans, the impact of troubled debt restructurings is generally reflected in our investment balance and in the allowance for mortgage loan credit losses. If we had troubled debt restructurings, these transactions would include either the acceptance of assets in satisfaction of principal during the respective periods or at a future date and were the result of agreements between the creditor and the debtor. During the sixnine months ended JuneSeptember 30, 2016 (Successor Company), we did not accept or agree to accept assets in satisfaction of principal. As of JuneSeptember 30, 2016 (Successor Company), we did not have any mortgage loan transactions accounted for as troubled debt restructurings.

Our mortgage loan portfolio consists of two categories of loans: 1) those not subject to a pooling and servicing agreement and 2) those subject to a contractual pooling and servicing agreement. As of JuneSeptember 30, 2016 (Successor Company), $1.0 million of mortgage loans not subject to a pooling and servicing agreement were nonperforming mortgage loans, restructured, or mortgage loans that were foreclosed and were converted to real estate properties. We did not forecloseforeclosed on any$1.0 million of nonperforming loans not subject to a pooling and servicing agreement during the sixnine months ended JuneSeptember 30, 2016 (Successor Company).

As of JuneSeptember 30, 2016 (Successor Company), none of the loans subject to a pooling and servicing agreement were nonperforming or restructured. We did not foreclose on any nonperforming loans subject to a pooling and servicing agreement during the sixnine months ended JuneSeptember 30, 2016 (Successor Company).

We do not expect these investments to adversely affect our liquidity or ability to maintain proper matching of assets and liabilities.



It is our policy to cease to carry accrued interest on loans that are over 90 days delinquent. For loans less than 90 days delinquent, interest is accrued unless it is determined that the accrued interest is not collectible. If a loan becomes over 90 days delinquent, it is our general policy to initiate foreclosure proceedings unless a workout arrangement to bring the loan current is in place. For loans subject to a pooling and servicing agreement, there are certain additional restrictions and/or requirements related

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to workout proceedings, and as such, these loans may have different attributes and/or circumstances affecting the status of delinquency or categorization of those in nonperforming status.

Risk Management and Impairment Review
 
We monitor the overall credit quality of our portfolio within established guidelines. The following table includes our available-for-sale fixed maturities by credit rating as of JuneSeptember 30, 2016 (Successor Company): 
   Percent of   Percent of
Rating Fair Value Fair Value Fair Value Fair Value
 (Dollars In Thousands)   (Dollars In Thousands)  
AAA $4,948,648
 13.8% $4,861,245
 13.3%
AA 2,945,979
 8.2
 3,203,452
 8.7
A 12,103,346
 33.7
 12,261,568
 33.5
BBB 14,092,221
 39.5
 14,404,556
 39.3
Investment grade 34,090,194
 95.2
 34,730,821
 94.8
BB 1,115,949
 3.1
 1,217,288
 3.3
B 381,445
 0.8
 418,057
 1.1
CCC or lower 298,028
 0.9
 280,457
 0.8
Below investment grade 1,795,422
 4.8
 1,915,802
 5.2
Total $35,885,616
 100.0% $36,646,623
 100.0%
 
Not included in the table above are $2.5 billion of investment grade and $270.8$266.4 million of below investment grade fixed maturities classified as trading securities and $2.8 billion of fixed maturities classified as held-to-maturity.
 
Limiting bond exposure to any creditor group is another way we manage credit risk. We held no credit default swaps on the positions listed below as of JuneSeptember 30, 2016 (Successor Company). The following table summarizes our ten largest maturity exposures to an individual creditor group as of JuneSeptember 30, 2016 (Successor Company): 
  Fair Value of  
  Funded Unfunded Total
Creditor Securities Exposures Fair Value
  (Dollars In Millions)
Exelon Corp $235.3
 $
 $235.3
AT&T Inc 215.9
 
 215.9
Wells Fargo & Co. 207.7
 
 207.7
Berkshire Hathaway Inc. 196.3
 
 196.3
Duke Energy Corp 191.8
 
 191.8
JP Morgan Chase and Company 166.3
 21.9
 188.2
Comcast Corp 182.2
 
 182.2
Bank of America Corp 179.7
 0.1
 179.8
Goldman Sachs Group Inc 174.3
 
 174.3
Morgan Stanley 168.1
 
 168.1
Total $1,917.6
 $22.0
 $1,939.6
  Fair Value of  
  Funded Unfunded Total
Creditor Securities Exposures Fair Value
  (Dollars In Millions)
The Southern Co. $242.9
 $
 $242.9
AT&T Inc. 213.2
 
 213.2
Federal Home Loan Bank 208.7
 
 208.7
Exelon Corp 206.6
 
 206.6
Wells Fargo & Co. 205.6
 
 205.6
Duke Energy Corp 198.6
 
 198.6
Goldman Sachs Group 191.2
 
 191.2
HSBC Holdings PLC 185.3
 
 185.3
Berkshire Hathaway 166.3
 16.7
 183.0
Nextera Energy Inc 181.9
 
 181.9
Total $2,000.3
 $16.7
 $2,017.0
 
Determining whether a decline in the current fair value of invested assets is an other-than-temporary decline in value is both objective and subjective, and can involve a variety of assumptions and estimates, particularly for investments that are not actively traded in established markets. We review our positions on a monthly basis for possible credit concerns and review our current exposure, credit enhancement, and delinquency experience.

Management considers a number of factors when determining the impairment status of individual securities. These include the economic condition of various industry segments and geographic locations and other areas of identified risks. Since it is possible for the impairment of one investment to affect other investments, we engage in ongoing risk management to safeguard against and limit any further risk to our investment portfolio. Special attention is given to correlative risks within specific industries, related parties, and business markets.



For certain securitized financial assets with contractual cash flows, including RMBS, CMBS, and other asset-backed securities (collectively referred to as asset-backed securities or “ABS”), GAAP requires us to periodically update our best estimate of cash flows over the life of the security. If the fair value of a securitized financial asset is less than its cost or amortized cost and there has been a decrease in the present value of the expected cash flows since the last revised estimate, considering both timing

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and amount, an other-than-temporary impairment charge is recognized. Estimating future cash flows is a quantitative and qualitative process that incorporates information received from third party sources along with certain internal assumptions and judgments regarding the future performance of the underlying collateral. Projections of expected future cash flows may change based upon new information regarding the performance of the underlying collateral. In addition, we consider our intent and ability to retain a temporarily depressed security until recovery.

Securities in an unrealized loss position are reviewed at least quarterly to determine if an other-than-temporary impairment is present based on certain quantitative and qualitative factors. We consider a number of factors in determining whether the impairment is other-than-temporary. These include, but are not limited to: 1) actions taken by rating agencies, 2) default by the issuer, 3) the significance of the decline, 4) an assessment of our intent to sell the security (including a more likely than not assessment of whether we will be required to sell the security) before recovering the security’s amortized cost, 5) the time period during which the decline has occurred, 6) an economic analysis of the issuer’s industry, and 7) the financial strength, liquidity, and recoverability of the issuer. Management performs a security-by-security review each quarter in evaluating the need for any other-than-temporary impairments. Although no set formula is used in this process, the investment performance, collateral position, and continued viability of the issuer are significant measures considered, along with an analysis regarding our expectations for recovery of the security’s entire amortized cost basis through the receipt of future cash flows. Based on our analysis, for the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company), we concluded that approximately $1.0$3.3 million and $3.6$6.9 million, respectively, of investment securities in an unrealized loss position were other-than-temporarily impaired, due to credit related factors, resulting in a charge to earnings. Additionally, we recognized $4.6$1.4 million of non-credit gains and $4.8$3.3 million of non-credit losses in other comprehensive income (loss), respectively.

There are certain risks and uncertainties associated with determining whether declines in fair values are other-than-temporary. These include significant changes in general economic conditions and business markets, trends in certain industry segments, interest rate fluctuations, rating agency actions, changes in significant accounting estimates and assumptions, commission of fraud, and legislative actions. We continuously monitor these factors as they relate to the investment portfolio in determining the status of each investment.

During 2015 and 2016, the energy and natural gas sector experienced increased volatility due to the decline in oil prices. A prolonged decline in oil prices could have a broad economic impact and put financial stress on companies in this sector. We continue to monitor our exposure to companies within and exposed to this sector closely. Our current exposure is predominantly with investment grade securities of companies with ample liquidity to weather a prolonged decline in oil prices. Many of these companies have displayed financial discipline by reducing capital expenditures to conserve cash and maintain their credit ratings. For the sixthree and nine months ended JuneSeptember 30, 2016 (Successor Company), we concluded that certain investment securities within the energy and natural gas sector that were in an unrealized loss position were other-than-temporarily impaired due to credit related factors, resulting in a $2.6 million impairment recognized in net income. We did not recognized an other-than-temporary impairment for the three months ended June 30, 2016 (Successor Company).impairment.

The energy and natural gas sector securities as of JuneSeptember 30, 2016 (Successor Company) are presented in the following tables.
Energy and Natural Gas
Fair
Value
 
Amortized
Cost
 
Unrealized
Loss
 
% Unrealized
Loss
Fair
Value
 
Amortized
Cost
 
Unrealized
Loss
 
% Unrealized
Loss
(Dollars In Thousands)(Dollars In Thousands)
Midstream$1,687,419
 $1,818,098
 $(130,679) 48.9%$1,776,398
 $1,835,697
 $(59,299) 42.3%
Integrated788,337
 816,448
 (28,111) 10.5
842,005
 857,161
 (15,156) 10.8
Distributors703,367
 728,756
 (25,389) 9.5
734,574
 749,929
 (15,355) 11.0
Independent550,774
 575,452
 (24,678) 9.2
575,237
 577,040
 (1,803) 1.3
Oil Field Services512,761
 561,342
 (48,581) 18.2
515,144
 560,904
 (45,760) 32.6
Refining169,184
 178,900
 (9,716) 3.7
175,596
 178,442
 (2,846) 2.0
Total$4,411,842
 $4,678,996
 $(267,154) 100.0%$4,618,954
 $4,759,173
 $(140,219) 100.0%



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Energy and Natural Gas
Rating Issuer Type 
Fair
Value
 
Amortized
Cost
 
Unrealized
Loss
 
% Unrealized
Loss
 Issuer Type 
Fair
Value
 
Amortized
Cost
 
Unrealized
Loss
 
% Unrealized
Loss
 (Dollars In Thousands) (Dollars In Thousands)
AAA/AA/A Distributors $364,181
 $366,546
 $(2,365) 0.9 % Distributors $386,411
 $387,259
 $(848) 0.6 %
 Independent 80,209
 76,888
 3,321
 (1.2) Independent 81,848
 78,051
 3,797
 (2.7)
 Integrated 319,817
 323,705
 (3,888) 1.4
 Integrated 363,320
 364,628
 (1,308) 0.9
 Midstream 175,568
 182,809
 (7,241) 2.7
 Midstream 170,118
 170,039
 79
 
 Oil Field Services 157,489
 157,921
 (432) 0.1
 Oil Field Services 81,964
 80,866
 1,098
 (0.8)
                
BBB Distributors 314,457
 335,065
 (20,608) 7.7
 Distributors 321,100
 335,519
 (14,419) 10.3
 Independent 417,910
 447,707
 (29,797) 11.2
 Independent 437,499
 447,985
 (10,486) 7.5
 Integrated 337,183
 358,326
 (21,143) 7.9
 Integrated 342,255
 357,861
 (15,606) 11.1
 Midstream 1,356,083
 1,468,323
 (112,240) 42.0
 Midstream 1,423,404
 1,485,896
 (62,492) 44.7
 Oil Field Services 140,297
 145,482
 (5,185) 1.9
 Oil Field Services 217,905
 221,954
 (4,049) 2.8
 Refining 158,976
 168,526
 (9,550) 3.6
 Refining 165,211
 168,082
 (2,871) 2.0
Total investment gradeTotal investment grade 3,822,170
 4,031,298
 (209,128) 78.2
Total investment grade 3,991,035
 4,098,140
 (107,105) 76.4
                
Below investment grade Distributors 24,729
 27,145
 (2,416) 0.9
 Distributors 27,063
 27,151
 (88) 0.1
 Independent 52,655
 50,857
 1,798
 (0.7) Independent 55,890
 51,004
 4,886
 (3.5)
 Integrated 131,337
 134,417
 (3,080) 1.2
 Integrated 136,430
 134,672
 1,758
 (1.3)
 Midstream 155,768
 166,966
 (11,198) 4.2
 Midstream 182,876
 179,762
 3,114
 (2.3)
 Oil Field Services 214,975
 257,939
 (42,964) 16.1
 Oil Field Services 215,275
 258,084
 (42,809) 30.6
 Refining 10,208
 10,374
 (166) 0.1
 Refining 10,385
 10,360
 25
 
Total below investment gradeTotal below investment grade 589,672
 647,698
 (58,026) 21.8
Total below investment grade 627,919
 661,033
 (33,114) 23.6
Total energy and natural gasTotal energy and natural gas $4,411,842
 $4,678,996
 $(267,154) 100.0 %Total energy and natural gas $4,618,954
 $4,759,173
 $(140,219) 100.0 %

During 2015, the metals and mining sector (a sub-sector of the basic industrial sector) experienced increased volatility due to the decline in precious and base metal prices. A prolonged decline in these prices could have a broad economic impact and put financial stress on companies in this sector. We continue to monitor our exposure to companies within and exposed to this sector closely. Our current exposure is predominantly with investment grade securities of companies with ample liquidity to weather a prolonged decline in these prices. Many of these companies have displayed financial discipline by reducing capital expenditures and reducing dividends to conserve cash and maintain their credit ratings.

The basic industrial sector securities as of JuneSeptember 30, 2016 (Successor Company) are presented in the following tables:

Basic Industrial
Fair
Value
 
Amortized
Cost
 
Unrealized
Loss
 
% Unrealized
Loss
Fair
Value
 
Amortized
Cost
 
Unrealized
Loss
 
% Unrealized
Loss
(Dollars In Thousands)(Dollars In Thousands)
Chemicals$758,727
 $790,630
 $(31,903) 49.2%$774,920
 $799,525
 $(24,605) 170.1 %
Metals and Mining730,065
 760,651
 (30,586) 47.2
772,367
 760,875
 11,492
 (79.5)
Paper131,283
 133,624
 (2,341) 3.6
131,770
 133,118
 (1,348) 9.4
Total$1,620,075
 $1,684,905
 $(64,830) 100.0%$1,679,057
 $1,693,518
 $(14,461) 100.0 %



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Basic Industrial
Rating Issuer Type 
Fair
Value
 
Amortized
Cost
 
Unrealized
Loss
 
% Unrealized
Loss
 Issuer Type 
Fair
Value
 
Amortized
Cost
 
Unrealized
Loss
 
% Unrealized
Loss
 (Dollars In Thousands) (Dollars In Thousands)
AAA/AA/A Chemicals $265,121
 $273,873
 $(8,752) 13.5% Chemicals $277,628
 $283,548
 $(5,920) 40.9 %
 Metals and Mining 225,054
 232,184
 (7,130) 11.1
 Metals and Mining 228,591
 231,865
 (3,274) 22.6
                
BBB Chemicals 491,669
 514,323
 (22,654) 34.8
 Chemicals 495,002
 513,457
 (18,455) 127.6
 Metals and Mining 220,803
 232,482
 (11,679) 18.0
 Metals and Mining 231,650
 232,738
 (1,088) 7.5
 Paper 131,284
 133,624
 (2,340) 3.6
 Paper 131,770
 133,118
 (1,348) 9.4
Total investment gradeTotal investment grade 1,333,931
 1,386,486
 (52,555) 81.0
Total investment grade 1,364,641
 1,394,726
 (30,085) 208.0
                
Below investment grade Chemicals 1,936
 2,434
 (498) 0.8
 Chemicals 2,290
 2,520
 (230) 1.6
 Metals and Mining 284,208
 295,985
 (11,777) 18.2
 Metals and Mining 312,126
 296,272
 15,854
 (109.6)
Total below investment gradeTotal below investment grade 286,144
 298,419
 (12,275) 19.0
Total below investment grade 314,416
 298,792
 15,624
 (108.0)
Total basic industrialTotal basic industrial $1,620,075
 $1,684,905
 $(64,830) 100.0%Total basic industrial $1,679,057
 $1,693,518
 $(14,461) 100.0 %

We have deposits with certain financial institutions which exceed federally insured limits. We have reviewed the creditworthiness of these financial institutions and believe that there is minimal risk of a material loss.
 
Certain European countries have experienced varying degrees of financial stress. Risks from the debt crisis in Europe could continue to disrupt the financial markets, which could have a detrimental impact on global economic conditions and on sovereign and non-sovereign obligations. There remains considerable uncertainty as to future developments in the European debt crisis and the impact on financial markets.
 
The chart shown below includes our non-sovereign fair value exposures in these countries as of JuneSeptember 30, 2016 (Successor Company). As of JuneSeptember 30, 2016 (Successor Company), we had no unfunded exposure and had no direct sovereign fair value exposure. 
     Total Gross     Total Gross
 Non-sovereign Debt Funded Non-sovereign Debt Funded
Financial Instrument and Country Financial Non-financial Exposure Financial Non-financial Exposure
 (Dollars In Millions) (Dollars In Millions)
Securities:  
  
  
  
  
  
United Kingdom $531.1
 $898.6
 $1,429.7
 $556.1
 $915.8
 $1,471.9
Netherlands 163.1
 252.2
 415.3
 179.4
 254.0
 433.4
Switzerland 190.3
 162.1
 352.4
 192.2
 140.9
 333.1
France 105.5
 205.4
 310.9
 106.5
 210.2
 316.7
Spain 22.9
 230.1
 253.0
 22.9
 226.6
 249.5
Germany 153.0
 83.0
 236.0
 150.1
 83.0
 233.1
Belgium 
 170.8
 170.8
 
 207.9
 207.9
Sweden 131.6
 34.0
 165.6
 132.4
 34.0
 166.4
Italy 42.2
 95.5
 137.7
 42.2
 96.1
 138.3
Norway 
 101.3
 101.3
 
 102.5
 102.5
Ireland 11.4
 58.7
 70.1
 11.4
 58.7
 70.1
Luxembourg 
 55.9
 55.9
 
 59.7
 59.7
Total securities 1,351.1
 2,347.6
 3,698.7
 1,393.2
 2,389.4
 3,782.6
Derivatives:  
  
  
  
  
  
Germany 70.0
 
 70.0
 67.9
 
 67.9
United Kingdom 32.0
 
 32.0
 25.9
 
 25.9
Switzerland 22.8
 
 22.8
 22.0
 
 22.0
France 4.2
 
 4.2
 5.1
 
 5.1
Total derivatives 129.0
 
 129.0
 120.9
 
 120.9
Total securities $1,480.1
 $2,347.6
 $3,827.7
 $1,514.1
 $2,389.4
 $3,903.5


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Realized Gains and Losses
 
The following table sets forth realized investment gains and losses for the periods shown:
 
Successor
Company
 
Predecessor
Company
Successor
Company
 
Predecessor
Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 
February 1, 2015
to
June 30, 2015
 
January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
(Dollars In Thousands) (Dollars In Thousands)(Dollars In Thousands) (Dollars In Thousands)
Fixed maturity gains - sales$18,550
 $5,381
 $27,461
 $6,888
 $6,920
$3,223
 $663
 $30,684
 $7,551
 $6,920
Fixed maturity losses - sales(1,820) (2,052) (5,029) (3,186) (29)(1,558) (1,967) (6,587) (5,153) (29)
Equity gains - sales202
 44
 320
 44
 

 51
 320
 95
 
Equity losses - sales
 (23) (284) (23) 

 
 (284) (23) 
Impairments on corporate securities(964) (5,734) (3,581) (5,734) (481)(3,308) (10,064) (6,892) (15,798) (481)
Modco trading portfolio76,201
 (108,741) 154,355
 (141,901) 73,062
23,995
 8,377
 178,353
 (133,524) 73,062
Other(4,353) 3,044
 (6,334) 775
 1,200
(1,508) (1,815) (7,842) (1,040) 1,200
Total realized gains (losses) - investments$87,816
 $(108,081) $166,908
 $(143,137) $80,672
$20,844
 $(4,755) $187,752
 $(147,892) $80,672
Derivatives related to VA contracts: 
  
    
  
 
  
    
  
Interest rate futures - VA$31,266
 $(14,183) $69,067
 $(14,231) $1,413
$(7,002) $12,140
 $62,065
 $(2,091) $1,413
Equity futures - VA(21,328) (5,267) (24,556) (37,736) 9,221
(41,836) 40,951
 (66,392) 3,215
 9,221
Currency futures - VA11,112
 (8,709) 4,954
 (2,572) 7,778
934
 4,000
 5,888
 1,428
 7,778
Equity options - VA(3,232) (3,550) 13,072
 (25,324) 3,047
(36,482) 33,519
 (23,410) 8,195
 3,047
Interest rate swaptions - VA(749) 2,547
 (2,983) (8,781) 9,268
(229) (3,618) (3,212) (12,399) 9,268
Interest rate swaps - VA81,554
 (121,167) 207,147
 (175,958) 122,710
14,737
 101,808
 221,884
 (74,150) 122,710
Embedded derivative - GMWB(66,019) 45,969
 (132,695) 81,839
 (68,503)24,150
 (71,296) (108,545) 10,543
 (68,503)
Funds withheld derivative17,850
 6,335
 10,052
 44,571
 (9,073)53,834
 (52,872) 63,886
 (8,301) (9,073)
Total derivatives related to VA contracts50,454
 (98,025) 144,058
 (138,192) 75,861
8,106
 64,632
 152,164
 (73,560) 75,861
Derivatives related to FIA contracts: 
  
    
  
 
  
    
  
Embedded derivative - FIA710
 290
 (1,452) (2,293) 1,769
(14,486) 11,328
 (15,938) 9,035
 1,769
Equity futures - FIA651
 123
 2,033
 307
 (184)2,236
 709
 4,269
 1,016
 (184)
Volatility futures - FIA
 25
 
 29
 

 (24) 
 6
 
Equity options - FIA735
 1,226
 (4,827) 5,601
 (2,617)6,583
 (12,099) 1,756
 (6,499) (2,617)
Total derivatives related to FIA contracts2,096
 1,664
 (4,246) 3,644
 (1,032)(5,667) (86) (9,913) 3,558
 (1,032)
Derivatives related to IUL contracts: 
  
    
  
 
  
    
  
Embedded derivative - IUL(96) 1,538
 (834) 1,795
 (486)7,136
 1,287
 6,302
 3,082
 (486)
Equity futures - IUL47
 9
 (172) 23
 3
101
 17
 (71) 39
 3
Equity options - IUL241
 (78) 214
 62
 (115)1,607
 (1,110) 1,821
 (1,048) (115)
Total derivatives related to IUL contracts192
 1,469
 (792) 1,880
 (598)8,844
 194
 8,052
 2,073
 (598)
Embedded derivative - Modco reinsurance treaties(22,820) 109,131
 (81,175) 141,322
 (68,026)(24,187) (9,817) (105,362) 131,505
 (68,026)
Derivatives with PLC(1)
13,681
 (3,684) 17,711
 (3,119) 15,863
13,387
 (12,978) 31,098
 (16,096) 15,863
Other derivatives(55) 11
 (100) 83
 (37)49
 (50) (51) 33
 (37)
Total realized gains (losses) - derivatives$43,548
 $10,566
 $75,456
 $5,618
 $22,031
$532
 $41,895
 $75,988
 $47,513
 $22,031

(1) These derivatives include the interest support agreement, two early renewable term ("YRT") premium support agreements, and three portfolio maintenance agreements between certain of our subsidiaries and PLC.

Realized gains and losses on investments reflect portfolio management activities designed to maintain proper matching of assets and liabilities and to enhance long-term investment portfolio performance. The change in net realized investment gains (losses), excluding impairments and Modco trading portfolio activity during the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company), primarily reflects the normal operation of our asset/liability program within the context of the changing interest rate and spread environment, as well as tax planning strategies designed to utilize capital loss carryforwards.
 
Realized losses are comprised of both write-downs of other-than-temporary impairments and actual sales of investments. For the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company) we concluded that approximately $1.0$3.3 million and $3.6$6.9 million, respectively, of investment securities in an unrealized loss position were other-than-temporarily impaired, due to credit related factors, resulting in a charge to earnings. Additionally, $4.6$1.4 million of non-credit gains and $4.8$3.3 million of non-credit losses was recorded in other comprehensive income (loss), respectively.


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For the period of January 1, 2015 to January 31, 2015 (Predecessor Company), we recognized pre-tax other-than-temporary impairments of $0.5 million due to credit-related factors, resulting in a charge to earnings. Of the credit losses, $0.1 million were non-credit losses previously recorded in other comprehensive income.

These other-than-temporary impairments resulted from our analysis of circumstances and our belief that credit events, loss severity, changes in credit enhancement, and/or other adverse conditions of the respective issuers have caused, or will lead to, a deficiency in the contractual cash flows related to these investments. These other-than-temporary impairments, net of Modco recoveries, are presented in the chart below: 
Successor
Company
 
Predecessor
Company
Successor
Company
 
Predecessor
Company
For The Three
Months Ended
June 30, 2016
 
For The Three
Months Ended
June 30, 2015
 
For The Six
Months Ended
June 30, 2016
 
February 1, 2015
to
June 30, 2015
 
January 1, 2015
to
January 31, 2015
For The Three Months Ended September 30, 2016 For The Three Months Ended September 30, 2015 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
(Dollars In Millions) (Dollars In Millions)(Dollars In Millions) (Dollars In Millions)
Alt-A MBS$
 $
 $
 $
 $0.3
$
 $
 $
 $
 $0.3
Other MBS
 0.1
 
 0.1
 0.2
0.2
 
 0.2
 0.1
 0.2
Corporate securities1.0
 5.6
 3.6
 5.6
 
3.1
 9.9
 6.7
 15.5
 
Other
 0.2
 
 0.2
 
Total$1.0
 $5.7
 $3.6
 $5.7
 $0.5
$3.3
 $10.1
 $6.9
 $15.8
 $0.5

As previously discussed, management considers several factors when determining other-than-temporary impairments. Although we purchase securities with the intent to hold them until maturity, we may change our position as a result of a change in circumstances. Any such decision is consistent with our classification of all but a specific portion of our investment portfolio as available-for-sale. For the sixnine months ended JuneSeptember 30, 2016 (Successor Company), we sold securities in an unrealized loss position with a fair value of $60.6$67.7 million. For such securities, the proceeds, realized loss, and total time period that the security had been in an unrealized loss position are presented in the table below for the sixnine months ended JuneSeptember 30, 2016 (Successor Company):
 
Proceeds % Proceeds Realized Loss % Realized LossProceeds % Proceeds Realized Loss % Realized Loss
(Dollars In Thousands)(Dollars In Thousands)
<= 90 days$53,566
 88.4% $(3,375) 63.5%$56,579
 83.6% $(4,316) 62.8%
>90 days but <= 180 days1,846
 3.0
 (364) 6.9
2,253
 3.3
 (433) 6.3
>180 days but <= 270 days1,211
 2.0
 (590) 11.1
1,512
 2.2
 (650) 9.5
>270 days but <= 1 year1,476
 2.4
 (325) 6.1
1,505
 2.2
 (328) 4.8
>1 year2,483
 4.2
 (659) 12.4
5,839
 8.7
 (1,144) 16.6
Total$60,582
 100.0% $(5,313) 100.0%$67,688
 100.0% $(6,871) 100.0%
 
     For the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company) we sold securities in an unrealized loss position with a fair value (proceeds) of $6.9$7.1 million and $60.6$67.7 million, respectively. The losses realized on the sale of these securities were $1.8$1.6 million and $5.3$6.9 million, respectively. We made the decision to exit these holdings in conjunction with our overall asset liability management process.
 
For the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company), we sold securities in an unrealized gain position with a fair value of $513.4$167.3 million and $819.8$987.0 million, respectively. The gains realized on the sale of these securities were $18.8$3.2 million and $27.8$31.0 million, respectively.
 
The $4.3$1.5 million of other realized losses recognized for the three months ended JuneSeptember 30, 2016 (Successor Company), consisted of an increasea decrease in mortgage loan reserves of $2.0$0.4 million partnershipand mortgage loan losses of $2.4 million, and real estate realized gains of $0.1$1.9 million.
 
The $6.3$7.8 million of other realized losses recognized for the sixnine months ended JuneSeptember 30, 2016 (Successor Company), consisted realized gainslosses related to mortgage loans of $0.3$1.6 million, an increase in mortgage loan reserves of $3.9$3.5 million, partnership losses of $2.5 million, and real estate realized losses of $0.2 million.

For the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company) net gains of $76.2$24.0 million and $154.4$178.4 million, respectively, primarily related to changes in fair value on our Modco trading portfolios were included in realized gains and losses. Of the $154.4$178.4 million for the sixnine months ended JuneSeptember 30, 2016 (Successor Company), approximately $2.0 million of losses were realized through the sale of certain securities, which will be reimbursed to our reinsurance partners over time through the reinsurance settlement process for this block of business.
 
The Modco embedded derivative associated with the trading portfolios had realized pre-tax losses of $22.8$24.2 million and $81.2$105.4 million, respectively, during the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company). The losses during the three months ended JuneSeptember 30, 2016 (Successor Company) were due to lower treasury yields.
 

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Realized investment gains and losses related to derivatives represent changes in their fair value during the period and termination gains/(losses) on those derivatives that were closed during the period.
 
We use various derivative instruments to manage risks related to certain life insurance and annuity products. We can use these derivatives as economic hedges against risks inherent in the products. These risks have a direct impact on the cost of these products and are correlated with the equity markets, interest rates, foreign currency levels, and overall volatility. The hedged risks are recorded through the recognition of embedded derivatives associated with the products. These products include the GMWB rider associated with the variable annuity, fixed indexed annuity products as well as indexed universal life products. During the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company) we experienced net realized gains on derivatives related to VA contracts of approximately $50.5$8.1 million and $144.1$152.2 million, respectively. These net gains on derivatives related to VA contracts were affected by capital market.market impacts.
 
The Funds Withheld derivative associated with Shades Creek had pre-tax realized gains of $17.9$53.8 million and $10.1$63.9 million, respectively, for the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company).

Certain of our subsidiaries have derivatives with PLC. These derivatives consist of an interest support agreement, two YRT premium support agreements, and three portfolio maintenance agreements with PLC. We recognized gains of $13.9$14.8 million and $13.8$28.6 million, respectively related to the interest support agreement for the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company). We recognized losses of $0.7$0.6 million and $0.5$1.1 million, respectively, related to the YRT premium support agreements for the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company). We entered into two separate portfolio maintenance agreements in October 2012 and one portfolio maintenance agreement in January 2016. We recognized pre-tax gainslosses of $0.5$0.8 million and $4.4 million, respectively, for the three and six months ended JuneSeptember 30, 2016 (Successor Company) and pre-tax gains of $3.6 million for the nine months ended September 30, 2016 (Successor Company).

We also use various swaps and other types of derivatives to mitigate risk related to other exposures. These contracts generated gains of $0.1 million for the three months ended September 30, 2016 (Successor Company) and losses of $0.1 million for the three and sixnine months ended JuneSeptember 30, 2016 (Successor Company).

Unrealized Gains and Losses — Available-for-Sale Securities
 
The information presented below relates to investments at a certain point in time and is not necessarily indicative of the status of the portfolio at any time after JuneSeptember 30, 2016 (Successor Company), the balance sheet date. Information about unrealized gains and losses is subject to rapidly changing conditions, including volatility of financial markets and changes in interest rates. Management considers a number of factors in determining if an unrealized loss is other-than-temporary, including the expected cash to be collected and the intent, likelihood, and/or ability to hold the security until recovery. Consistent with our long-standing practice, we do not utilize a “bright line test” to determine other-than-temporary impairments. On a quarterly basis, we perform an analysis on every security with an unrealized loss to determine if an other-than-temporary impairment has occurred. This analysis includes reviewing several metrics including collateral, expected cash flows, ratings, and liquidity. Furthermore, since the timing of recognizing realized gains and losses is largely based on management’s decisions as to the timing and selection of investments to be sold, the tables and information provided below should be considered within the context of the overall unrealized gain/(loss) position of the portfolio. We had an overall net unrealized loss of $589.7$138.6 million, prior to tax and the related impact of certain insurance assets and liabilities offsets, as of JuneSeptember 30, 2016 (Successor Company), and an overall net unrealized loss of $2.9 billion as of December 31, 2015 (Successor Company).
 
For fixed maturity and equity securities held that are in an unrealized loss position as of JuneSeptember 30, 2016 (Successor Company), the fair value, amortized cost, unrealized loss, and total time period that the security has been in an unrealized loss position are presented in the table below: 
Fair
Value
 
% Fair
Value
 
Amortized
Cost
 
% Amortized
Cost
 
Unrealized
Loss
 
% Unrealized
Loss
Fair
Value
 
% Fair
Value
 
Amortized
Cost
 
% Amortized
Cost
 
Unrealized
Loss
 
% Unrealized
Loss
(Dollars In Thousands)(Dollars In Thousands)
<= 90 days$437,308
 2.4% $447,890
 2.4% $(10,582) 0.9%$3,214,934
 20.3% $3,250,310
 19.4% $(35,376) 4.5%
>90 days but <= 180 days362,619
 2.0
 383,025
 2.0
 (20,406) 1.8
75,744
 0.5
 76,590
 0.5
 (846) 0.1
>180 days but <= 270 days391,831
 2.2
 406,451
 2.1
 (14,620) 1.4
132,578
 0.8
 142,246
 0.9
 (9,668) 1.2
>270 days but <= 1 year1,562,123
 8.7
 1,651,502
 8.6
 (89,379) 7.9
183,599
 1.2
 191,951
 1.2
 (8,352) 1.1
>1 year but <= 2 years15,257,801
 84.7
 16,252,330
 84.9
 (994,529) 88.0
12,268,217
 77.2
 13,001,795
 78.0
 (733,578) 93.1
>2 years but <= 3 years
 
 
 
 
 

 
 
 
 
 
>3 years but <= 4 years
 
 
 
 
 

 
 
 
 
 
>4 years but <= 5 years
 
 
 
 
 

 
 
 
 
 
>5 years
 
 
 
 
 

 
 
 
 
 
Total$18,011,682
 100.0% $19,141,198
 100.0% $(1,129,516) 100.0%$15,875,072
 100.0% $16,662,892
 100.0% $(787,820) 100.0%
 
The book value of our investment portfolio was marked to fair value as of February 1, 2015 (Successor Company), in conjunction with the Dai-ichi Merger which resulted in the elimination of previously unrealized gains and losses from accumulated other comprehensive income. The level of interest rates as of February 1, 2015 (Successor Company), resulted in an increase in


the carrying value of our investments. Since February 1, 2015 (Successor Company) interest rates have increased resulting in net unrealized losses in our investment portfolio.
 

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As of JuneSeptember 30, 2016 (Successor Company), the Barclays Investment Grade Index was priced at 147.6133.0 bps versus a 10 year average of 175176.1 bps. Similarly, the Barclays High Yield Index was priced at 628.9508.7 bps versus a 10 year average of 642.2647.0 bps. As of JuneSeptember 30, 2016 (Successor Company), the five, ten, and thirty-year U.S. Treasury obligations were trading at levels of 1.000%1.150%, 1.471%1.595%, and 2.285%2.316%, as compared to 10 year averages of 2.080%2.003%, 2.943%2.875%, and 3.752%3.696%, respectively.
 
As of JuneSeptember 30, 2016 (Successor Company), 84.8%83.8% of the unrealized loss was associated with securities that were rated investment grade. We have examined the performance of the underlying collateral and cash flows and expect that our investments will continue to perform in accordance with their contractual terms. Factors such as credit enhancements within the deal structures and the underlying collateral performance/characteristics support the recoverability of the investments. Based on the factors discussed, we do not consider these unrealized loss positions to be other-than-temporary. However, from time to time, we may sell securities in the ordinary course of managing our portfolio to meet diversification, credit quality, yield enhancement, asset/liability management, and liquidity requirements.
 
Expectations that investments in mortgage-backed and asset-backed securities will continue to perform in accordance with their contractual terms are based on assumptions that a market participant would use in determining the current fair value. It is reasonably possible that the underlying collateral of these investments will perform worse than current market expectations and that such an event may lead to adverse changes in the cash flows on our holdings of these types of securities. This could lead to potential future write-downs within our portfolio of mortgage-backed and asset-backed securities. Expectations that our investments in corporate securities and/or debt obligations will continue to perform in accordance with their contractual terms are based on evidence gathered through our normal credit surveillance process. Although we do not anticipate such events, it is reasonably possible that issuers of our investments in corporate securities will perform worse than current expectations. Such events may lead us to recognize potential future write-downs within our portfolio of corporate securities. It is also possible that such unanticipated events would lead us to dispose of those certain holdings and recognize the effects of any such market movements in our financial statements.
 
As of JuneSeptember 30, 2016 (Successor Company), there were estimated gross unrealized losses of $5.8$3.5 million related to our mortgage-backed securities collateralized by Alt-A mortgage loans. Gross unrealized losses in our securities collateralized by Alt-A residential mortgage loans as of JuneSeptember 30, 2016 (Successor Company), were primarily the result of continued widening spreads, representing marketplace uncertainty arising from higher defaults in Alt-A residential mortgage loans and rating agency downgrades of securities collateralized by Alt-A residential mortgage loans.
 

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We have no material concentrations of issuers or guarantors of fixed maturity securities. The industry segment composition of all securities in an unrealized loss position held as of JuneSeptember 30, 2016 (Successor Company) is presented in the following table:
 
Fair
Value
 
% Fair
Value
 
Amortized
Cost
 
% Amortized
Cost
 
Unrealized
Loss
 
% Unrealized
Loss
Fair
Value
 
% Fair
Value
 
Amortized
Cost
 
% Amortized
Cost
 
Unrealized
Loss
 
% Unrealized
Loss
(Dollars In Thousands)(Dollars In Thousands)
Banking$1,665,354
 9.2% $1,741,708
 9.1% $(76,354) 6.8%$1,266,368
 8.0% $1,318,435
 7.9% $(52,067) 6.6%
Other finance122,801
 0.7
 126,390
 0.7
 (3,589) 0.3
104,405
 0.7
 106,482
 0.6
 (2,077) 0.3
Electric utility2,646,564
 14.7
 2,796,947
 14.6
 (150,383) 13.3
2,495,386
 15.7
 2,628,939
 15.8
 (133,553) 17.0
Energy and natural gas3,249,904
 18.0
 3,546,873
 18.6
 (296,969) 26.3
2,714,485
 17.1
 2,905,322
 17.4
 (190,837) 24.2
Insurance2,254,331
 12.5
 2,415,833
 12.6
 (161,502) 14.3
2,051,456
 12.9
 2,168,178
 13.0
 (116,722) 14.8
Communications935,891
 5.2
 1,023,589
 5.3
 (87,698) 7.8
889,981
 5.6
 947,917
 5.7
 (57,936) 7.4
Basic industrial1,100,079
 6.1
 1,184,074
 6.2
 (83,995) 7.4
906,826
 5.7
 954,365
 5.7
 (47,539) 6.0
Consumer noncyclical1,078,285
 6.0
 1,131,061
 5.9
 (52,776) 4.7
916,861
 5.8
 952,223
 5.7
 (35,362) 4.5
Consumer cyclical618,777
 3.4
 650,006
 3.4
 (31,229) 2.8
565,496
 3.6
 585,974
 3.5
 (20,478) 2.6
Finance companies28,104
 0.2
 31,953
 0.2
 (3,849) 0.3
29,993
 0.2
 31,876
 0.2
 (1,883) 0.2
Capital goods653,192
 3.6
 675,274
 3.5
 (22,082) 2.0
489,503
 3.1
 507,131
 3.0
 (17,628) 2.2
Transportation502,135
 2.8
 529,143
 2.8
 (27,008) 2.4
469,868
 3.0
 490,619
 2.9
 (20,751) 2.6
Other industrial138,964
 0.8
 146,317
 0.8
 (7,353) 0.7
155,349
 1.0
 160,921
 1.0
 (5,572) 0.7
Brokerage243,013
 1.3
 256,714
 1.3
 (13,701) 1.2
226,633
 1.4
 239,325
 1.4
 (12,692) 1.6
Technology555,169
 3.1
 591,332
 3.1
 (36,163) 3.2
448,820
 2.8
 470,115
 2.8
 (21,295) 2.7
Real estate51,916
 0.5
 52,300
 0.3
 (384) 
15,441
 0.5
 15,856
 0.1
 (415) 0.1
Other utility130,681
 0.7
 134,329
 0.7
 (3,648) 0.3
115,772
 0.7
 118,784
 0.7
 (3,012) 0.4
Commercial mortgage-backed securities238,515
 1.3
 242,241
 1.3
 (3,726) 0.3
280,140
 1.8
 282,772
 1.7
 (2,632) 0.3
Other asset-backed securities641,176
 3.6
 677,231
 3.5
 (36,055) 3.2
533,826
 3.4
 549,517
 3.3
 (15,691) 2.0
Residential mortgage-backed non-agency securities307,092
 1.7
 316,250
 1.7
 (9,158) 0.8
245,899
 1.5
 250,392
 1.5
 (4,493) 0.6
Residential mortgage-backed agency securities38,174
 0.2
 38,269
 0.2
 (95) 
21,777
 0.1
 21,842
 0.1
 (65) 
U.S. government-related securities58,655
 0.3
 58,860
 0.3
 (205) 
128,227
 0.8
 130,016
 0.8
 (1,789) 0.2
Other government-related securities
 
 
 
 
 
1,927
 
 1,929
 
 (2) 
States, municipals, and political divisions752,910
 4.1
 774,504
 3.9
 (21,594) 1.9
800,633
 4.6
 823,962
 5.2
 (23,329) 3.0
Total$18,011,682
 100.0% $19,141,198
 100.0% $(1,129,516) 100.0%$15,875,072
 100.0% $16,662,892
 100.0% $(787,820) 100.0%


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We have no material concentrations of issuers or guarantors of fixed maturity securities. The industry segment composition of all securities in an unrealized loss position held as of December 31, 2015 (Successor Company) is presented in the following table:
 
Fair
Value
 
% Fair
Value
 
Amortized
Cost
 
% Amortized
Cost
 
Unrealized
Loss
 
% Unrealized
Loss
 (Dollars In Thousands)
Banking$2,898,187
 9.6% $3,013,605
 9.1% $(115,418) 3.9%
Other finance437,409
 1.4
 452,946
 1.4
 (15,537) 0.5
Electric utility3,394,404
 11.2
 3,788,969
 11.4
 (394,565) 13.5
Energy and natural gas3,717,401
 12.3
 4,408,415
 13.3
 (691,014) 23.6
Insurance2,695,639
 8.9
 2,981,123
 9.0
 (285,484) 9.7
Communications1,207,228
 4.0
 1,396,152
 4.4
 (188,924) 6.4
Basic industrial1,403,081
 4.6
 1,657,297
 5.0
 (254,216) 8.7
Consumer noncyclical2,777,167
 9.2
 3,033,358
 9.1
 (256,191) 8.7
Consumer cyclical1,509,609
 5.0
 1,624,305
 4.9
 (114,696) 3.9
Finance companies102,526
 0.3
 111,112
 0.3
 (8,586) 0.3
Capital goods1,265,004
 4.2
 1,364,376
 4.1
 (99,372) 3.4
Transportation856,118
 2.8
 942,135
 2.8
 (86,017) 2.9
Other industrial273,473
 0.9
 299,859
 0.9
 (26,386) 0.9
Brokerage478,551
 1.6
 514,350
 1.6
 (35,799) 1.2
Technology1,146,636
 3.7
 1,241,127
 3.6
 (94,491) 3.5
Real estate139,853
 0.5
 142,483
 0.4
 (2,630) 0.1
Other utility216,013
 0.7
 236,051
 0.7
 (20,038) 0.7
Commercial mortgage-backed securities1,232,495
 4.1
 1,274,347
 3.8
 (41,852) 1.4
Other asset-backed securities633,274
 2.1
 652,037
 2.0
 (18,763) 0.6
Residential mortgage-backed non-agency securities562,686
 1.9
 572,327
 1.7
 (9,641) 0.3
Residential mortgage-backed agency securities414,747
 1.4
 422,218
 1.3
 (7,471) 0.3
U.S. government-related securities1,291,476
 4.3
 1,326,008
 4.0
 (34,532) 1.2
Other government-related securities17,740
 0.1
 18,483
 0.1
 (743) 
States, municipals, and political divisions1,566,752
 5.2
 1,693,566
 5.1
 (126,814) 4.3
Total$30,237,469
 100.0% $33,166,649
 100.0% $(2,929,180) 100.0%

The range of maturity dates for securities in an unrealized loss position as of JuneSeptember 30, 2016 (Successor Company) varies, with 11.1%10.2% maturing in less than 5 years, 10.4% maturing between 5 and 10 years, and 78.5%79.4% maturing after 10 years. The following table shows the credit rating of securities in an unrealized loss position as of JuneSeptember 30, 2016 (Successor Company):
 
S&P or Equivalent Fair % Fair Amortized % Amortized Unrealized % Unrealized Fair % Fair Amortized % Amortized Unrealized % Unrealized
Designation Value Value Cost Cost Loss Loss Value Value Cost Cost Loss Loss
 (Dollars In Thousands) (Dollars In Thousands)
AAA/AA/A $7,480,661
 41.5% $7,786,263
 40.7% $(305,602) 27.1% $6,778,615
 42.7% $7,007,015
 42.1% $(228,400) 29.0%
BBB 9,032,141
 50.1
 9,683,546
 50.6
 (651,405) 57.7
 7,946,015
 50.1
 8,378,019
 50.3
 (432,004) 54.8
Investment grade 16,512,802
 91.6% 17,469,809
 91.3% (957,007) 84.8% 14,724,630
 92.8% 15,385,034
 92.4% (660,404) 83.8%
BB 908,803
 5.0
 987,893
 5.2
 (79,090) 7.0
 649,772
 4.1
 708,184
 4.3
 (58,412) 7.4
B 368,303
 2.0
 440,255
 2.3
 (71,952) 6.4
 353,884
 2.2
 417,493
 2.5
 (63,609) 8.1
CCC or lower 221,774
 1.4
 243,241
 1.2
 (21,467) 1.8
 146,786
 0.9
 152,181
 0.8
 (5,395) 0.7
Below investment grade 1,498,880
 8.4% 1,671,389
 8.7% (172,509) 15.2% 1,150,442
 7.2% 1,277,858
 7.6% (127,416) 16.2%
Total $18,011,682
 100.0% $19,141,198
 100.0% $(1,129,516) 100.0% $15,875,072
 100.0% $16,662,892
 100.0% $(787,820) 100.0%

As of JuneSeptember 30, 2016 (Successor Company), we held a total of 1,4141,230 positions that were in an unrealized loss position. Included in that amount were 187144 positions of below investment grade securities with a fair value of $1.5$1.2 billion that were in an unrealized loss position. Total unrealized losses related to below investment grade securities were $172.5$127.4 million, $90.4$112.4 million

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of which had been in an unrealized loss position for more than twelve months. Below investment grade securities in an unrealized loss position were 3.0%2.2% of invested assets.
 
As of JuneSeptember 30, 2016 (Successor Company), securities in an unrealized loss position that were rated as below investment grade represented 8.4%7.2% of the total fair value and 15.2%16.2% of the total unrealized loss. We have the ability and intent to hold these securities to maturity. After a review of each security and its expected cash flows, we believe the decline in market value to be temporary.
 
The following table includes the fair value, amortized cost, unrealized loss, and total time period that the security has been in an unrealized loss position for all below investment grade securities as of JuneSeptember 30, 2016 (Successor Company):
 
 
Fair
Value
 
% Fair
Value
 
Amortized
Cost
 
% Amortized
Cost
 
Unrealized
Loss
 
% Unrealized
Loss
 
Fair
Value
 
% Fair
Value
 
Amortized
Cost
 
% Amortized
Cost
 
Unrealized
Loss
 
% Unrealized
Loss
 (Dollars In Thousands) (Dollars In Thousands)
<= 90 days $105,089
 7.0% $112,305
 6.7% $(7,216) 4.2% $90,081
 7.8% $91,837
 7.2% $(1,756) 1.4%
>90 days but <= 180 days 174,206
 11.6
 184,601
 11.0
 (10,395) 6.0
 16,900
 1.5
 17,099
 1.3
 (199) 0.2
>180 days but <= 270 days 116,408
 7.8
 124,490
 7.4
 (8,082) 4.7
 69,275
 6.0
 75,575
 5.9
 (6,300) 4.9
>270 days but <= 1 year 531,501
 35.5
 587,931
 35.2
 (56,430) 32.7
 66,469
 5.8
 73,217
 5.8
 (6,748) 5.3
>1 year but <= 2 years 571,676
 38.1
 662,062
 39.7
 (90,386) 52.4
 907,717
 78.9
 1,020,130
 79.8
 (112,413) 88.2
>2 years but <= 3 years 
 
 
 
 
 
 
 
 
 
 
 
>3 years but <= 4 years 
 
 
 
 
 
 
 
 
 
 
 
>4 years but <= 5 years 
 
 
 
 
 
 
 
 
 
 
 
>5 years 
 
 
 
 
 
 
 
 
 
 
 
Total $1,498,880
 100.0% $1,671,389
 100.0% $(172,509) 100.0% $1,150,442
 100.0% $1,277,858
 100.0% $(127,416) 100.0%

LIQUIDITY AND CAPITAL RESOURCES

Liquidity
 
Liquidity refers to a company’s ability to generate adequate amounts of cash to meet its needs. We meet our liquidity requirements primarily through positive cash flows from our operating subsidiaries. Primary sources of cash from the operating subsidiaries are premiums, deposits for policyholder accounts, investment sales and maturities, and investment income. Primary uses of cash include benefit payments, withdrawals from policyholder accounts, investment purchases, policy acquisition costs, interest payments, and other operating expenses. We believe that we have sufficient liquidity to fund our cash needs under normal operating scenarios.
 
In the event of significant unanticipated cash requirements beyond our normal liquidity needs, we have additional sources of liquidity available depending on market conditions and the amount and timing of the liquidity need. These additional sources of liquidity include cash flows from operations, the sale of liquid assets, accessing our credit facility, and other sources described herein.
 
Our decision to sell investment assets could be impacted by accounting rules, including rules relating to the likelihood of a requirement to sell securities before recovery of our cost basis. Under stressful market and economic conditions, liquidity may broadly deteriorate, which could negatively impact our ability to sell investment assets. If we require on short notice significant amounts of cash in excess of normal requirements, we may have difficulty selling investment assets in a timely manner, be forced to sell them for less than we otherwise would have been able to realize, or both.
 
While we anticipate that the cash flows of our operating subsidiaries will be sufficient to meet our investment commitments and operating cash needs in a normal credit market environment, we recognize that investment commitments scheduled to be funded may, from time to time, exceed the funds then available. Therefore, we have established repurchase agreement programs for certain of our insurance subsidiaries to provide liquidity when needed. We expect that the rate received on its investments will equal or exceed its borrowing rate. Under this program, we may, from time to time, sell an investment security at a specific price and agree to repurchase that security at another specified price at a later date. These borrowings are typically for a term less than 90 days. The market value of securities to be repurchased is monitored and collateral levels are adjusted where appropriate to protect the counterparty against credit exposure. Cash received is invested in fixed maturity securities, and the agreements provided for net settlement in the event of default or on termination of the agreements. As of JuneSeptember 30, 2016 (Successor Company), the fair value of securities pledged under the repurchase program was $177.5$224.8 million and the repurchase obligation of $160.0$219.5 million was included in our consolidated condensed balance sheets (at an average borrowing rate of 4243 basis points). During the sixnine months ended JuneSeptember 30, 2016 (Successor Company), the maximum balance outstanding at any one point in time related to these programs was $725.0 million. The average daily balance was $464.5$453.0 million (at an average borrowing rate of 4041 basis points) during the sixnine months ended JuneSeptember 30, 2016 (Successor Company). As of December 31, 2015 (Successor Company), the fair value of securities pledged under the repurchase program was $479.9 million and the repurchase obligation of $438.2 million was included in our consolidated condensed balance sheets. During 2015, the maximum balance outstanding at any one point in time related to these programs was $912.7 million. The average daily balance was $540.3 million and $77.4 million (at


an average borrowing rate of

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20 and 16 basis points) during the period of February 1, 2015 to December 31, 2015 (Successor Company) and the period of January 1, 2015 to January 31, 2015 (Predecessor Company).
 
Additionally, we may, from time to time, sell short-duration stable value products to complement our cash management practices. Depending on market conditions, we may also use securitization transactions involving our commercial mortgage loans to increase liquidity for the operating subsidiaries.
 
Credit Facility
 
On February 2, 2015, we and PLC amended and restated the Credit Facility (the “Credit Facility”). Under the Credit Facility, we have the ability to borrow on an unsecured basis up to an aggregate principal amount of $1.0 billion. We have the right in certain circumstances to request that the commitment under the Credit Facility be increased up to a maximum principal amount of $1.25 billion. Balances outstanding under the Credit Facility accrue interest at a rate equal to, at the option of the Borrowers, (i) LIBOR plus a spread based on the ratings of PLC’s Senior Debt, or (ii) the sum of (A) a rate equal to the highest of (x) the Administrative Agent’s prime rate, (y) 0.50% above the Federal Funds rate, or (z) the one-month LIBOR plus 1.00% and (B) a spread based on the ratings of PLC's Senior Debt. The Credit Facility also provided for a facility fee at a rate that varies with the ratings of PLC’s Senior Debt and that is calculated on the aggregate amount of commitments under the Credit Facility, whether used or unused. The initial facility fee rate was 0.15% on February 2, 2015, and was adjusted to 0.125% upon PLC’s subsequent ratings upgrade on February 2, 2015. The Credit Facility provides that PLC is liable for the full amount of any obligations for borrowings or letters of credit, including those of the Company, under the Credit Facility. The maturity date of the Credit Facility is February 2, 2020. We are not aware of any non-compliance with the financial debt covenants of the Credit Facility as of JuneSeptember 30, 2016 (Successor Company). PLC had an outstanding balance of $360.0$385.0 million bearing interest at a rate of LIBOR plus 1.00% as of JuneSeptember 30, 2016 (Successor Company). As of June 30, 2016 (Successor Company), we had used $30.0 million of borrowing capacity by executing a Letter of Credit under the Credit Facility for the benefit on an affiliated captive reinsurance subsidiary of the Company. This Letter of Credit had not been drawn uponwas terminated during the period and no Letter of Credit was outstanding as of JuneSeptember 30, 2016 (Successor Company).
 
Sources and Use of Cash
 
Our primary sources of funding are from our insurance operations and revenues from investments. These sources of cash support our operations and are used to pay dividends to PLC. The states in which we and our insurance subsidiaries are domiciled impose certain restrictions on the ability to pay dividends. These restrictions are based in part on the prior year’s statutory income and/or surplus.
 
We are a member of the FHLB of Cincinnati and FHLB of New York. FHLB advances provide an attractive funding source for short-term borrowing and for the sale of funding agreements. Membership in the FHLB requires that we purchase FHLB capital stock based on a minimum requirement and a percentage of the dollar amount of advances outstanding. Our borrowing capacity is determined by criteria established by each respective bank.
 
We held $65.7 million of FHLB common stock as of JuneSeptember 30, 2016 (Successor Company), which is included in equity securities. In addition, our obligations under the advances must be collateralized. We maintain control over any such pledged assets, including the right of substitution. As of JuneSeptember 30, 2016 (Successor Company), we had $822.3 million of funding agreement-related advances and accrued interest outstanding under the FHLB program.

As of JuneSeptember 30, 2016 (Successor Company), we reported approximately $524.2$544.2 million (fair value) of Auction Rate Securities (“ARS”) in non-Modco portfolios. As of JuneSeptember 30, 2016 (Successor Company), 100% of these ARS were rated Aaa/AA+. While the auction rate market has experienced liquidity constraints, we believe that based on our current liquidity position and our operating cash flows, any lack of liquidity in the ARS market will not have a material impact on our liquidity, financial condition, or cash flows. For information on how we determine the fair value of these securities refer to Note 7, Fair Value of Financial Instruments, of the consolidated condensed financial statements.
 
The liquidity requirements of our regulated insurance subsidiaries primarily relate to the liabilities associated with their various insurance and investment products, operating expenses, and income taxes. Liabilities arising from insurance and investment products include the payment of policyholder benefits, as well as cash payments in connection with policy surrenders and withdrawals, policy loans, and obligations to redeem funding agreements.
 
Our insurance subsidiaries maintain investment strategies intended to provide adequate funds to pay benefits and expected surrenders, withdrawals, loans, and redemption obligations without forced sales of investments. In addition, our insurance subsidiaries hold highly liquid, high-quality short-term investment securities and other liquid investment grade fixed maturity securities to fund our expected operating expenses, surrenders, and withdrawals. We were committed as of JuneSeptember 30, 2016 (Successor Company), to fund mortgage loans in the amount of $717.3$726.2 million.
 
Our positive cash flows from operations are used to fund an investment portfolio that provides for future benefit payments. We employ a formal asset/liability program to manage the cash flows of our investment portfolio relative to our long-term benefit obligations. As of JuneSeptember 30, 2016 (Successor Company), we held cash and short-term investments of approximately $539.5$576.1 million.
 

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The following chart includes the cash flows provided by or used in operating, investing, and financing activities for the following periods:
 
 Successor Company Predecessor Company Successor Company Predecessor Company
 
For The Six
Months Ended
June 30, 2016
 
February 1, 2015
to
June 30, 2015
 
January 1, 2015
to
January 31, 2015
 For The Nine Months Ended September 30, 2016 February 1, 2015
to
September 30, 2015
 
January 1, 2015
to
January 31, 2015
 (Dollars In Thousands) (Dollars In Thousands) (Dollars In Thousands) (Dollars In Thousands)
Net cash provided by operating activities $270,017
 $292,196
 $148,060
 $295,143
 $393,160
 $148,060
Net cash (used in) provided by investing activities (2,817,169) (625,090) 33,475
 (3,425,540) (710,602) 33,475
Net cash provided by (used in) financing activities 2,629,937
 354,568
 (70,918) 3,325,617
 456,439
 (70,918)
Total $82,785
 $21,674
 $110,617
 $195,220
 $138,997
 $110,617
 
For The SixNine Months Ended JuneSeptember 30, 2016 (Successor Company)
 
Net cash provided by operating activities - Cash flows from operating activities are affected by the timing of premiums received, fees received, investment income, and expenses paid. Principal sources of cash include sales of our products and services. We typically generate positive cash flows from operating activities, as premiums and policy fees collected from our insurance and investment products exceed benefit payments and redemptions, and we invest the excess. Accordingly, in analyzing our cash flows we focus on the amount of cash provided by or used in investing and financing activities.
 
Net cash (used in) provided by investing activities - Changes in cash from investing activities primarily related to the activity in our investment portfolio and the purchase of $2.2 billion of held-to-maturity securities issued by affiliates in conjunction with the GLAIC reinsurance transaction. See Note 3, Reinsurance and Financing Transactions and Note 12, Debt and Other Obligations for additional information on the transaction.
 
Net cash provided by (used in) financing activities - Changes in cash from financing activities included $278.2$218.7 million of outflows from repurchase program borrowings for the sixnine months ended JuneSeptember 30, 2016 (Successor Company) and $1.0$1.8 billion of inflows of investment product and universal life net activity for the sixnine months ended JuneSeptember 30, 2016 (Successor Company). Net issuance of non-recourse funding obligations was $2.2 billion during the sixnine months ended JuneSeptember 30, 2016 (Successor Company), which occurred in conjunction with the GLAIC reinsurance transaction. See Note 3, Reinsurance and Financing Transactions and Note 12, Debt and Other Obligations for additional information on the transaction.

Capital Resources
 
Our primary sources of capital are from retained income from our insurance operations and capital infusions from our parent, PLC. Additionally, we have access to the Credit Facility discussed above.
 
Captive Reinsurance Companies
 
Our life insurance subsidiaries are subject to a regulation entitled “Valuation of Life Insurance Policies Model Regulation,” commonly known as “Regulation XXX,” and a supporting guideline entitled “The Application of the Valuation of Life Insurance Policies Model Regulation,” commonly known as “Guideline AXXX.” The regulation and supporting guideline require insurers to establish statutory reserves for term and universal life insurance policies with long-term premium guarantees that are consistent with the statutory reserves required for other individual life insurance policies with similar guarantees. Many market participants believe that these levels of reserves are non-economic. We use captive reinsurance companies to implement reinsurance and capital management actions to satisfy these reserve requirements by financing the non-economic reserves either through the issuance of non-recourse funding obligations by the captives or obtaining Letters of Credit from third-party financial institutions. For more information regarding our use of captives and their impact on our financial statements, please refer to Note 12, Debt and Other Obligations.
 
Our captive reinsurance companies assume business from affiliates only. Our captives are capitalized to a level we believe is sufficient to support the contractual risks and other general obligations of the respective captive entity. All of our captive reinsurance companies are wholly owned subsidiaries and are located domestically. The captive insurance companies are subject to regulations in the state of domicile.
 
The National Association of Insurance Commissioners (“NAIC”), through various committees, subgroups and dedicated task forces, is reviewing the use of captives and special purpose vehicles used to transfer insurance risk in relation to existing state laws and regulations, and several committees have adopted or exposed for comment white papers and reports that, if or when implemented, could impose additional requirements on the use of captives and other reinsurers. The Financial Condition (E) Committee of the NAIC recently established a Variable Annuity Issues Working Group to examine company use of variable annuity captives. The Committee has proposed changes in the regulation of variable annuities and variable annuity captives could adversely affect our future financial condition and results of operations.

The Principles Based Reserving Implementation (EX) Task Force of the NAIC, charged with analysis of the adoption of a principles-based reserving methodology, adopted the “conceptual framework” contained in a report issued by Rector & Associates, Inc., dated June 4, 2014 (as modified or supplemented, the “Rector Report”), that contains numerous recommendations

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pertaining to the regulation and use of certain captive reinsurers. Certain high-level recommendations have been adopted and assigned to various NAIC working groups, which working groups are in various stages of discussions regarding recommendations. One recommendation of the Rector Report has beenwas adopted as Actuarial Guideline XLVIII (“AG48”). AG48 sets more restrictive standards on the permitted collateral utilized to back reserves of a captive. Other recommendations inIn September 2016, the Rector Report are subjectFinancial Condition (E) Committee of the NAIC adopted the Term and Universal Life Insurance Reserve Financing Model Regulation (the "Reserve Model") which is substantially similar to ongoing commentAG48. AG48 and revision. It is unclear at this time to what extent the recommendations in the Rector Report, or additional or revised recommendations relating to captive transactions or reinsurance transactions in general, will be adopted by the NAIC. If the recommendations proposed in the Rector Report are implemented, itReserve Model will likely bemake it difficult for the Company to establish new captive financing arrangements on a basis consistent with past practices. As a result of AG48 and the Rector Report,Reserve Model, the implementation of new captive structures in the future may be less capital efficient, may lead to lower product returns and/or increased product pricing or result in reduced sales of certain products. Additionally, inIn some circumstances, AG48 and the implementation of the recommendations in the Rector ReportReserve Model could impact the Company’s ability to engage in certain reinsurance transactions with non-affiliates.
 
We also use a captive reinsurance company to reinsure risks associated with GMWB and GMDB riders which helps us to manage those risks on an economic basis. In an effort to mitigate the equity market risks relative to our RBC ratio, in the fourth quarter of 2012, PLC established a direct wholly owned subsidiary, Shades Creek Captive Insurance Company (“Shades Creek”), to which we have reinsured GMWB and GMDB riders related to its VA contracts. The purpose of Shades Creek is to reduce the volatility in RBC due to non-economic variables included within the RBC calculation.
 
During 2012, PLC entered into an intercompany capital support agreement with Shades Creek. The agreement provides through a guarantee that PLC will contribute assets or purchase surplus notes (or cause an affiliate or third party to contribute assets or purchase surplus notes) in amounts necessary for Shades Creek’s regulatory capital levels to equal or exceed minimum thresholds as defined by the agreement. As of JuneSeptember 30, 2016 (Successor Company), Shades Creek maintained capital levels in excess of the required minimum thresholds. The maximum potential future payment amount which could be required under the capital support agreement will be dependent on numerous factors, including the performance of equity markets, the level of interest rates, performance of associated hedges, and related policyholder behavior.

 Statutory Capital

A life insurance company’s statutory capital is computed according to rules prescribed by the NAIC, as modified by state law. Generally speaking, other states in which a company does business defer to the interpretation of the domiciliary state with respect to NAIC rules, unless inconsistent with the other state’s regulations. Statutory accounting rules are different from GAAP and are intended to reflect a more conservative view, for example, requiring immediate expensing of policy acquisition costs. The NAIC’s risk-based capital requirements require insurance companies to calculate and report information under a risk-based capital formula. The achievement of long-term growth will require growth in the statutory capital of our insurance subsidiaries. The subsidiaries may secure additional statutory capital through various sources, such as retained statutory earnings or our equity contributions. In general, dividends up to specified levels are considered ordinary and may be paid thirty days after written notice to the insurance commissioner of the state of domicile unless such commissioner objects to the dividend prior to the expiration of such period. Dividends in larger amounts are considered extraordinary and are subject to affirmative prior approval by such commissioner. The maximum amount that would qualify as an ordinary dividend from our insurance subsidiaries in 2016 is approximately $165.6 million.
 
State insurance regulators and the NAIC have adopted risk-based capital (“RBC”) requirements for life insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks. The requirements provide a means of measuring the minimum amount of statutory surplus appropriate for an insurance company to support its overall business operations based on its size and risk profile. A company’s risk-based statutory surplus is calculated by applying factors and performing calculations relating to various asset, premium, claim, expense, and reserve items. Regulators can then measure the adequacy of a company’s statutory surplus by comparing it to RBC. We manage our capital consumption by using the ratio of our total adjusted capital, as defined by the insurance regulators, to our company action level RBC (known as the RBC ratio), also as defined by insurance regulators.
 
Statutory reserves established for VA contracts are sensitive to changes in the equity markets and are affected by the level of account values relative to the level of any guarantees and product design. As a result, the relationship between reserve changes and equity market performance may be non-linear during any given reporting period. Market conditions greatly influence the capital required due to their impact on the valuation of reserves and derivative investments mitigating the risk in these reserves. Risk mitigation activities may result in material and sometimes counterintuitive impacts on statutory surplus and RBC ratio. Notably, as changes in these market and non-market factors occur, both our potential obligation and the related statutory reserves and/or required capital can vary at a non-linear rate.
 
Our statutory surplus is impacted by credit spreads as a result of accounting for the assets and liabilities on our fixed MVA annuities. Statutory separate account assets supporting the fixed MVA annuities are recorded at fair value. In determining the statutory reserve for the fixed MVA annuities, we are required to use current crediting rates based on U.S. Treasuries. In many capital market scenarios, current crediting rates based on U.S. Treasuries are highly correlated with market rates implicit in the fair value of statutory separate account assets. As a result, the change in the statutory reserve from period to period will likely substantially offset the change in the fair value of the statutory separate account assets. However, in periods of volatile credit markets, actual credit spreads on investment assets may increase or decrease sharply for certain sub-sectors of the overall credit market, resulting in statutory separate account asset market value gains or losses. As actual credit spreads are not fully reflected in current crediting rates based on U.S. Treasuries, the calculation of statutory reserves will not substantially offset the change in fair value of the statutory separate account assets resulting in a change in statutory surplus.
 

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On January 15, 2016, we closed the reinsurance transaction with GLAIC. We currently estimate that the total capital investment was approximately $589 million, instead of $661 million, as previously estimated and disclosed. The estimated total


capital investment decreased primarily due to lower initial risk-based capital than previously estimated and our ability to utilize certain tax benefits sooner than expected.

We cede material amounts of insurance and transfer related assets to other insurance companies through reinsurance. However, notwithstanding the transfer of related assets, we remain liable with respect to ceded insurance should any reinsurer fail to meet the obligations that it assumed. We evaluate the financial condition of our reinsurers and monitor the associated concentration of credit risk. For three and sixnine months ended JuneSeptember 30, 2016 (Successor Company), we ceded premiums to third party reinsurers amounting to $340.6$325.4 million and $655.5$980.8 million. In addition, we had receivables from reinsurers amounting to $5.2 billion as of JuneSeptember 30, 2016 (Successor Company). We review reinsurance receivable amounts for collectability and establish bad debt reserves if deemed appropriate.
 
Ratings
 
Various Nationally Recognized Statistical Rating Organizations (“rating organizations”) review the financial performance and condition of insurers, including our insurance subsidiaries, and publish their financial strength ratings as indicators of an insurer’s ability to meet policyholder and contract holder obligations. These ratings are important to maintaining public confidence in an insurer’s products, its ability to market its products and its competitive position. The following table summarizes the current financial strength ratings of our significant member companies from the major independent rating organizations:
 
      Standard &  
Ratings A.M. Best Fitch Poor’s Moody’s
         
Insurance company financial strength rating:        
Protective Life Insurance Company A+ A+ AA- A2
West Coast Life Insurance Company A+ A+ AA- A2
Protective Life and Annuity Insurance Company A+ A+ AA- 
Lyndon Property Insurance Company A-   
MONY Life Insurance Company A+ A+ A+ A2

     Our ratings are subject to review and change by the rating organizations at any time and without notice. A downgrade or other negative action by a ratings organization with respect to the financial strength ratings of our insurance subsidiaries could adversely affect sales, relationships with distributors, the level of policy surrenders and withdrawals, competitive position in the marketplace, and the cost or availability of reinsurance. The rating agencies may take various actions, positive or negative, with respect to the debt and financial strength ratings of PLC and its subsidiaries, including as a result of PLC’s status as a subsidiary of Dai-ichi Life.
 
On April 28, 2015, Fitch announced a one-notch downgrade of the insurance financial strength ratings of the Company, West Coast Life Insurance Company, Protective Life and Annuity Insurance Company and MONY Life Insurance Company to A from A+ following the downgrade of Japan’s Long-Term Local Currency Issuer Default Rating (IDR) to A from A+. Fitch stated that such life insurance companies cannot be rated above the sovereign currency rating applicable to their ultimate parent company, Dai-ichi Life, based in Japan. The ratings downgrades announced by Fitch did not trigger any requirements for the Company or its affiliates to post collateral or otherwise negatively impact current obligations.

LIABILITIES
 
Many of our products contain surrender charges and other features that are designed to reward persistency and penalize the early withdrawal of funds. Certain stable value and annuity contracts have market-value adjustments that protect us against investment losses if interest rates are higher at the time of surrender than at the time of issue.
 
As of JuneSeptember 30, 2016 (Successor Company), we had policy liabilities and accruals of approximately $31.3$31.4 billion. Our interest-sensitive life insurance policies have a weighted average minimum credited interest rate of approximately 3.50%3.49%.

Contractual Obligations
 
We enter into various obligations to third parties in the ordinary course of our operations. However, we do not believe that our cash flow requirements can be assessed solely based upon an analysis of these obligations. The most significant factors affecting our future cash flows are our ability to earn and collect cash from our customers, and the cash flows arising from our investment program. Future cash outflows, whether they are contractual obligations or not, will also vary based upon our future needs. Although some outflows are fixed, others depend on future events. Examples of fixed obligations include our obligations to pay principal and interest on fixed-rate borrowings. Examples of obligations that will vary include obligations to pay interest on variable-rate borrowings and insurance liabilities that depend on future interest rates, market performance, or surrender provisions. Many of our obligations are linked to cash-generating contracts. In addition, our operations involve significant expenditures that are not based upon contractual obligations. These include expenditures for income taxes and payroll.
 

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As of JuneSeptember 30, 2016 (Successor Company), we carried a $9.4$9.8 million liability for uncertain tax positions. These amounts are not included in the long-term contractual obligations table because of the difficulty in making reasonably reliable estimates of the occurrence or timing of cash settlements with the respective taxing authorities.
 


The table below sets forth future maturities of our contractual obligations:
 
  Payments due by period  Payments due by period
Total 
Less than
1 year
 1-3 years 3-5 years 
More than
5 years
Total 
Less than
1 year
 1-3 years 3-5 years 
More than
5 years
(Dollars In Thousands)(Dollars In Thousands)
Non-recourse funding obligations(1)
$5,244,902
 $229,799
 $540,510
 $654,000
 $3,820,593
$5,193,490
 $236,700
 $555,056
 $664,704
 $3,737,030
Stable value products(2)
2,949,925
 540,145
 1,697,642
 701,528
 10,610
3,596,495
 807,698
 1,755,747
 1,015,361
 17,689
Operating leases(3)
30,527
 4,343
 7,598
 7,186
 11,400
29,784
 4,257
 7,642
 7,197
 10,688
Home office lease(4)
78,622
 1,453
 77,169
 
 
78,389
 1,509
 76,880
 
 
Mortgage loan and investment commitments925,169
 867,119
 58,050
 
 
912,729
 771,695
 141,034
 
 
Repurchase program borrowings(5)
160,002
 160,002
 
 
 
219,463
 219,463
 
 
 
Policyholder obligations(6)
41,934,704
 1,671,588
 3,535,544
 3,479,593
 33,247,979
42,043,255
 1,664,185
 3,562,961
 3,454,756
 33,361,353
Total$51,323,851
 $3,474,449
 $5,916,513
 $4,842,307
 $37,090,582
$52,073,605
 $3,705,507
 $6,099,320
 $5,142,018
 $37,126,760
 
(1)Non-recourse funding obligations include all undiscounted principal amounts owed and expected future interest payments due over the term of the notes. Of the total undiscounted cash flows, $1.8 billion relates to the Golden Gate V transaction. These cash outflows are matched and predominantly offset by the cash inflows Golden Gate V receives from notes issued by a nonconsolidated variable interest entity. Additionally, $3.0 billion relates to the Golden Gate transaction that occurred in Q1 2016. These cash outflows are matched and predominantly offset by the cash inflows Golden Gate receives from notes issued by nonconsolidated entity and third parties. The remaining amounts are associated with the Golden Gate II notes held by third parties as well as certain obligations assumed with the acquisition of MONY Life Insurance Company.
(2)Anticipated stable value products cash flows including interest.
(3)Includes all lease payments required under operating lease agreements.
(4)The lease payments shown assume we exercise our option to purchase the building at the end of the lease term. Additionally, the payments due by the periods above were computed based on the terms of the renegotiated lease agreement, which was entered in December 2013.
(5)Represents secured borrowings as part of our repurchase program as well as related interest.
(6)Estimated contractual policyholder obligations are based on mortality, morbidity, and lapse assumptions comparable to our historical experience, modified for recent observed trends. These obligations are based on current balance sheet values and include expected interest crediting, but do not incorporate an expectation of future market growth, or future deposits. Due to the significance of the assumptions used, the amounts presented could materially differ from actual results. As variable separate account obligations are legally insulated from general account obligations, the variable separate account obligations will be fully funded by cash flows from variable separate account assets. We expect to fully fund the general account obligations from cash flows from general account investments.

FAIR VALUE OF FINANCIAL INSTRUMENTS
 
FASB guidance defines fair value for GAAP and establishes a framework for measuring fair value as well as a fair value hierarchy based on the quality of inputs used to measure fair value and enhances disclosure requirements for fair value measurements. The term “fair value” in this document is defined in accordance with GAAP. The standard describes three levels of inputs that may be used to measure fair value. For more information, see Note 7, Fair Value of Financial Instruments.
 
OFF-BALANCE SHEET ARRANGEMENTS
 
We have entered into operating leases that do not result in an obligation being recorded on the balance sheet. Refer to Note 13, Commitments and Contingencies, of the consolidated financial statements for more information.

MARKET RISK EXPOSURES
 
Our financial position and earnings are subject to various market risks including changes in interest rates, the yield curve, spreads between risk-adjusted and risk-free interest rates, foreign currency rates, used vehicle prices, and equity price risks and issuer defaults. We analyze and manage the risks arising from market exposures of financial instruments, as well as other risks, through an integrated asset/liability management process. Our asset/liability management programs and procedures involve the monitoring of asset and liability durations for various product lines; cash flow testing under various interest rate scenarios; and the continuous rebalancing of assets and liabilities with respect to yield, credit and market risk, and cash flow characteristics. These programs also incorporate the use of derivative financial instruments primarily to reduce our exposure to interest rate risk, inflation risk, currency exchange risk, volatility risk, and equity market risk. See Note 8, Derivative Financial Instruments to the consolidated condensed financial statements included in this report for additional information on our financial instruments.
 

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The primary focus of our asset/liability program is the management of interest rate risk within the insurance operations. This includes monitoring the duration of both investments and insurance liabilities to maintain an appropriate balance between risk and profitability for each product category, and for us as a whole. It is our policy to maintain asset and liability durations within one year of one another, although, from time to time, a broader interval may be allowed.



We are exposed to credit risk within our investment portfolio and through derivative counterparties. Credit risk relates to the uncertainty of an obligor’s continued ability to make timely payments in accordance with the contractual terms of the instrument or contract. We manage credit risk through established investment policies which attempt to address quality of obligors and counterparties, credit concentration limits, diversification requirements, and acceptable risk levels under expected and stressed scenarios. Derivative counterparty credit risk is measured as the amount owed to us, net of collateral held, based upon current market conditions. In addition, we periodically assess exposure related to potential payment obligations between us and our counterparties. We minimize the credit risk in derivative financial instruments by entering into transactions with high quality counterparties, (A-rated or higher at the time we enter into the contract), and we maintain credit support annexes with certain of those counterparties.
 
We utilize a risk management strategy that includes the use of derivative financial instruments. Derivative instruments expose us to credit market and basis risk. Such instruments can change materially in value from period- to-period. We minimize our credit risk by entering into transactions with highly rated counterparties. We manage the market and basis risks by establishing and monitoring limits as to the types and degrees of risk that may be undertaken. We monitor our use of derivatives in connection with our overall asset/liability management programs and procedures. In addition, all derivative programs are monitored by our risk management department.

Derivative instruments that are used as part of our interest rate risk management strategy include interest rate swaps, interest rate futures, interest rate caps, and interest rate options. Our inflation risk management strategy involves the use of swaps that require us to pay a fixed rate and receive a floating rate that is based on changes in the Consumer Price Index (“CPI”).
 
We may use the following types of derivative contracts to mitigate our exposure to certain guaranteed benefits related to variable annuity, fixed indexed annuity, and indexed universal life contracts:
 
Foreign Currency Futures
Variance Swaps
Interest Rate Futures
Equity Options
Equity Futures
Credit Derivatives
Interest Rate Swaps
Interest Rate Swaptions
Volatility Futures
Volatility Options
Funds Withheld Agreement
Total Return Swaps
 
Other Derivatives
 
Certain of our subsidiaries have derivatives with PLC. These derivatives consist of an interest support agreement, YRT premium support arrangements, and portfolio maintenance agreements with PLC.
 
We have a funds withheld account that consists of various derivative instruments held by us that is used to hedge the GMWB and GMDB riders. The economic performance of derivatives in the funds withheld account is ceded to Shades Creek. The funds withheld account is accounted for as a derivative financial instrument.
 
We believe that our asset/liability management programs and procedures and certain product features provide protection against the effects of changes in interest rates under various scenarios. Additionally, we believe our asset/liability management programs and procedures provide sufficient liquidity to enable us to fulfill our obligation to pay benefits under our various insurance and deposit contracts. However, our asset/liability management programs and procedures incorporate assumptions about the relationship between short-term and long-term interest rates (i.e., the slope of the yield curve), relationships between risk-adjusted and risk-free interest rates, market liquidity, spread movements, implied volatility, policyholder behavior, and other factors, and the effectiveness of our asset/liability management programs and procedures may be negatively affected whenever actual results differ from those assumptions.
 
In the ordinary course of our commercial mortgage lending operations, we may commit to provide a mortgage loan before the property to be mortgaged has been built or acquired. The mortgage loan commitment is a contractual obligation to fund a mortgage loan when called upon by the borrower. The commitment is not recognized in our financial statements until the commitment is actually funded. The mortgage loan commitment contains terms, including the rate of interest, which may be different than prevailing interest rates. As of JuneSeptember 30, 2016 (Successor Company), we had outstanding mortgage loan commitments of $717.3$726.2 million at an average rate of 4.2%.
 

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Impact of continued low interest rate environment
 
Significant changes in interest rates expose us to the risk of not realizing anticipated spreads between the interest rate earned on investments and the interest rate credited to in-force policies and contracts. In addition, certain of our insurance and investment products guarantee a minimum guaranteed interest rate (“MGIR”). In periods of prolonged low interest rates, the interest spread earned may be negatively impacted to the extent our ability to reduce policyholder crediting rates is limited by the guaranteed minimum credited interest rates. Additionally, those policies without account values may exhibit lower profitability in periods of prolonged low interest rates due to reduced investment income.


The table below presents account values by range of current minimum guaranteed interest rates and current crediting rates for our universal life and deferred fixed annuity products as of JuneSeptember 30, 2016 (Successor Company) and December 31, 2015 (Successor Company):
 
Credited Rate Summary
As of JuneSeptember 30, 2016 (Successor Company)
 
   1-50 bps More than     1-50 bps More than  
Minimum Guaranteed Interest Rate At above 50 bps   At above 50 bps  
Account Value MGIR MGIR above MGIR Total MGIR MGIR above MGIR Total
 (Dollars In Millions) (Dollars In Millions)
Universal Life Insurance  
  
  
  
  
  
  
  
>2% - 3% $200
 $1,077
 $2,008
 $3,285
 $201
 $1,109
 $2,009
 $3,319
>3% - 4% 4,034
 1,194
 11
 5,239
 4,016
 1,191
 11
 5,218
>4% - 5% 1,958
 14
 
 1,972
 1,941
 14
 
 1,955
>5% - 6% 212
 
 
 212
 210
 
 
 210
Subtotal 6,404
 2,285
 2,019
 10,708
 6,368
 2,314
 2,020
 10,702
Fixed Annuities  
  
  
  
  
  
  
  
1% $665
 $164
 $132
 $961
 $667
 $162
 $124
 $953
>1% - 2% 561
 491
 121
 1,173
 554
 484
 110
 1,148
>2% - 3% 2,074
 179
 11
 2,264
 2,105
 100
 7
 2,212
>3% - 4% 273
 
 
 273
 270
 
 
 270
>4% - 5% 281
 
 
 281
 281
 
 
 281
>5% - 6% 3
 
 
 3
 3
 
 
 3
Subtotal 3,857
 834
 264
 4,955
 3,880
 746
 241
 4,867
Total $10,261
 $3,119
 $2,283
 $15,663
 $10,248
 $3,060
 $2,261
 $15,569
                
Percentage of Total 66% 20% 14% 100% 66% 20% 14% 100%


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Credited Rate Summary
As of December 31, 2015 (Successor Company)
 
    1-50 bps More than  
Minimum Guaranteed Interest Rate At above 50 bps  
Account Value MGIR MGIR above MGIR Total
  (Dollars In Millions)
Universal Life Insurance  
  
  
  
>2% - 3% $197
 $1,033
 $2,016
 $3,246
>3% - 4% 3,648
 1,603
 27
 5,278
>4% - 5% 1,983
 14
 
 1,997
>5% - 6% 215
 
 
 215
Subtotal 6,043
 2,650
 2,043
 10,736
Fixed Annuities  
  
  
  
1% $663
 $169
 $138
 $970
>1% - 2% 569
 496
 131
 1,196
>2% - 3% 2,083
 248
 11
 2,342
>3% - 4% 278
 
 
 278
>4% - 5% 287
 
 
 287
>5% - 6% 3
 
 
 3
Subtotal 3,883
 913
 280
 5,076
Total $9,926
 $3,563
 $2,323
 $15,812
         
Percentage of Total 63% 23% 14% 100%
 
We are active in mitigating the impact of a continued low interest rate environment through product design, as well as adjusting crediting rates on current in-force policies and contracts. We also manage interest rate and reinvestment risks through our asset/liability management process. Our asset/liability management programs and procedures involve the monitoring of asset and liability durations; cash flow testing under various interest rate scenarios; and the regular rebalancing of assets and liabilities with respect to yield, credit and market risk, and cash flow characteristics. These programs also incorporate the use of derivative financial instruments primarily to reduce our exposure to interest rate risk, inflation risk, currency exchange risk, volatility risk, and equity market risk.

IMPACT OF INFLATION
 
Inflation increases the need for life insurance. Many policyholders who once had adequate insurance programs may increase their life insurance coverage to provide the same relative financial benefit and protection. Higher interest rates may result in higher sales of certain of our investment products.

The higher interest rates that have traditionally accompanied inflation could also affect our operations. Policy loans increase as policy loan interest rates become relatively more attractive. As interest rates increase, disintermediation of stable value and annuity account balances and individual life policy cash values may increase. The market value of our fixed-rate, long-term investments may decrease, we may be unable to implement fully the interest rate reset and call provisions of our mortgage loans, and our ability to make attractive mortgage loans, including participating mortgage loans, may decrease. In addition, participating mortgage loan income may decrease. The difference between the interest rate earned on investments and the interest rate credited to life insurance and investment products may also be adversely affected by rising interest rates. During the periods covered by this report, we believe inflation has not had a material impact on our business.
 
RECENTLY ISSUED ACCOUNTING STANDARDS
 
See Note 2, Summary of Significant Accounting Policies, to the consolidated condensed financial statements for information regarding recently issued accounting standards.

Item 3.                    Quantitative and Qualitative Disclosures about Market Risk
 
See Part I, Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, “Liquidity and Capital Resources” and Part II, Item 1A, Risk Factors, of this report for market risk disclosures.


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Item 4.                    Controls and Procedures
 
(a)                                Disclosure controls and procedures
 
In order to ensure that the information the Company must disclose in its filings with the Securities and Exchange Commission is recorded, processed, summarized, and reported on a timely basis, the Company’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on their evaluation as of the end of the period covered by this Form 10-Q, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective. It should be noted that any system of controls, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of any control system is based in part upon certain judgments, including the costs and benefits of controls and the likelihood of future events. Because of these and other inherent limitations of control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within the Company have been detected.

As described in Note 3 to the consolidated condensed financial statements set forth in this periodic report on Form 10-Q, the Company entered into a reinsurance transaction with Genworth Life and Annuity Insurance Company effective January 1, 2016. The Company performed due diligence on this transaction prior to the effective date and developed a reasonable level of assurance that the disclosure controls and procedures for the related administrative systems and processes were effective. 
 
(b)                            Changes in internal control over financial reporting
 
There have been no changes in the Company’s internal control over financial reporting during the three months ended JuneSeptember 30, 2016 (Successor Company), that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The Company’s internal controls exist within a dynamic environment and the Company continually strives to improve its internal controls and procedures to enhance the quality of its financial reporting.

PART II
 

Item 1A.  Risk Factors
 
The operating results of companies in the insurance industry have historically been subject to significant fluctuations. The factors which could affect the Company’s future results include, but are not limited to, general economic conditions and known trends and uncertainties. In addition to other information set forth in this report, you should carefully consider the factors discussed in Part I, Item 1A, Risk Factors,, in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (Successor Company), which could materially affect the Company’s business, financial condition, or future results of operations.
 
The Company is exposed to risks related to natural and man-made disasters and catastrophes, diseases, epidemics, pandemics, malicious acts, cyber-attacks, terrorist acts and climate change, which could adversely affect the Company’s operations and results.

While the Company has obtained insurance, implemented risk management and contingency plans, and taken preventive measures and other precautions, no predictions of specific scenarios can be made nor can assurance be given that there are not scenarios that could have an adverse effect on the Company. A natural or man-made disaster or catastrophe, including a severe weather or geological event such as a storm, tornado, fire, flood, or earthquake, disease, epidemic, pandemic, malicious act, cyber-attack, terrorist act, or the occurrence of climate change, could cause the Company’s workforce to be unable to engage in operations at one or more of its facilities or result in shortshort- or long-term interruptions in the Company’s business operations, any of which could be material to the Company’s operating results for a particular period. In addition, suchcertain of these events could adversely affect the mortality, morbidity, or other experience of the Company or its reinsurers and have a significant negative impact on the Company. In addition, claims arising from the occurrence of such events or conditions could have a material adverse effect on the Company’s financial condition and results of operations. Such events or conditions could also have an adverse effect on lapses and surrenders of existing policies, as well as sales of new policies. The Company’s risk management efforts and other precautionary plans and activities may not adequately predict the impact on the Company from such events.
 
In addition, such events or conditions could result in a decrease or halt in economic activity in large geographic areas, adversely affecting the marketing or administration of the Company’s business within such geographic areas and/or the general economic climate, which in turn could have an adverse effect on the Company. Such events or conditions could also result in additional regulation or restrictions on the Company in the conduct of its business. The possible macroeconomic effects of such events or conditions could also adversely affect the Company’s asset portfolio, as well as many other aspects of the Company’s business, financial condition, and results of operations.

Confidential information maintained in the systems of the Company or other parties upon which the Company relies could be compromised or misappropriated, damaging the Company’s business and reputation and adversely affecting its financial condition and results of operations.
In the course of conducting its business, the Company retains confidential information, including information about its customers and proprietary business information. The Company retains confidential information in various electronic systems, including computer systems, data processing and administrative systems, and communication systems. The Company maintains


physical, administrative, and technical safeguards to protect the information and it relies on commercial technologies to maintain the security of its systems and to maintain the security of its transmission of such information to other parties, including its business partners, counterparties and service providers. The Company’s business partners, counter parties and service providers likewise maintain confidential information, including, in some cases, customer information, on behalf of the Company. An intentional or unintentional breach or compromise of the security measures of the Company or such other parties could result in the disclosure, misappropriation, misuse, alteration or destruction of the confidential information retained by or on behalf of the Company, or the inability of the Company to conduct business for an indeterminate amount of time. Any of these events or circumstances could damage the Company’s business and reputation, and adversely affect its financial condition and results of operations by, among other things, causing harm to the Company’s business operations and customers, deterring customers and others from doing business with the Company, subjecting the Company to significant regulatory, civil, and criminal liability, and requiring the Company to incur significant legal and other expenses.
                Despite our efforts to ensure the integrity of our systems, it is possible that we may not be able to anticipate and implement effective preventative measures against security breaches of all types because the techniques used change frequently or are not recognized until launched and because cyber-attacks can originate from a wide variety of sources or parties. Those parties may also attempt to fraudulently induce employees, customers or other users of our system to disclose sensitive information in order to gain access to our data or that of our customers or clients.

Cyber threats and related legal and regulatory standards applicable to our business are rapidly evolving and may subject the Company to heightened legal standards, new theories of liability and material claims and penalties that we cannot currently predict or anticipate.  As cyber threats and applicable legal standards continue to evolve, the Company may be required to expend significant additional resources to continue to modify or enhance our protective measures, to investigate and remediate any information security vulnerabilities and to pay claims, fines or penalties. While the Company has experienced cyber-attacks in the past, and to date the Company has not suffered any material harm or loss relating to cyber-attacks or other information security breaches at the Company or its counterparties, there can be no assurance that the Company will not suffer such losses in the future.

The Company’s results and financial condition may be negatively affected should actual experience differ from management’s assumptions and estimates.

In the conduct of business, the Company makes certain assumptions regarding mortality, morbidity, persistency, expenses, interest rates, equity market volatility, tax liability, business mix, frequency and severity of claims, contingent liabilities, investment performance, and other factors appropriate to the type of business it expects to experience in future periods. These assumptions are also used to estimate the amounts of deferred policy acquisition costs, policy liabilities and accruals, future earnings, and

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various components of the Company’s balance sheet. These assumptions are used in the operation of the Company’s business in making decisions crucial to the success of the Company, including the pricing of products and expense structures relating to products. The Company’s actual experience, as well as changes in estimates, is used to prepare the Company’s financial statements. To the extent the Company’s actual experience and changes in estimates differ from original estimates, the Company’s financial condition may be affected.     

Mortality, morbidity, and casualty expectations incorporate assumptions about many factors, including for example, how a product is distributed, for what purpose the product is purchased, the mix of customers purchasing the products, persistency and lapses, future progress in the fields of health and medicine, and the projected level of used vehicle values. Actual mortality, morbidity, and/or casualty experience may differ from expectations. In addition, continued activity in the viatical, stranger-owned, and/or life settlement industry could cause the Company’s level of lapses to differ from its assumptions about persistency and lapses, which could negatively impact the Company’s performance.

The calculations the Company uses to estimate various components of its balance sheet and statements of income are necessarily complex and involve analyzing and interpreting large quantities of data. The Company currently employs various techniques for such calculations and relies, in certain instances, on third parties to make or assist in making such calculations. From time to time it develops and implements more sophisticated administrative systems and procedures capable of facilitating the calculation of more precise estimates. The systems and procedures that the Company develops and the Company's reliance upon third parties could result in errors in the calculations that impact our financial statements or affect our financial condition.

Assumptions and estimates involve judgment, and by their nature are imprecise and subject to changes and revisions over time. Accordingly, the Company’s results may be affected, positively or negatively, from time to time, by actual results differing from assumptions, by changes in estimates, and by changes resulting from implementing more sophisticated administrative systems and procedures that facilitate the calculation of more precise estimates.

The Company may not realize its anticipated financial results from its acquisitions strategy.

The Company’s acquisitions of companies and coinsurance of blocks of insurance business have increased its earnings. However, there can be no assurance that the Company will have future suitable opportunities for, or sufficient capital available to fund, such transactions. If our competitors have access to capital on more favorable terms or at a lower cost, our ability to compete for acquisitions may be diminished. In addition, there can be no assurance that the Company will be able to realize any projected operating efficiencies or realize the anticipated financial results from such transactions.

The Company may be unable to complete an acquisition transaction. Completion of an acquisition transaction may be more costly or take longer than expected, or may have a different or more costly financing structure than initially contemplated. In addition, the Company may not be able to complete or manage multiple acquisition transactions at the same time, or the completion of such transactions may be delayed or be more costly than initially contemplated. The Company or other parties to


the transaction may be unable to obtain regulatory approvals required to complete an acquisition transaction. If the Company identifies and completes suitable acquisitions, it may not be able to successfully integrate the business in a timely or cost-effective manner, or retain key personnel and business relationships necessary to achieve anticipated financial results. In addition, there may be unforeseen liabilities that arise in connection with businesses or blocks of insurance business that the Company acquires. Additionally, in connection with its acquisition transactions that involve reinsurance, the Company assumes, or otherwise becomes responsible for, the obligations of policies and other liabilities of other insurers. Any regulatory, legal, financial, or other adverse development affecting the other insurer could also have an adverse effect on the Company.

The Company’s use of derivative financial instruments within its risk management strategy may not be effective or sufficient.

The Company uses derivative financial instruments within its risk management strategy to mitigate risks to which it is exposed, including the adverse effects of domestic and/or international credit and/or equity market and/or interest rate levels, foreign exchange risks, or volatility on its fixed indexed annuity and variable annuity products with guaranteed benefit features. These derivative financial instruments may not effectively offset the changes in the carrying value of the guarantees due to, among other things, the time lag between changes in the value of such guarantees and the changes in the value of the derivative financial instruments purchased by the Company, extreme credit and/or equity market and/or interest rate levels or volatility, contract holder behavior that differs from the Company’s expectations, and divergence between the performance of the underlying funds of such variable annuity products with guaranteed benefit features and the indices utilized by the Company in estimating its exposure to such guarantees.

The Company may also use derivative financial instruments within its risk management strategy to mitigate risks arising from its exposure to investments in individual issuers or sectors of issuers and to mitigate the adverse effects of distressed domestic and/or international credit and/or equity markets and/or interest rate levels or volatility on its overall financial condition or results of operations.

The use of derivative financial instruments by the Company may have an adverse impact on the level of statutory capital and the risk-based capital ratios of the Company’s insurance subsidiaries. The Company employs strategies in the use of derivative financial instruments that are intended to mitigate such adverse impacts, but the Company’s strategies may not be effective.

The Company may also choose not to hedge, in whole or in part, these or other risks that it has identified, due to, for example, the availability and/or cost of a suitable derivative financial instrument or, in reaction to extreme credit, equity market and/or interest rate levels or volatility. Additionally, the Company’s estimates and assumptions made in connection with its use of any derivative financial instrument may fail to reflect or correspond to its actual long-term exposure in respect to identified risks.

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Derivative financial instruments held or purchased by the Company may also otherwise be insufficient to hedge the risks in relation to the Company’s obligations. In addition, the Company may fail to identify risks, or the magnitude thereof, to which it is exposed. The Company is also exposed to the risk that its use of derivative financial instruments within its risk management strategy may not be properly designed and/or may not be properly implemented as designed.

The Company is also subject to the risk that its derivative counterparties or clearinghouse may fail or refuse to meet their obligations to the Company under derivative financial instruments. If the Company’s derivative counterparties or clearinghouse fail or refuse to meet their obligations to the Company in this regard, the Company’s efforts to mitigate risks to which it is subject through the use of such derivative financial instruments may prove to be ineffective or inefficient.

The above factors, either alone or in combination, may have a material adverse effect on the Company’s financial condition and results of operations.

Disruption of the capital and credit markets could negatively affect the Company’s ability to meet its liquidity and financing needs.

The Company needs liquidity to meet its obligations to its policyholders and its debt holders, and to pay its operating expenses. The Company’s sources of liquidity include insurance premiums, annuity considerations, deposit funds, cash flow from investments and assets, and other income from its operations. In normal credit and capital market conditions, the Company’s sources of liquidity also include a variety of short and long-term borrowing arrangements, including issuing debt securities.

The Company’s business is dependent on the capital and credit markets, including confidence in such markets. When the credit and capital markets are disrupted and confidence is eroded the Company may not be able to borrow money, including through the issuance of debt securities, or the cost of borrowing or raising capital may be prohibitively high. If the Company’s internal sources of liquidity are inadequate during such periods, the Company could suffer negative effects from not being able to borrow money, or from having to do so on unfavorable terms. The negative effects could include being forced to sell assets at a loss, a lowering of the Company’s credit ratings and the financial strength ratings of its insurance subsidiaries, and the possibility that customers, lenders, ratings agencies, or regulators develop a negative perception of the Company’s financial prospects, which could lead to further adverse effects on the Company.

The Company could be adversely affected by an inability to access its credit facility.

The Company relies on its credit facility as a potential source of liquidity. The availability of these funds could be critical to the Company’s credit and financial strength ratings and its ability to meet obligations, particularly when alternative sources of credit or liquidity are either difficult to access or costly. The availability of the Company’s credit facility is dependent in part on the ability of the lenders to provide funds under the facility. The Company’s credit facility contains various affirmative and negative covenants and events of default, including covenants requiring the Company to maintain a specified minimum consolidated net


worth. The Company’s right to make borrowings under the facility is subject to the fulfillment of certain conditions, including its compliance with all covenants. The Company’s failure to comply with the covenants in the credit facility could restrict its ability to access this credit facility when needed. The Company’s inability to access some or all of the line of credit under the credit facility could have a material adverse effect on its financial condition and results of operations.

The Company could be adversely affected by an inability to access FHLB lending.

The Company is a member of the Federal Home Loan Bank (the “FHLB”) of Cincinnati and the FHLB of New York. Membership provides the Company with access to FHLB financial services, including advances that provide an attractive funding source for short-term borrowing and for the sale of funding agreements. In recent years, the Federal Housing Finance Agency (“FHFA”) has released advisory bulletins addressing concerns associated with insurance company (as opposed to federally-backed bank) access to FHLB financial services, the state insurance regulatory framework and FHLB creditor status in the event of member insurer insolvency. In response to FHFA actions, FHLB members, the NAIC and trade groups developed model legislation that would subject insurers accessing FHLB funding to collateral requirements similar to those applicable to federally insured depository institutions. While members of the FHLB and NAIC were not able to agree on certain points, legislation based on this model has been introduced and adopted in several states and is not being opposed by the NAIC. It is unclear at this time whether or to what extent additional or new legislation or regulatory action regarding continued access to FHLB financial services will be enacted or adopted. Any developments that limit access to FHLB financial services could have a material adverse effect on the Company.

The amount of statutory capital or risk-based capital that the Company has and the amount of statutory capital or risk-based capital that it must hold to maintain its financial strength and credit ratings and meet other requirements can vary significantly from time to time and such amounts are sensitive to a number of factors outside of the Company’s control.

Insurance regulators have established regulations that provide minimum capitalization requirements based on risk-based capital formulas for life and property and casualty companies. The risk-based capital formula for life insurance companies establishes capital requirements relating to insurance, business, asset, interest rate, and certain other risks.

In any particular year, statutory surplus amounts and risk-based capital ratios may increase or decrease depending on a variety of factors including the following: the amount of statutory income or losses generated by the Company and its insurance subsidiaries (which itself is sensitive to equity market and credit market conditions); the amount of additional capital which the Company and its insurance subsidiaries must hold to support business growth; changes in the Company’s reserve requirements; the Company’s ability to secure capital market solutions to provide reserve relief; changes in equity market levels; the value of certain fixed-income and equity securities in its investment portfolio; the credit ratings of investments held in its portfolio, including those issued by, or explicitly or implicitly guaranteed by, a government; the value of certain derivative instruments; changes in interest rates and foreign currency exchange rates; credit market volatility; changes in consumer behavior; and changes to the NAIC risk-based capital formula. Most of these factors are outside of the Company’s control. The Company’s financial strength and credit ratings are significantly influenced by its statutory surplus amounts and risk-based capital ratios and those of its insurance company subsidiaries. Rating agencies may implement changes to their internal models that have the effect of increasing or decreasing the amount of statutory capital the Company must hold in order to maintain its current ratings. In addition, rating agencies may downgrade the investments held in the Company’s portfolio, which could result in a reduction of the Company’s capital and surplus and/or its risk-based capital ratio.

In scenarios of equity market declines, the amount of additional statutory reserves or risk-based capital the Company is required to hold for its variable product guarantees may increase at a rate greater than the rate of change of the markets. Increases in reserves or risk-based capital could result in a reduction to the Company’s capital, surplus, and/or risk-based capital ratio. Also, in environments where there is not a correlative relationship between interest rates and spreads, the Company’s market value adjusted annuity product can have a material adverse effect on the Company’s statutory surplus position.

The Company may be subject to regulations influenced by or related to international regulatory authorities or initiatives.
The NAIC and the Company’s state regulators may be influenced by the initiatives of international regulatory bodies, and those initiatives may not translate readily into the legal system under which U.S. insurers must operate. There is increasing pressure to conform to international standards due to the globalization of the business of insurance and the most recent financial crisis. In addition to developments at the NAIC and in the United States, the Financial Stability Board (“FSB”), consisting of representatives of national financial authorities of the G20 nations, and the G20 have issued a series of proposals intended to produce significant changes in how financial companies, particularly companies that are members of large and complex financial groups, should be regulated.
The International Association of Insurance Supervisors (“IAIS”), at the direction of the FSB, has published a methodology for identifying “global systemically important insurers” (“G-SIIs”) and high level policy measures that will apply to G-SIIs. The FSB, working with national authorities and the IAIS, has designated nine insurance groups as G-SIIs. The IAIS is working on the policy measures which include higher capital requirements and enhanced supervision. Although neither the Company nor Dai-ichi Life has been designated a G-SII, the list of designated insurers will be updated annually by the FSB. It is possible that the greater size and reach of the combined group as a result of the Company becoming a subsidiary of Dai-ichi Life, or a change in the methodologies or their application, could lead to the combined group’s designation as a G-SII.
The IAIS is also in the process of developing a common framework for the supervision of internationally active insurance groups (“IAIGs”), which is targeted to be implemented in 2019. Under the proposed framework, insurance groups deemed to be IAIGs may be required by their regulators to comply with new global capital requirements, which may exceed the sum of state or other local capital requirements. In addition, the IAIS is developing a model framework for the supervision of IAIGs that


contemplates “group wide supervision” across national boundaries, which requires each IAIG to conduct its own risk and solvency assessment to monitor and manage its overall solvency. It is likely that, as a result of the Merger, the combined group will be deemed an IAIG, in which case it may be subject to supervision and capital requirements beyond those applicable to any competitors who are not designated as an IAIG.
While it is not yet known how or if these actions will impact the Company, such regulation could result in increased costs of compliance, increased disclosure, less flexibility in capital management and more burdensome regulation and capital requirements for specific lines of business, and could impact the Company and its reserve and capital requirements, financial condition or results of operations.

NAIC actions, pronouncements and initiatives may affect the Company’s product profitability, reserve and capital requirements, financial condition or results of operations.

Although some NAIC pronouncements, particularly as they affect accounting, reserving and risk-based capital issues, may take effect automatically without affirmative action taken by the states, the NAIC is not a governmental entity and its processes and procedures do not comport with those to which governmental entities typically adhere. Therefore, it is possible that actions could be taken by the NAIC that become effective without the procedural safeguards that would be present if governmental action was required. In addition, with respect to some financial regulations and guidelines, states sometimes defer to the interpretation of the insurance department of a non-domiciliary state. Neither the action of the domiciliary state nor the action of the NAIC is binding on a non-domiciliary state. Accordingly, a state could choose to follow a different interpretation. The Company is also subject to the risk that compliance with any particular regulator’s interpretation of a legal, accounting or actuarial issue may result in non-compliance with another regulator’s interpretation of the same issue, particularly when compliance is judged in hindsight. There is an additional risk that any particular regulator’s interpretation of a legal, accounting or actuarial issue may change over time to the Company’s detriment, or that changes to the overall legal or market environment may cause the Company to change

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its practices in ways that may, in some cases, limit its growth or profitability. Statutes, regulations, interpretations, and instructions may be applied with retroactive impact, particularly in areas such as accounting, reserve and risk-based capital requirements. Also, regulatory actions with prospective impact can potentially have a significant impact on currently sold products.

The NAIC has announced more focused inquiries on certain matters that could have an impact on the Company’s financial condition and results of operations. Such inquiries concern, for example, examination of statutory accounting disclosures for separate accounts, insurer use of captive reinsurance companies, variable annuity reserves and capital treatment, certain aspects of insurance holding company reporting and disclosure, reserving for universal life products with secondary guarantees, reinsurance, cybersecurity practices, and risk-based capital calculations. In addition, the NAIC continues to consider various initiatives to change and modernize its financial and solvency requirements and regulations. It has adopted a principles-based reserving methodologymethodologies for life insurance and annuity reserves, but additional formulas and/or guidance relevant to the new standard are being developed. The NAIC is also considering changes to accounting and risk-based capital regulations, governance practices of insurers, and other items. Some of these proposed changes including implementing a principles-based reserving methodology,will require the approval of state legislatures. The Company cannot currently estimate what impact these more focused inquiries or proposed changes, if they occur, will have on its product mix, product profitability, reserve and capital requirements, financial condition or results of operations.

The Company’s use of captive reinsurance companies to finance statutory reserves related to its term and universal life products and to reduce volatility affecting its variable annuity products may be limited or adversely affected by regulatory action, pronouncements and interpretations.

The Company currently uses affiliated captive reinsurance companies in various structures to finance certain statutory reserves based on a regulation entitled “Valuation of Life Insurance Policies Model Regulation,” commonly known as “Regulation XXX,” and a supporting guideline entitled “The Application of the Valuation of Life Insurance Policies Model Regulation,” commonly known as “Guideline AXXX”, which are associated with term life insurance and universal life insurance with secondary guarantees, respectively, as well as to reduce the volatility in statutory risk-based capital associated with certain guaranteed minimum withdrawal and death benefit riders associated with the Company’s variable annuity products. The NAIC, through various committees, subgroups and dedicated task forces, is reviewing the use of captives and special purpose vehicles used to transfer insurance risk in relation to existing state laws and regulations, and several committees have adopted or exposed for comment white papers and reports that, if or when implemented, could impose additional requirements on the use of captives and other reinsurers (including traditional reinsurers) (the “Affected Business”). In addition, the Principles Based Reserving Implementation (EX) Task Force of the NAIC, charged with analysis of the adoption of a principles-based reserving methodology, adopted the “conceptual framework” contained in a report issued by Rector & Associates, Inc., dated June 4, 2014 (as modified or supplemented, the “Rector Report”), that includes numerous recommendations pertaining to the regulation and use of certain captive reinsurers. Certain high-level recommendations have been adopted and assigned to various NAIC working groups, which working groups are in various stages of discussions regarding recommendations.

One recommendation of the Rector Report has beenwas adopted as Actuarial Guideline XLVIII (“AG48”). AG48 sets more restrictive standards on the permitted collateral utilized to back reserves of a captive. Other recommendations inIn September 2016, the Rector Report are subjectFinancial Condition (E) Committee of the NAIC adopted the Term and Universal Life Insurance Reserve Financing Model Regulation (the “Reserve Model”) which is substantially similar to ongoing commentAG48. AG48 and revision. It is unclear at this time to what extent the recommendations in the Rector Report, or additional or revised recommendations relating to captive transactions or reinsurance transactions in general, will be adopted by the NAIC. If the recommendations proposed in the Rector Report are implemented, itReserve Model will likely bemake it difficult for the Company to establish new captive financing arrangements on a basis consistent with past practices. As a result of AG48 and the Rector Report,Reserve Model, the implementation of new captive structures in the future may be less capital efficient, may lead to lower product returns and/or increased product pricing or result in reduced sales of certain products. Additionally, inIn some circumstances, AG48 and the implementation of the recommendations in the Rector ReportReserve Model could impact the Company’s ability to engage in certain reinsurance transactions with non-affiliates.    

The Financial Condition (E) Committee of the NAIC established a Variable Annuity Issues Working Group ("VAIWG") in 2015 to oversee the NAIC’s efforts to study and address regulatory issues resulting in variable annuity captive reinsurance


transactions. The VAIWG developed a Framework for Change (the “Framework”) which was adopted in 2015. The Framework suggests numerous changes to current NAIC rules and regulations that are intended to decrease incentives for insurers to establish variable annuities captives, which changes could potentially be applied to both in-force and new business. The Framework proposes that various NAIC groups consider and adopt recommended changes to current rules and regulations (with a targeted effective date in 2017)2018) and that, upon adoption, domestic regulators request that insurers ceding business to variable annuity captives recapture such business and dissolve such captives. The VAIWG expects or receivereceived a draft of recommendationsproposal for changes to current rules and regulations in Augustlate 2016. If the proposals set forth in the Framework areproposal is adopted, changes in the regulation of variable annuities and variable annuity captives could adversely affect our future financial condition and results of operations.

The NAIC adopted revisions to the Part A Laws and Regulations Preamble (the "Preamble") of the NAIC Financial Regulation Standards and Accreditation Program that will include within the definition of “multi-state insurer” certain insurer-owned captives and special purpose vehicles that are single-state licensed but assume reinsurance from cedants operating in multiple states. The revised definition will subject certain captives, including XXX/AXXX captives, variable annuity and long-term care captives, to all of the accreditation standards applicable to other traditional multi-state insurers, including standards related to capital and surplus requirements, risk-based capital requirements, investment laws and credit for reinsurance laws. Although we do not expect the revised definition to affect our existing life insurance captives (or our ability to engage in life insurance captive transactions in the future), such application will likely prevent us from engaging in variable annuity captive transactions on the same or a similar basis as in the past and, if applied retroactively, would likely cause us to recapture business from and unwind our existing variable annuity captive (“VA Captive”).

While the recapture of business from our existing VA Captive, caused either by actions of the VAIWG or the effect of the Preamble, would not have a material adverse effect on the Company given current market conditions, in the future the Company

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could experience fluctuations in its risk-based capital ratio due to market volatility if it were prohibited from engaging in similar transactions or required to unwind its existing VA Captive, which could adversely affect our future financial condition and results of operations.

Any regulatory action or changeschange in interpretation that materially adversely affects the Company’s use or materially increases the Company’s cost of using captives or reinsurers for the Affected Business, either retroactively or prospectively, could have a material adverse impact on the Company’s financial condition or results of operations. If the Company were required to discontinue its use of captives for intercompany reinsurance transactions on a retroactive basis, adverse impacts would include early termination fees payable with respect to certain structures, diminished capital position and higher cost of capital. Additionally, finding alternative means to support policy liabilities efficiently is an unknown factor that would be dependent, in part, on future market conditions and the Company’s ability to obtain required regulatory approvals. On a prospective basis, discontinuation of the use of captives could impact the types, amounts and pricing of products offered by the Company’s insurance subsidiaries.

Laws, regulations and initiatives related to unreported deaths and unclaimed property and death benefits may result in operational burdens, fines, unexpected payments or escheatments.

Since 2012, various states have enacted laws that require life insurers to search for unreported deaths. The National Conference of Insurance Legislators (“NCOIL”) has adopted the Model Unclaimed Life Insurance Benefits Act (the “Unclaimed Benefits Act”) and legislation or regulations have been enacted in numerous states that are similar to the Unclaimed Benefits Act, although each state’s version differs in some respects. The Unclaimed Benefits Act, if adopted by any state, imposes new requirements on insurers to periodically compare their life insurance and annuity contracts and retained asset accounts against the U.S. Social Security Administration's Death Master File or similar databases (a "Death Database"), investigate any potential matches to confirm the death and determine whether benefits are due, and to attempt to locate the beneficiaries of any benefits that are due or, if no beneficiary can be located, escheat the benefit to the state as unclaimed property. Other states in which the Company does business may also consider adopting legislation similar to the Unclaimed Benefits Act. The Company cannot predict whether such legislation will be proposed or enacted in additional states. Additionally, the NAIC Unclaimed Life Insurance Benefits (A) Working Group is developing a model unclaimed property law that overlaps with the NCOIL-based laws already adopted in numerous states.

The Uniform Laws Commission has adopted revisions to the Uniform Unclaimed Property Act in a manner likely to impact state unclaimed property laws and requirements, though it is not clear at this time to what extent or whether requirements will conflict with otherwise imposed search requirements. Other life insurance industry associations and regulatory associations are also considering these matters. Certain states have amended or may amend their unclaimed property laws to require insurers to compare in-force and certain terminated life insurance policies, annuity contracts, and retained asset accounts against a Death Database, to investigate potential matches to determine whether the named insured is deceased, to attempt to locate and pay beneficiaries any unclaimed benefits required to be paid, and, if no beneficiary can be located, to escheat policy benefits to the appropriate state as unclaimed property. The enactment of such unclaimed property laws may require the Company to incur significant expenses, including benefits with respect to terminated policies for which no reserves are currently held and unanticipated operational expenses. Any of the foregoing could have a material adverse effect on the Company's financial condition and results of operations.

A number of state treasury departments and administrators of unclaimed property have audited life insurance companies for compliance with unclaimed property laws. The focus of the audits has been to determine whether there have been maturities of policies or contracts, or policies that have exceeded limiting age with respect to which death benefits or other payments under the policies should be treated as unclaimed property that should be escheated to the state. In addition, the audits have sought to identify unreported deaths of insureds. There is no clear basis in previously existing law for treating an unreported death as giving rise to a policy benefit that would be subject to unclaimed property procedures. A number of life insurers, however, have entered into resolution agreements with state treasury departments and administrators of unclaimed property under which the life insurers


agreed to procedures for comparing their previously issued life insurance and annuity contracts and retained asset accounts against a Death Database, treating confirmed deaths as giving rise to a death benefit under their policies, locating beneficiaries and paying them the benefits and interest, escheating the benefits and interest, in some cases at a negotiated rate, to the state if the beneficiary could not be found, and paying penalties to the state, if required. The amounts publicly reported to have been paid to beneficiaries and/or escheated to the states have been substantial.

The NAIC has established an Investigations of Life/Annuity Claims Settlement Practices (D) Task Force to coordinate targeted multi-state examinations of life insurance companies on claims settlement practices. The state insurance regulators on the Task Force have initiated targeted multi-state examinations of life insurance companies with respect to the companies’ claims paying practices and use of a Death Database to identify unreported deaths in their life insurance policies, annuity contracts and retained asset accounts. There is no clear basis in previously existing law for requiring a life insurer to search for unreported deaths in order to determine whether a benefit is owed. A number of life insurers, however, have entered into settlement or consent agreements with state insurance regulators under which the life insurers agreed to implement systems and procedures for periodically comparing their life insurance and annuity contracts and retained asset accounts against a Death Database, treating confirmed deaths as giving rise to a death benefit under their policies, locating beneficiaries and paying them the benefits and interest, escheating the benefits and interest to the state if the beneficiary could not be found, and paying penalties to the state, if required. It has been publicly reported that the life insurers have paid substantial administrative and/or examination fees to the insurance regulators in connection with the settlement or consent agreements.

CertainThe Company and certain of the Company’sits subsidiaries as well as certain other insurance companies from whom the Company has coinsured blocks of life insurance and annuity policies are subject to unclaimed property audits and/or targeted multistatemulti-state examinations by insurance regulators similar to those described above. It is possible that the audits, examinations and/or the enactment of state

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laws similar to the Unclaimed Benefits Act could result in additional payments to beneficiaries, additional escheatment of funds deemed abandoned under state laws, payment of administrative penalties and/or examination fees to state authorities, and changes to the Company’s procedures for identifying unreported deaths and escheatment of abandoned property. It is possible any such additional payments and any costs related to changes in Company procedures could materially impact the Company’s financial results from operations. It is also possible that life insurers, including the Company, may be subject to claims, regulatory actions, law enforcement actions, and civil litigation arising from their prior business practices, unclaimed property practices or related audits and examinations. Any resulting liabilities, payments or costs, including initial and ongoing costs of changes to the Company’s procedures or systems, could be significant and could have a material adverse effect on the Company’s financial condition or results of operations.

During December 2012, the West Virginia Treasurer filed actions against the Company’s subsidiaries Protective Life Insurance Company and one of its subsidiaries West Coast Life Insurance Company, in West Virginia state court (State(State of West Virginia ex rel. John D. Perdue v. Protective Life Insurance Company, State of West Virginia ex rel. John D. Perdue v. West Coast Life Insurance Company; Defendants’ Motions to Dismiss granted on December 27, 2013; Notice of Appeal filed on January 27, 2014; dismissal reversed by the West Virginia Supreme Court of Appeals on June 16, 2015; Petition for Rehearing filed by Defendant insurance companies denied on September 21, 2015). The actions, which also name numerous other life insurance companies, allege that the companies violated the West Virginia Uniform Unclaimed Property Act, seek to compel compliance with the Act, and seek payment of unclaimed property, interest, and penalties. While the legal theory or theories that may give rise to liability in the West Virginia Treasurer litigation are uncertain, it is possible that other jurisdictions may pursue similar actions. The Company does not currently believe that losses, if any, arising from the West Virginia Treasurer litigation will be material. The Company cannot, however, predict whether other jurisdictions will pursue similar actions or, if they do, whether such actions will have a material impact on the Company’s financial results from operations.

The Company is subject to insurance guaranty fund and insurable interest laws which could result in assessments that adversely affect the Company's financial condition or results of operations.

Under insurance guaranty fund laws in most states, insurance companies doing business therein can be assessed up to prescribed limits for policyholder losses incurred by insolvent companies. From time to time, companies may be asked to contribute amounts beyond prescribed limits. It is possible that the Company could be assessed with respect to product lines not offered by the Company. The Company cannot predict the amount of timing of any future assessments, any of which could have a material and adverse impact on the Company's financial condition or results of operations.

Laws, rules and regulations promulgated in connection with the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act may adversely affect the results of operations or financial condition of the Company.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) enacted in July 2010 made sweeping changes to the regulation of financial services entities, products and markets. Certain provisions of Dodd-Frank are or may become applicable to the Company, its competitors or those entities with which the Company does business. Such provisions include, but are not limited to the following: the establishment of consolidated federal regulation and resolution authority over systemically important financial services firms, the establishment of the Federal Insurance Office, changes to the regulation and standards applicable to broker-dealers and investment advisors, changes to the regulation of reinsurance, changes to regulations affecting the rights of shareowners, and the imposition of additional regulation over credit rating agencies, and the imposition of concentration limits on financial institutions that restrict the amount of credit that may be extended to a single person or entity. Since the enactment of Dodd-Frank, many regulations have been enacted and others are likely to be adopted in the future that will have an impact upon the Company. Dodd-Frank also created the Financial Stability Oversight Council (the “FSOC”), which has issued a final rule and interpretive guidance setting forth the methodology by which it will determine whether a non-bank financial company is a systemically important financial institution (“SIFI”). A non- bank financial company, such as the Company, that is designated as a SIFI by the FSOC will become subject to supervision by the Board of Governors of the Federal Reserve System (the “Federal


Reserve”). The Company is not currently supervised by the Federal Reserve as a SIFI. Such supervision could impact the Company’s requirements relating to capital, liquidity, stress testing, limits on counterparty credit exposure, compliance and governance, early remediation in the event of financial weakness and other prudential matters, and in other ways the Company currently cannot anticipate. FSOC-designated non-bank financial companies will also be required to prepare resolution plans, so- calledso-called “living wills,” that set out how they could most efficiently be liquidated if they endangered the U.S. financial system or the broader economy. The FSOC has conducted multiple rounds of SIFI designation consideration. However, this process is still new, and the FSOC continues to make changes to its process for designating a company as a SIFI. The FSOC has made its initial SIFI designations, and the Company was not designated as such. However, the Company could be considered and designated at any time. Because the process is in its initial stages, the Company is at this time unable to predict the impact on an entity that is supervised as a SIFI by the Federal Reserve Board. The Company is not able to predict whether the capital requirements or other requirements imposed on SIFIs may impact the requirements applicable to the Company even if it is not designated as a SIFI. The uncertainty about regulatory requirements could influence the Company’s product line or other business decisions with respect to some product lines.

There is a similarly uncertain international designation process. The Financial Stability Board, appointed by the G-20 Summit, recently designated nine insurers as “G-SIIs,” or global systemically-important insurers. The insurers designated as G-SIIs to date represent organizations larger than the Company, but the possibility remains that the Company could be so designated. As with the designation of SIFI’s,SIFIs, it is unclear at this time how additional capital, use of non-traditionalpotentially systemic non-insurance products,activities and product features, and other requirements affect the insurance and financial industries.

Additionally, Dodd-Frank created the Consumer Financial Protection Bureau (“CFPB”), an independent division of the Department of Treasury with jurisdiction over credit, savings, payment, and other consumer financial products and services, other than investment products already regulated by the United States Securities and Exchange Commission (the “SEC”) or the U.S. Commodity Futures Trading Commission. The CFPB has supervisory authority over certain non-banks whose activities or products it determines pose risks to consumers, and recently issued a rule amending regulations under the Home Mortgage Disclosure Act that will require the Company to, among other things, collect and disclose extensive data related to its lending practices. It is unclear at this time the extent to which the Company’sCompany or its activities or products will be impacted by this rule or other rules promulgated by the CFPB, or how burdensome compliance will become.

Certain of the Company’s subsidiaries sell products that may be regulated by the CFPB. CFPB continues to bring enforcement actions involving a growing number of issues, including actions brought jointly with state Attorneys General, which could directly or indirectly affect the Company or any of its subsidiaries. Additionally, the CFPB is exploring the possibility of helping Americans manage their retirement savings and is considering the extent of its authority in that area. The Company is unable at this time to predict the impact of these activities on the Company.


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Dodd-Frank includes a framework of regulation of over-the-counter (“OTC”) derivatives markets which requires clearing of certain types of transactions which have been or are currently traded OTC by the Company. The types of transactions to be cleared are expected to increase in the future. The new framework could potentially impose additional costs, including increased margin requirements and additional regulation on the Company. Increased margin requirements on the Company’s part, combined with restrictions on securities that will qualify as eligible collateral, could continue to reduce its liquidity and require an increase in its holdings of cash and government securities with lower yields causing a reduction in income. The Company uses derivative financial instruments to mitigate a wide range of risks in connection with its businesses, including those arising from its variable annuity products with guaranteed benefit features. The derivative clearing requirements of Dodd-Frank could continue to increase the cost of the Company’s risk mitigation and expose it to the risk of a default by a clearinghouse with respect to the Company’s cleared derivative transactions.

Numerous provisions of Dodd-Frank require the adoption of implementing rules and/or regulations. The process of adopting such implementing rules and/or regulations have in some instances been delayed beyond the timeframes imposed by Dodd-Frank. Until the various final regulations are promulgated pursuant to Dodd-Frank, the full impact of the regulations on the Company will remain unclear. In addition, Dodd-Frank mandates multiple studies, which could result in additional legislation or regulation applicable to the insurance industry, the Company, its competitors or the entities with which the Company does business. Legislative or regulatory requirements imposed by or promulgated in connection with Dodd-Frank may impact the Company in many ways, including but not limited to the following: placing the Company at a competitive disadvantage relative to its competition or other financial services entities, changing the competitive landscape of the financial services sector and/or the insurance industry, making it more expensive for the Company to conduct its business, requiring the reallocation of significant company resources to government affairs, legal and compliance-related activities, causing historical market behavior or statistics utilized by the Company in connection with its efforts to manage risk and exposure to no longer be predictive of future risk and exposure or otherwise have a material adverse effect on the overall business climate as well as the Company’s financial condition and results of operations.

Regulations issued by the Department of Labor on April 6, 2016, expanding the definition of “investment advice fiduciary” under ERISA and creating and revising several prohibited transaction exemptions for investment activities in light of that expanded definition, may have a material adverse impact on our ability to sell annuities and other products, to retain in-force business and on our financial condition or results of operation.

Broker-dealers, insurance agencies and other financial institutions sell the Company’s annuities to employee benefit plans governed by provisions of the Employee Retirement Income Security Act (“ERISA”) and Individual Retirement Accounts (“IRAs”) that are governed by similar provisions under the Internal Revenue Code (the “Code”). Consequently, our activities and those of the firms that sell the Company’s products are subject to restrictions that require ERISA fiduciaries to perform their duties solely in the interests of ERISA plan participants and beneficiaries, and that prohibit ERISA fiduciaries from causing a covered plan or


retirement account to engage in certain prohibited transactions absent an exemption. In general, the prohibited transaction provisions of ERISA and the Code restrict the receipt of compensation from third parties in connection with the provision of investment advice to ERISA plans and participants and IRAs.

On April 6, 2016, the Department of Labor issued new regulations expanding the definition of “investment advice fiduciary” under ERISA. These new regulations increase the number of circumstances in which the Company and broker-dealers, insurance agencies and other financial institutions that sell the Company’s products could be deemed a fiduciary when providing investment advice with respect to ERISA plans or IRAs. The Department of Labor also issued amendments to long standinglong-standing exemptions from the provisions of ERISA and the Code that prohibit fiduciaries from engaging in certain types of transactions (“Prohibited Transaction Exemptions”) and adopted new Prohibited Transaction Exemptions. These amended and new Prohibited Transaction Exemptions appear to increase significantly the conditions that must be satisfied by fiduciaries in order to receive traditional forms of commission, such as sales commissions, for sales of insurance products to ERISA plans, plan participants and IRAs.
 
Although it is expected that that the Department of Labor may provide additional interpretive guidance with respect to these new regulations, it appears that sales of certain of our products may be materially and adversely affected and our current distributors may limit the number of products they offer, including the types of products offered by the Company. The Company may find it necessary to change sales representative and/or broker compensation, to limit the assistance or advice it can provide to owners of the Company’s annuities, to replace or engage additional distributors, or otherwise change the manner in which it designs and supports sales of its annuities. In addition, the Company may incur significant expenses in connection with initial and ongoing compliance obligations with respect to such rules. The foregoing could have a material adverse impact on our ability to sell annuities and other products, to retain in-force business, and on our financial condition or results of operations.

Changes to tax law or interpretations of existing tax law could adversely affect the Company and its ability to compete with non-insurance products or reduce the demand for certain insurance products.

Under the Internal Revenue Code of 1986, as amended (the “Code”), income taxes payable by policyholders on investment earnings on most life insurance and annuity productproducts are deferred during their accumulation period .period. This favorable tax treatment provides some of the Company’s products with a competitive advantage over products offered by non-insurance companies. To the extent that the Code is revised to either reduce the tax-deferred status of life insurance and annuity products, or to establish the tax-deferred status of competing products, then all life insurance companies, including the Company’s subsidiaries, would be adversely affected with respect to their ability to sell their products. Furthermore, depending upon grandfathering provisions, such changes could cause increased surrenders of existing life insurance and annuity products. For example, future legislation that further restricts the deductibility of interest on funds borrowed to purchase corporate-owned life insurance products could result in increased surrenders of these products.


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The Company is subject to the federal corporate income tax in the U.S. Certain tax provisions, such as the dividends-received deduction, the deferral of current taxation on derivatives’ and securities’ economic income, and the deduction for future policy benefits and claims, are beneficial to the Company. The Obama Administration and Congress have each made proposals that either materially change or eliminate these benefits. Most of the foregoing proposals would cause the Company to pay higher current taxes, offset (in whole or in part) by a reduction in its deferred taxes. However, the proposal regarding the dividends-received deduction would cause the Company’s net income to decrease. Whether these proposals will be enacted, and if so, whether they will be enacted as described above, is uncertain.

The Company’s mid-2005 transition from relying on reinsurance for newly-written traditional life products to reinsuring some of these products’ reserves into its captive insurance companies resulted in a net reduction in its current taxes, offset by an increase in its deferred taxes. The resulting benefit of reduced current taxes is attributed to the applicable life products and is an important component of the profitability of these products. The profitability and competitive position of these products is dependent on the continuation of current tax law and the ability to generate taxable income.

There is general uncertainty regarding the taxes to which the Company and its products will be subject in the future. The Company cannot predict what changes to tax law or interpretations of existing tax law may ultimately be enacted or adopted, or whether such changes will adversely affect the Company.

The Company’s reinsurers could fail to meet assumed obligations, increase rates, terminate agreements or be subject to adverse developments that could affect the Company.

The Company and its insurance subsidiaries cede material amounts of insurance and transfer related assets to other insurance companies through reinsurance. However, notwithstanding the transfer of related assets or other issues, the Company remains liable with respect to ceded insurance should any reinsurer fail to meet the assumed obligations. Therefore, the failure, insolvency, or inability or unwillingness to pay under the terms of the reinsurance agreement with the Company of one or more of the Company’s reinsurers could negatively impact the Company’s earnings and financial position.

The Company’s results and its ability to compete are affected by the availability and cost of reinsurance. Premium rates charged by the Company are based, in part, on the assumption that reinsurance will be available at a certain cost. Under certain reinsurance agreements, a reinsurerCertain reinsurers may attempt to increase the rate it chargesrates they charge the Company for the reinsurance, including rates for new policies the Company is issuing and rates related to policies that the Company has already issued. The Company may not be able to increase the premium rates it charges for policies it has already issued, and for competitive reasons it may not be able to raise the premium rates it charges for new policies to offset the increase in rates charged by reinsurers. If the cost of reinsurance were to increase, if reinsurance were


to become unavailable, if alternatives to reinsurance were not available to the Company, or if a reinsurer should fail to meet its obligations, the Company could be adversely affected.

Over the last several years, the number of life reinsurers has decreased as the reinsurance industry has consolidated. The decreased number of participants in the life reinsurance market over time has resulted in increased concentration of risk for insurers, including the Company. If the reinsurance market further contracts, the Company’s ability to continue to offer its products on terms favorable to it could be adversely impacted.

In addition, reinsurers face challenges regarding illiquid credit and/or capital markets, investment downgrades, rating agency downgrades, deterioration of general economic conditions, and other factors negatively impacting the financial services industry. If reinsurers, including those with significant exposure to international markets and European Union member states, are unable to meet their obligations, the Company would be adversely impacted.

The Company has implemented a reinsurance program through the use of captive reinsurers. Under these arrangements, a captive owned by the Company serves as the reinsurer, and the consolidated books and tax returns of the Company reflects a liability consisting of the full reserve amount attributable to the reinsured business. The success of the Company’s captive reinsurance program is dependent on a number of factors outside the control of the Company, including continued access to financial solutions, a favorable regulatory environment, and the overall tax position of the Company. If the captive reinsurance program is not successful, the Company’s financial condition could be adversely impacted.

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Item 6.                    Exhibits
 
Exhibit  
Number Document
3(a)* 2011 Amended and Restated Charter of Protective Life Insurance Company dated as of June 27, 2011, incorporated by reference to Exhibit 3(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed March 29, 2012 (No. 001-31901).
3(b)* 2011 Amended and Restated By-Laws of Protective Life Insurance Company dated as of June 27, 2011, incorporated by reference to Exhibit 3(b) to the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 filed March 29, 2012 (No. 001-31901).
12 Consolidated Earnings Ratio.
31(a) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32(a) Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32(b) Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101 Financial statements from the quarterly report on Form 10-Q of Protective Life Insurance Company for the quarter ended JuneSeptember 30, 2016, filed on AugustNovember 10, 2016, formatted in XBRL: (i) the Consolidated Condensed Statements of Income (Loss), (ii) the Consolidated Condensed Statements of Comprehensive Income (Loss), (iii) the Consolidated Condensed Balance Sheets, (iv) the Consolidated Condensed Statements of Shareowner’s Equity, (v) the Consolidated Condensed Statements of Cash Flows, and (iv) the Notes to Consolidated Condensed Financial Statements.
 
*Incorporated by Reference.

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SIGNATURE
 
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
 PROTECTIVE LIFE INSURANCE COMPANY
  
  
Date: AugustNovember 10, 2016 By:/s/ Steven G. Walker
   Steven G. Walker
   Executive Vice President,
   Chief Financial Officer and Controller


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