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Table of Contents


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549

FORM 10-Q
 
☒  Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended March 31, 2020
 
or
 
☐  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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
N/A N/A N/A

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 ☒  No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).  Yes ☒  No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐  
Accelerated Filer
☐
   
Non-accelerated filer
☒
Smaller Reporting Company
☐
Emerging Growth Company
☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ☐  No ☒
 
Number of shares of Common Stock, $1.00 Par Value, outstanding as of April 26, 2020:  5,000,000


Table of Contents
PROTECTIVE LIFE INSURANCE COMPANY
QUARTERLY REPORT ON FORM 10-Q
FOR QUARTERLY PERIOD ENDED MARCH 31, 2020
TABLE OF CONTENTS
    Page
  PART I  
     
Item 1. Financial Statements (unaudited):  
 
2
 
3
 
4
 
6
 
7
 
9
Item 2.
59
Item 3.
105
Item 4.
105
     
   
     
Item 1.
106
Item 1A.
106
Item 6.
113
 
114

1
Table of Contents
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF INCOME
(Unaudited)
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Revenues  
Premiums and policy fees $ 896,165    $ 923,686   
Reinsurance ceded (53,318)   (331,517)  
Net of reinsurance ceded 842,847    592,169   
Net investment income 752,980    641,422   
Realized gains (losses) - investments/derivatives (38,111)   53,078   
Other income 127,170    78,136   
Total revenues 1,684,886    1,364,805   
Benefits and expenses  
Benefits and settlement expenses, net of reinsurance ceded: (2020 - $(30,724); 2019 - $251,674)
1,344,162    973,154   
Amortization of deferred policy acquisition costs and value of business acquired 53,963    30,373   
Other operating expenses, net of reinsurance ceded: (2020 - $59,611; 2019 - $52,534)
195,288    184,551   
Total benefits and expenses 1,593,413    1,188,078   
Income before income tax 91,473    176,727   
Income tax expense 17,508    34,629   
Net income $ 73,965    $ 142,098   

See Notes to Consolidated Condensed Financial Statements
2
Table of Contents
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Unaudited) 
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Net income $ 73,965    $ 142,098   
Other comprehensive income (loss):  
Change in net unrealized gains (losses) on investments, net of income tax: (2020 - $(391,653); 2019 - $300,430)
(1,473,362)   1,130,190   
Reclassification adjustment for investment amounts included in net income, net of income tax: (2020 - $2,651; 2019 - $(419))
9,972    (1,576)  
Change in net unrealized gains (losses) for which a credit loss has been recognized in operations, net of income tax: (2020 - $(1,735))
(6,529)   —   
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: (2019 - $2,337)
—    8,792   
Change in accumulated (loss) gain - derivatives, net of income tax: (2020 - $(1,232); 2019 - $(522))
(4,636)   (1,966)  
Reclassification adjustment for derivative amounts included in net income, net of income tax: (2020 - $253; 2019 - $58)
951    220   
Total other comprehensive income (loss) (1,473,604)   1,135,660   
Total comprehensive income (loss) $ (1,399,639)   $ 1,277,758   

See Notes to Consolidated Condensed Financial Statements
3
Table of Contents
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS

As of
March 31, 2020 December 31, 2019
(Unaudited)
  (Dollars In Thousands)
Assets    
Fixed maturities, at fair value (amortized cost: 2020 - $63,974,338; 2019 - $63,268,660; allowance for credit losses: 2020 - $51,793)
$ 63,906,243    $ 66,043,992   
Fixed maturities, at amortized cost (fair value: 2020 - $2,930,737; 2019 - $3,025,790)
2,775,710    2,823,881   
Equity securities, at fair value (cost: 2020 - $502,063; 2019 - $534,463)
478,189    553,720   
Mortgage loans, net of allowance for credit losses (allowance for credit losses: 2020 - $171,216; 2019 - $4,884)
9,332,867    9,379,401   
Investment real estate, net of accumulated depreciation (2020 - $245; 2019 - $203)
10,279    10,321   
Policy loans 1,657,375    1,675,121   
Other long-term investments 2,561,893    2,479,520   
Short-term investments 1,021,337    1,320,864   
Total investments 81,743,893    84,286,820   
Cash 381,447    171,752   
Accrued investment income 723,400    715,388   
Accounts and premiums receivable 127,550    174,202   
Reinsurance receivables, net of allowances for credit losses (allowances for credit losses: 2020 - $95,819; 2019 - $0)
4,432,117    4,371,865   
Deferred policy acquisition costs and value of business acquired 3,760,783    3,519,555   
Goodwill 825,511    825,511   
Other intangibles, net of accumulated amortization (2020 - $267,746; 2019 - $253,759)
574,158    583,426   
Property and equipment, net of accumulated depreciation (2020 - $52,583; 2019 - $49,357)
211,383    211,745   
Other assets 646,598    308,544   
Income tax receivable 58,932    —   
Assets related to separate accounts    
Variable annuity 10,493,017    12,730,090   
Variable universal life 915,750    1,135,666   
Reinsurance assumed 10,603,032    11,443,105   
Total assets $ 115,497,571    $ 120,477,669   

See Notes to Consolidated Condensed Financial Statements
4
Table of Contents
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED BALANCE SHEETS
(continued)
As of
March 31, 2020 December 31, 2019
(Unaudited)
  (Dollars In Thousands)
Liabilities    
Future policy benefits and claims $ 53,182,778    $ 53,943,962   
Unearned premiums 788,752    794,832   
Total policy liabilities and accruals 53,971,530    54,738,794   
Stable value product account balances 5,885,738    5,443,752   
Annuity account balances 14,604,211    14,289,907   
Other policyholders’ funds 1,331,233    1,576,856   
Other liabilities 3,756,147    2,977,278   
Income tax payable —    34,224   
Deferred income taxes 1,053,794    1,371,970   
Debt 878    968   
Subordinated debt 110,000    110,000   
Non-recourse funding obligations 3,035,549    3,082,753   
Secured financing liabilities 67,605    335,480   
Liabilities related to separate accounts    
Variable annuity 10,493,017    12,730,090   
Variable universal life 915,750    1,135,666   
Reinsurance assumed 10,603,032    11,443,105   
Total liabilities 105,828,484    109,270,843   
Commitments and contingencies - Note 11
Shareowner’s equity    
Preferred Stock; $1 par value, shares authorized: 2,000; Liquidation preference: $2
2    2   
Common Stock, $1 par value, shares authorized and issued: 2020 and 2019 - 5,000,000
5,000    5,000   
Additional paid-in-capital 8,260,537    8,260,537   
Retained earnings 1,469,510    1,533,645   
Accumulated other comprehensive income (loss):    
Net unrealized gains (losses) on investments, net of income tax: (2020 - $(5,692); 2019 - $(383,311))
(21,412)   1,441,978   
Net unrealized losses on investments for which a credit loss has been recognized in operations, net of income tax: (2020 - $(8,739))
(32,876)   —   
Net unrealized losses relating to other-than-temporary impaired investments for which a portion has been recognized in operations, net of income tax: (2019 - $(7,004))
—    (26,347)  
Accumulated gain (loss) - derivatives, net of income tax: (2020 - $(3,103); 2019 - $(2,123))
(11,674)   (7,989)  
Total shareowner’s equity 9,669,087    11,206,826   
Total liabilities and shareowner’s equity $ 115,497,571    $ 120,477,669   

See Notes to Consolidated Condensed Financial Statements
5
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
  (Dollars In Thousands)
Balance, December 31, 2019 $ 2    $ 5,000    $ 8,260,537    $ 1,533,645    $ 1,407,642    $ 11,206,826   
Net income for the three months ended March 31, 2020                73,965         73,965   
Other comprehensive income (loss)                (1,473,604)   (1,473,604)  
Comprehensive income (loss) for the three months ended March 31, 2020 (1,399,639)  
Cumulative effect adjustments (138,100)   (138,100)  
Balance, March 31, 2020 $ 2    $ 5,000    $ 8,260,537    $ 1,469,510    $ (65,962)   $ 9,669,087   

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
  (Dollars In Thousands)
Balance, December 31, 2018 $ 2    $ 5,000    $ 7,410,537    $ 1,031,465    $ (1,404,216)   $ 7,042,788   
Net income for the three months ended March 31, 2019                142,098         142,098   
Other comprehensive income                1,135,660    1,135,660   
Comprehensive income for the three months ended March 31, 2019 1,277,758   
Cumulative effect adjustments (50,804)   (50,804)  
Balance, March 31, 2019 $ 2    $ 5,000    $ 7,410,537    $ 1,122,759    $ (268,556)   $ 8,269,742   

See Notes to Consolidated Condensed Financial Statements
6
Table of Contents
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Cash flows from operating activities  
Net income $ 73,965    $ 142,098   
Adjustments to reconcile net income to net cash used in operating activities:    
Realized (gains) losses - investments/derivatives 38,111    (53,078)  
Amortization of DAC and VOBA 53,963    30,373   
Capitalization of DAC (106,881)   (95,970)  
Depreciation and amortization expense 18,605    18,477   
Deferred income tax 112,115    4,938   
Accrued income tax (93,156)   105,877   
Interest credited to universal life and investment products 410,691    285,588   
Policy fees assessed on universal life and investment products (448,079)   (407,380)  
Change in reinsurance receivables (156,296)   104,293   
Change in accrued investment income and other receivables 55,674    (77,802)  
Change in policy liabilities and other policyholders’ funds of traditional life and health products (211,245)   (200,135)  
Trading securities:    
Maturities and principal reductions of investments 25,519    30,111   
Sale of investments 123,118    142,370   
Cost of investments acquired (179,484)   (149,133)  
Other net change in trading securities 1,877    1,662   
Amortization of premiums and accretion of discounts on investments and mortgage loans 84,373    67,037   
Change in other liabilities 353,158    59,859   
Other, net 30,115    (74,734)  
Net cash provided by (used in) operating activities $ 186,143    $ (65,549)  

See Notes to Consolidated Condensed Financial Statements
7
Table of Contents
PROTECTIVE LIFE INSURANCE COMPANY
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(continued)
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Cash flows from investing activities    
Maturities and principal reductions of investments, available-for-sale $ 819,663    $ 374,989   
Sale of investments, available-for-sale 964,996    987,615   
Cost of investments acquired, available-for-sale (2,586,611)   (1,331,158)  
Mortgage loans:    
New lendings (354,508)   (155,798)  
Repayments 225,817    170,322   
Change in investment real estate, net 42    477   
Change in policy loans, net 17,746    18,444   
Change in other long-term investments, net 301,647    (8,735)  
Change in short-term investments, net 299,684    28,357   
Net unsettled security transactions (151,013)   (36,814)  
Purchase of property, equipment, and intangibles (9,063)   (5,543)  
Net cash (used in) provided by investing activities $ (471,600)   $ 42,156   
Cash flows from financing activities    
Secured financing liabilities (267,876)   (311,295)  
Deposits to universal life and investment contracts 1,549,478    1,380,615   
Withdrawals from universal life and investment contracts (786,352)   (979,532)  
Other financing activities, net (98)   (241)  
Net cash provided by financing activities $ 495,152    $ 89,547   
Change in cash 209,695    66,154   
Cash at beginning of period 171,752    151,400   
Cash at end of period $ 381,447    $ 217,554   

See Notes to Consolidated Condensed Financial Statements
8
Table of Contents
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 (now known as Dai-ichi Life Holdings, Inc., “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 remained an SEC registrant within the United States until January 23, 2020, when it suspended its reporting obligations with the SEC under the Securities Exchange Act of 1934. The Company has continued to be an SEC registrant for financial reporting purposes in the United States. The Company markets individual life insurance, credit life and disability insurance, guaranteed investment contracts, guaranteed funding agreements, fixed and variable annuities, and extended service contracts throughout the United States. The Company also maintains a separate segment devoted to the acquisition of insurance policies from other companies. PLC is a holding company with subsidiaries that provide financial services through the production, distribution, and administration of insurance and investment products.
These consolidated condensed 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. In the opinion of management, the accompanying consolidated condensed financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair presentation of the results for the interim periods presented. Operating results for the three months ended March 31, 2020, are not necessarily indicative of the results of operations that may be expected for the year ending December 31, 2020. The year end consolidated condensed financial data included herein was derived from audited financial statements but this report does not include all disclosures required by GAAP. 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, 2019.
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.
During the first quarter of 2020, the Company identified certain reclassifications needed to appropriately present amounts related to reinsured vehicle service contracts. Also during the first quarter, the Company identified cash flows presented in its investing and financing activities that were determined to be non-cash items. The Company determined that the reclassifications were not material to the financial statements for any period. These amounts have been corrected in the consolidated condensed balance sheets, statements of income, and statements of cash flows for the three months ended March 31, 2019.

In the first quarter, the uncontained outbreak of the novel coronavirus, which causes the disease termed COVID-19, created significant economic and social disruption and impacted various operational and financial aspects of the Company's business. While not all of the impacts of COVID-19 are identifiable or quantifiable, as of March 31, 2020, the deterioration in actual and forecasted macroeconomic variables have adversely impacted the market values of certain of the Company's investments and its allowance for credit losses on commercial mortgage loans. Also, the Company has recorded an increase associated with guaranteed benefits on certain of its variable annuity contracts, while realizing gains from derivatives held to hedge these guaranteed benefits.
Entities Included
The consolidated condensed financial statements in this report include the accounts of Protective Life Insurance Company and affiliate companies in which the Company holds a majority voting or economic interest. Intercompany balances and transactions have been eliminated.
9
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Accounting Policies
For a full description of the Company's significant accounting policies, refer to Note 2 to the Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. There were no significant changes to the Company’s accounting policies during the three months ended March 31, 2020, except the items noted below.
Goodwill
The balance of goodwill for the Company as of March 31, 2020 was $825.5 million. There has been no change to goodwill during the three months ended March 31, 2020.
During the three months ended March 31, 2020, the Company did not identify any events or circumstances which would indicate that it is more likely than not that the fair value of its reporting units would have declined below their book value, either individually or in the aggregate.
Allowance for Credit Losses - Fixed Maturity and Structured Investments
Each quarter the Company reviews investments with unrealized losses to determine whether such impairments are the result of credit losses. The Company analyzes various factors to make such determination including, 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 the Company’s intent to sell the security (including a more likely than not assessment of whether the Company will be required to sell the security) before recovering the security’s amortized cost, 5) an economic analysis of the issuer’s industry, and 6) the financial strength, liquidity, and recoverability of the issuer. Management performs a security by security review each quarter to evaluate whether a credit loss has occurred.
For securities which the Company does not intend to sell and does not expect to be required to sell before recovering the security’s amortized cost basis, analysis of expected cash flows is used to measure the amount of the credit loss. To the extent the amortized cost basis of the security exceeds the present value of future cash flows expected to be collected, this difference represents a credit loss. Beginning on January 1, 2020, credit losses are recorded in realized gains (losses) - investments/derivatives with a corresponding adjustment to the allowance for credit losses, except that the credit loss recognized cannot exceed the difference between the book value and fair value of the security as of the date of the analysis. In future periods, recoveries in the present value of expected cash flows are recorded as a reversal of the previously recognized allowance for credit losses with an offsetting adjustment to realized gains (losses) - investments/derivatives. See, “Accounting Pronouncements Recently Adopted” below for additional information. The Company considers contractual cash flows and all known market data related to cash flows when developing its estimates of expected cash flows. The Company uses the effective interest rate implicit in the security at the date of acquisition to discount expected cash flows. For floating rate securities, the Company’s policy is to lock in the interest rate at the first instance of an impairment. Estimates of expected cash flows are not probability-weighted but reflect the Company’s best estimate based on past events, current conditions, and reasonable and supportable forecasts of future events. Debt securities that the Company intends to sell or expects to be required to sell before recovery are written down to fair value with the change recognized in realized gains (losses) - investments/derivatives.
The Company presents accrued interest receivable separately from other components of the amortized cost basis of its fixed maturity and structured investments and has made an accounting policy election not to measure an allowance for credit losses for accrued interest receivable. The Company’s policy is to write off uncollectible accrued interest receivables through a reversal of interest income in the period in which a credit loss is identified.
Allowance for Credit Losses - Mortgage Loans and Unfunded Commitments
The Company’s commercial mortgage loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, and net of the allowance for credit losses (“ACL”). Beginning January 1, 2020, the ACL represents the Company’s best estimate of expected credit losses over the contractual term of the loans. The allowance for credit losses for unfunded loan commitments is recognized as a component of other liabilities on the consolidated condensed balance sheet. Changes in the allowance for credit losses for both funded and unfunded mortgage loans are recognized in realized gains (losses) - investments/derivatives.
The Company uses a loan-level probability of default (“PD”) and loss given default (“LGD”) model to calculate the allowance for credit losses for substantially all of its commercial mortgage loans and unfunded loan commitments. Guidance in Accounting Standards Codification (“ASC”) Topic 326-20 - Credit Losses requires collective assessment of financial assets with similar risk characteristics. Consistent with this guidance, the model used by the Company (the “CML Model”) incorporates historical default data for a large number of loans with similar characteristics to the Company’s mortgage loans in
10
the measurement of the allowance for credit losses. Relevant risk characteristics include debt service coverage ratio (“DSCR”), loan-to-value ratio (“LTV”), geographic location, and property type. This historical default data is applied through the CML Model to forecast loan-level risk parameters including PD and LGD which provide the basis for the determination of expected losses.
The CML Model incorporates both current conditions and reasonable and supportable forecasts when estimating the PD and LGD values that are used as the basis for calculating expected losses. Current conditions are incorporated by considering market-specific information, such as vacancy rates and property prices, to reflect the current position in the market cycle. To incorporate reasonable and supportable forecasts, loan-level risk parameters produced by the CML Model are conditioned by multiple probability-weighted macroeconomic forecast scenarios to reflect management’s best estimate of the impact of future events and circumstances on the allowance for credit losses.
PDs and LGDs are forecasted over a reasonable and supportable forecast period, which is reassessed on a quarterly basis. After the reasonable and supportable forecast period, the CML Model reverts to the Company’s own historical loss history at a portfolio segment level. The historical loss data used for reversion will be assessed annually in the third quarter, along with certain other model inputs and assumptions.
All or a portion of a loan may be written off at such point that the Company no longer expects to receive cash payments, the present value of future expected payments of a 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 write-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.
Certain loans which meet the definition of collateral dependent (as outlined in the Financial Accounting Standards Board “FASB” ASC Topic 326-20) are identified as part of the Company’s ongoing loan surveillance process. Loans are considered to be collateral dependent if foreclosure is deemed probable, or if a borrower is in financial difficulty and repayment is expected to be provided substantially through the operation or sale of the underlying collateral. The allowance for credit losses for loans identified as collateral dependent is measured based on the fair value of the underlying collateral, less costs to sell.
The Company presents accrued interest receivable separately from other components of the amortized cost basis of its mortgage loans and has made an accounting policy election not to measure an allowance for credit losses for accrued interest receivable. 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. In each scenario, accrued income is reversed through investment income. See Note 9, Mortgage Loans, for additional information.
Allowance for Credit Losses - Reinsurance Receivables
Beginning January 1, 2020, in accordance with FASB ASC Topic 326-20, the Company establishes an allowance for credit losses related to amounts receivable from reinsurers (the “Reinsurance ACL”). Changes in the Reinsurance ACL are recognized as components of other income or other operating expenses. The Reinsurance ACL is remeasured on a quarterly basis using an internally developed PD and LGD model. Key inputs to the calculation are a conditional probability of insurer liquidation by issuer credit rating and exposure at default derived from a runoff projection of ceded reserves by reinsurer to forecast future loss amounts. Management’s position is that the rate of return implicit in the financial asset (i.e. the ceded reserves) is associated with the discount rate used to value the underlying insurance reserves; that is, the rate of return on the asset portfolio(s) supporting the reserves. For reinsurance receivable exposures that do not share similar risk characteristics with other receivables, including those associated with counterparties that have experienced significant credit deterioration, the Company measures the allowance for credit losses individually, based on facts and circumstances associated with the specific reinsurer or transaction.
The Reinsurance ACL was $96.0 million as of January 1, 2020 upon adoption of ASU No. 2016-13 - Credit Losses. In the first quarter of 2020, the Reinsurance ACL decreased slightly to $95.8 million. There were no write-offs or recoveries during the first quarter.

The Company had total reinsurance receivables of $4.5 billion as of March 31, 2020. Of reserves ceded as of March 31, 2020, approximately 73% were receivables from reinsurers rated by A.M. Best Company. Of the total rated by A.M. Best Company, 84% were rated A+ or better, 13% were rated A, and 3% were rated A- or lower. The Company monitors the concentration of credit risk the Company has with any reinsurer, as well as the financial condition of its reinsurers, on an ongoing basis. Certain of the Company’s reinsurance receivables are supported by letters of credit, funds held or trust agreements.
11
Accounting Pronouncements Recently Adopted
Accounting Standards Update(“ASU”) No. 2016-13 - Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. The amendments in this Update introduce a new current expected credit loss (“CECL”) model for certain financial assets, including mortgage loans and reinsurance receivables. For assets within the scope of the new model, an entity will recognize as an allowance against earnings its estimate of the contractual cash flows not expected to be collected on day one of the asset’s acquisition. The allowance may be reversed through earnings if a security recovers in value. This differs from the current impairment model, which requires recognition of credit losses when they have been incurred and recognizes a security’s subsequent recovery in value in other comprehensive income. 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. Similar to the CECL model, credit loss impairments will be recorded in an allowance against earnings that may be reversed for subsequent recoveries in value. The amendments in this Update, along with related amendments in ASU No. 2018-19, ASU No. 2019-04, and ASU No. 2019-11 - Codification Improvements to Topic 326, Financial Instruments-Credit Losses, are effective for annual and interim periods beginning after December 15, 2019 on a modified retrospective basis. A vendor-provided credit loss model will be used to measure the allowance for the majority of the Company’s commercial mortgage loans and unfunded mortgage loan commitments, and the Company will use an internally-developed model to measure the allowance for amounts recoverable from reinsurers. The Company applied the revisions in the Update through a cumulative effect adjustment to retained earnings as of January 1, 2020. The cumulative effect adjustment resulted in a decrease in retained earnings of $138.1 million, net of the impact to deferred taxes, deferred acquisition costs (“DAC”), value of business acquired (“VOBA”) and other items. The Company continues to apply the previous guidance to 2019 and prior periods.
Accounting Pronouncements Not Yet Adopted

ASU No. 2018-12 - Financial Services - Insurance (Topic 944): Targeted Improvements to Accounting for Long-Duration Contracts. The amendments in this Update are designed to make improvements to the existing recognition, measurement, presentation, and disclosure requirements for certain long-duration contracts issued by an insurance company. The new amendments require insurance entities to provide a more current measure of the liability for future policy benefits for traditional and limited-payment contracts by regularly refining the liability for actual past experience and updated future assumptions. This differs from current requirements where assumptions are locked-in at contract issuance for these contract types. In addition, the updated liability will be discounted using an upper-medium grade (low-credit-risk) fixed income instrument yield that reflects the characteristics of the liability which differs from currently used rates based on the invested assets supporting the liability. In addition, the amendments introduce new requirements to assess market-based insurance contract options and guarantees for Market Risk Benefits and measure them at fair value. This Update also requires insurance entities to amortize deferred acquisition costs on a constant-level basis over the expected life of the contract. Finally, this Update requires new disclosures including liability rollforwards and information about significant inputs, judgments, assumptions, and methods used in the measurement. The amendments in this Update were originally effective for periods beginning after December 15, 2020. However, in November 2019, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2019-09 – Financial Services – Insurance (Topic 944): Effective Date which extended the implementation deadline by one year to periods beginning after December 15, 2021. The Company is currently reviewing its policies, processes, and applicable systems to determine the impact this standard will have on its operations and financial results.

ASU No. 2019-12 – Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this Update remove certain exceptions to the general principles in Topic 740 related to intraperiod tax allocations, interim tax calculations, and outside basis differences. The amendments also clarify and amend guidance in certain other areas of Topic 740 in order to eliminate diversity in practice. The amendments in this Update are effective for public business entities in fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is reviewing its accounting policies and processes to ensure compliance with the revised guidance, upon adoption.

3. SIGNIFICANT TRANSACTIONS
Great-West Life & Annuity Insurance Company

On January 23, 2019, the Company entered into a Master Transaction Agreement (the “GWL&A Master Transaction Agreement”) with Great-West Life & Annuity Insurance Company (“GWL&A”), Great-West Life & Annuity Insurance Company of New York (“GWL&A of NY”), The Canada Life Assurance Company (“CLAC”) and The Great-West Life Assurance Company (“GWL” and, together with GWL&A, GWL&A of NY and CLAC, the “Sellers”), pursuant to which the Company will acquire via reinsurance (the “Transaction”) substantially all of the Sellers’ individual life insurance and annuity business (the “GW Individual Life Business”).
12
On June 3, 2019, the Company and PLAIC completed the Transaction (the “GWL&A Closing”). Pursuant to the GWL&A Master Transaction Agreement, the Company and PLAIC entered into reinsurance agreements (the “GWL&A Reinsurance Agreements”) and related ancillary documents at the GWL&A Closing. On the terms and subject to the conditions of the GWL&A Reinsurance Agreements, the Sellers ceded to the Company and PLAIC, effective as of the date of the GWL&A Closing, substantially all of the insurance policies related to the Individual Life Business on a 100% indemnity basis net of reinsurance recoveries. The aggregate ceding commission for the reinsurance of the Individual Life Business paid at the GWL&A Closing was $765.7 million, which amount is subject to adjustment in accordance with the GWL&A Master Transaction Agreement. All policies issued in states other than New York were ceded to the Company under reinsurance agreements between the applicable Seller and the Company, and all policies issued in New York were ceded to PLAIC under a reinsurance agreement between GWL&A of NY and PLAIC. The aggregate statutory reserves of the Sellers ceded to the Company and PLAIC as of the GWL&A Closing were approximately $20.4 billion, which amount was based on initial estimates and is subject to adjustment following the GWL&A Closing. To support its obligations under the GWL&A Reinsurance Agreements, the Company established trust accounts for the benefit of GWL&A, CLAC and GWL, and PLAIC established a trust account for the benefit of GWL&A of NY. The Sellers retained a block of participating policies, which will be administered by PLC.
As of the purchase date, the Company recorded an estimate in the amount of $51.9 million related to contingent consideration. The final ceding commission will be adjusted based on any changes in contingent consideration. These amounts, $49.5 million as of March 31, 2020, are accrued within other liabilities in the Company’s consolidated condensed balance sheet.

The contingent consideration is comprised of a holdback provision and a post-closing sales adjustment. The holdback amount is related to the performance of certain blocks of business for a specified period of time after the close of the transaction.  The range of amounts payable to Great West under this provision is $0 - $40.0 million. The Company established a liability of $40.0 million as of the transaction date, which represents the Company's best estimate of the present value of future payments. As of March 31, 2020, the liability recorded within other liabilities in the Company’s consolidated condensed balance sheet was $37.6 million.

The GWL&A Master Transaction Agreement and other transaction documents contain certain customary representations and warranties made by each of the parties, and certain customary covenants regarding the Sellers and the Individual Life Business, and provide for indemnification, among other things, for breaches of those representations, warranties, and covenants. The terms of the GWL&A Reinsurance Agreements resulted in an acquisition of the Individual Life Business by PLC in accordance with ASC Topic 805, Business Combinations.


13
The following table details the preliminary allocation of assets acquired and liabilities assumed from the Individual Life Business reinsurance transaction as of the date of the Closing. The Company has not completed the process of determining the fair value of assets acquired and liabilities assumed, but will do so in the twelve month measurement period subsequent to the date of the Closing. These estimates are provisional and subject to adjustment. Any adjustments to these fair value estimates will be reflected, retroactively, as of the date of the acquisition, and may result in adjustments to the value of business acquired.

Fair Value
as of
June 1, 2019
(Dollars In Thousands)
ASSETS
Fixed maturities $ 8,697,966   
Mortgage loans 1,386,228   
Policy loans 44,002   
Other long-term investments 1,521,965   
Total investments 11,650,161   
Cash 34,835   
Accrued investment income 101,452   
Reinsurance receivables 62   
Accounts and premiums receivable 1,642   
Value of business acquired 517,434   
Other intangibles 21,300   
Other assets 5,525   
Assets related to separate accounts 9,583,217   
Total assets 21,915,628   
LIABILITIES
Future policy benefits and claims $ 11,004,132   
Annuity account balances 220,064   
Other policyholders’ funds 220,117   
Other liabilities 75,456   
Liabilities related to separate accounts 9,583,217   
Total liabilities 21,102,986   
NET ASSETS ACQUIRED $ 812,642   

Assets related to separate accounts and liabilities related to separate accounts represent amounts receivable and payable for variable annuity and variable universal life products reinsured on a modified co-insurance basis. 

The following unaudited pro forma condensed consolidated results of operations assumes that the aforementioned transactions of the Individual Life Business were completed as of January 1, 2018. The unaudited pro forma condensed results of operations are presented solely for informational purposes and are not necessarily indicative of the consolidated condensed results of operations that might have been achieved had the transaction been completed as of the date indicated:
Unaudited
For The
Three Months Ended
March 31, 2019
(Dollars In Thousands)
Revenue $ 1,621,351   
Net income $ 148,407   


14
4. 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.
Summarized financial information for the Closed Block as of March 31, 2020 and December 31, 2019 is as follows:
As of
March 31, 2020 December 31, 2019
  (Dollars In Thousands)
Closed block liabilities    
Future policy benefits, policyholders’ account balances and other policyholder liabilities $ 5,593,437    $ 5,836,815   
Policyholder dividend obligation 73,930    278,505   
Other liabilities 17,732    11,247   
Total closed block liabilities 5,685,099    6,126,567   
Closed block assets    
Fixed maturities, available-for-sale, at fair value $ 4,453,685    $ 4,682,731   
Mortgage loans on real estate 70,789    72,829   
Policy loans 632,318    640,134   
Cash and other invested assets 57,031    44,877   
Other assets 100,885    107,177   
Total closed block assets 5,314,708    5,547,748   
Excess of reported closed block liabilities over closed block assets 370,391    578,819   
Portion of above representing accumulated other comprehensive income:    
Net unrealized gains (losses) - investments/derivatives net of policyholder dividend obligation: $— and $167,285; and net of income tax: $— and $(35,130)
—    —   
Future earnings to be recognized from closed block assets and closed block liabilities $ 370,391    $ 578,819   
Reconciliation of the policyholder dividend obligation is as follows:
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Policyholder dividend obligation, beginning balance $ 278,505    $ —   
Applicable to net revenue (losses) (6,496)   (10,655)  
Change in net unrealized gains (losses) - investments/derivatives allocated to the policyholder dividend obligation (198,079)   22,458   
Policyholder dividend obligation, ending balance $ 73,930    $ 11,803   
15
Closed Block revenues and expenses were as follows:
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Revenues  
Premiums and other income $ 35,336    $ 37,444   
Net investment income 51,015    51,128   
Net gains (losses) - investments/derivatives 75    (454)  
Total revenues 86,426    88,118   
Benefits and other deductions  
Benefits and settlement expenses 77,593    78,666   
Other operating expenses 323    359   
Total benefits and other deductions 77,916    79,025   
Net revenues before income taxes 8,510    9,093   
Income tax expense 1,768    1,910   
Net revenues $ 6,742    $ 7,183   

5. INVESTMENT OPERATIONS
Realized gains (losses) - investments includes realized gains and losses from the sale of investments, changes in fair value of equity securities, net credit losses, certain derivative and embedded derivative gains and losses, gains and losses on reinsurance-related embedded derivatives and trading securities. Realized gains and losses on investments are calculated on the basis of specific identification on the trade date.
Net realized gains (losses) - investments/derivatives are summarized as follows:
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Fixed maturities $ 39,170    $ 5,137   
Equity securities (43,013)   30,635   
Modco trading portfolio (124,200)   94,902   
Net credit losses recognized in operations (1)
(51,793)   —   
Net impairment losses recognized in operations (2)
—    (3,142)  
Mortgage loans (95,396)   (1,068)  
Other investments (1,019)   (78)  
Realized gains (losses) - investments (276,251)   126,386   
Realized gains (losses) - derivatives(3)
238,140    (73,308)  
Realized gains (losses) - investments/derivatives $ (38,111)   $ 53,078   
(1) Represents credit losses recognized under FASB ASC 326-20
(2) Represents other-than-temporary impairment losses recognized in prior periods under FASB ASC 326-20
(3) See Note 7, Derivative Financial Instruments
16
Gross realized gains and gross realized losses on investments available-for-sale (fixed maturities and short-term investments) are as follows:
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Gross realized gains $ 39,968    $ 7,870   
Gross realized losses:
Credit losses(1)
$ (51,793)   $ —   
Impairment losses(2)
$ —    $ (3,142)  
Other realized losses $ (798)   $ (2,733)  
(1) Represents credit losses recognized under FASB ASC 326-20
(2) Represents other-than-temporary impairment losses recognized in prior periods under FASB ASC 326-20
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.
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Securities in an unrealized gain position:
Fair value proceeds $ 504,337    $ 648,891   
Gains realized $ 39,968    $ 7,870   
Securities in an unrealized loss position(1):
Fair value proceeds $ 15    $ 171,302   
Losses realized $ (798)   $ (2,733)  
(1) The Company made the decision to exit these holdings in conjunction with its overall asset/liability management process.
The chart below summarizes the realized gains (losses) on equity securities sold during the period and equity securities still held at the reporting date.
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Gains (losses) recognized during the period on equity securities still held $ (43,131)   $ 30,575   
Net gains recognized on equity securities sold during the period 118    60   
Net gains (losses) recognized during the period on equity securities $ (43,013)   $ 30,635   


17
The amortized cost and fair value of the Company’s investments classified as available-for-sale are as follows:
As of March 31, 2020 Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair
Value
  (Dollars In Thousands)
Fixed maturities:        
Residential mortgage-backed securities $ 6,979,230    $ 63,970    $ (112,660)   $ 6,930,540   
Commercial mortgage-backed securities 2,527,869    45,074    (66,893)   2,506,050   
Other asset-backed securities 1,726,799    31,403    (103,164)   1,655,038   
U.S. government-related securities 1,000,140    30,154    (38)   1,030,256   
Other government-related securities 565,785    29,038    (15,422)   579,401   
States, municipals, and political subdivisions 4,301,818    271,882    (10,081)   4,563,619   
Corporate securities 44,352,067    1,681,608    (1,905,740)   44,127,935   
Redeemable preferred stocks 87,124    8    (7,234)   79,898   
  61,540,832    2,153,137    (2,221,232)   61,472,737   
Short-term investments 929,966    —    —    929,966   
  $ 62,470,798    $ 2,153,137    $ (2,221,232)   $ 62,402,703   
As of December 31, 2019 Amortized
Cost 		Gross
Unrealized
Gains 		Gross
Unrealized
Losses 		Fair
Value
(Dollars In Thousands)
Fixed maturities:        
Residential mortgage-backed securities $ 5,812,170    $ 125,493    $ (6,322)   $ 5,931,341   
Commercial mortgage-backed securities 2,588,575    54,385    (3,292)   2,639,668   
Other asset-backed securities 1,764,120    32,041    (14,926)   1,781,235   
U.S. government-related securities 1,032,048    5,664    (5,316)   1,032,396   
Other government-related securities 548,136    51,024    (1,991)   597,169   
States, municipals, and political subdivisions 4,415,008    225,072    (1,230)   4,638,850   
Corporate securities 44,493,799    2,603,636    (288,334)   46,809,101   
Redeemable preferred stocks 87,237    6,677    (4,249)   89,665   
  60,741,093    3,103,992    (325,660)   63,519,425   
Short-term investments 1,229,651    —    —    1,229,651   
  $ 61,970,744    $ 3,103,992    $ (325,660)   $ 64,749,076   
18
The Company holds certain investments pursuant to certain modified coinsurance (“Modco”) arrangements. The fixed maturities, equity securities, and short-term investments held as part of these arrangements are classified as trading securities. The fair value of the investments held pursuant to these Modco arrangements are as follows:
As of
March 31, 2020 December 31, 2019
  (Dollars In Thousands)
Fixed maturities:    
Residential mortgage-backed securities $ 197,722    $ 209,521   
Commercial mortgage-backed securities 181,870    201,284   
Other asset-backed securities 134,311    143,361   
U.S. government-related securities 45,072    47,067   
Other government-related securities 27,596    28,775   
States, municipals, and political subdivisions 284,213    293,791   
Corporate securities 1,552,707    1,590,936   
Redeemable preferred stocks 10,015    12,832   
  2,433,506    2,527,567   
Equity securities 6,661    6,656   
Short-term investments 91,371    91,213   
  $ 2,531,538    $ 2,625,436   

The amortized cost and fair value of available-for-sale and held-to-maturity fixed maturities as of March 31, 2020, 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.
  Available-for-Sale Held-to-Maturity
Amortized
Cost 		Fair
Value 		Amortized
Cost 		Fair
Value
  (Dollars In Thousands)
Due in one year or less $ 1,951,249    $ 1,934,451    $ —    $ —   
Due after one year through five years 10,508,087    10,428,838    —    —   
Due after five years through ten years 13,474,203    13,461,001    —    —   
Due after ten years 35,607,293    35,648,447    2,775,710    2,930,737   
  $ 61,540,832    $ 61,472,737    $ 2,775,710    $ 2,930,737   
The following chart is a rollforward of available-for-sale allowance for credit losses on fixed maturities held by the Company:
For The
Three Months Ended
March 31,
2020
  (Dollars In Thousands)
Beginning balance in the allowance for credit losses $ —   
Additions for current-period expected credit losses 51,793   
Reductions for write-offs charged against the allowance for credit losses —   
Recoveries of amounts previously written off —   
Ending balance $ 51,793   
The allowance for credit losses includes $51.1 million of corporate securities and $0.7 million of other asset-backed securities.
19
The following table includes the gross unrealized losses and fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2020:
  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 $ 4,116,106    $ (111,887)   $ 21,709    $ (773)   $ 4,137,815    $ (112,660)  
Commercial mortgage-backed securities 1,529,401    (65,325)   31,072    (1,568)   1,560,473    (66,893)  
Other asset-backed securities 796,757    (59,430)   248,785    (43,734)   1,045,542    (103,164)  
U.S. government-related securities 93    (2)   1,615    (36)   1,708    (38)  
Other government-related securities 127,614    (13,108)   5,232    (2,314)   132,846    (15,422)  
States, municipals, and political subdivisions 350,617    (10,003)   5,980    (78)   356,597    (10,081)  
Corporate securities 18,116,030    (1,455,603)   1,253,783    (450,137)   19,369,813    (1,905,740)  
Redeemable preferred stocks 58,610    (2,576)   16,280    (4,658)   74,890    (7,234)  
  $ 25,095,228    $ (1,717,934)   $ 1,584,456    $ (503,298)   $ 26,679,684    $ (2,221,232)  
Residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”) had gross unrealized losses greater than twelve months of $0.8 million and $1.6 million, respectively, as of March 31, 2020. 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 have a gross unrealized loss greater than twelve months of $43.7 million as of March 31, 2020. Of those losses, $0.7 million were considered credit related. This category predominately includes student loan backed auction rate securities (“ARS”) whose underlying collateral 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 other government-related securities had gross unrealized losses greater than twelve months of $2.3 million as of March 31, 2020. These declines were related to changes in interest rates.
The states, municipals, and political subdivisions category had gross unrealized losses greater than twelve months of $0.1 million as of March 31, 2020. The aggregate decline in fair 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.
The corporate securities category had gross unrealized losses greater than twelve months of $450.1 million as of March 31, 2020. Of these losses, $51.1 million were considered credit related. The decline in fair value as of March 31, 2020, reflect deterioration in the macroeconomic environment as a result of the impact of COVID-19 as well as the continued pressure on commodity prices. Multiple sectors were affected with the largest impacts in the oil & gas, real estate, and consumer and retail industries. Fair values were also negatively affected by disruptions in capital markets activity during the quarter due to COVID-19. The aggregate decline in fair value of the remaining 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, interest rate movement, and other pertinent information.
As of March 31, 2020, the Company had a total of 2,450 positions that were in an unrealized loss position, including 16 positions for which an allowance for credit losses was established. For unrealized losses for which an allowance for credit losses was not established, the Company does not consider these unrealized loss positions to be credit-related. 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.
20
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, 2019:
  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 $ 851,333    $ (4,231)   $ 220,843    $ (2,091)   $ 1,072,176    $ (6,322)  
Commercial mortgage-backed securities 371,945    (1,721)   115,566    (1,571)   487,511    (3,292)  
Other asset-backed securities 482,547    (6,516)   214,058    (8,410)   696,605    (14,926)  
U.S. government-related securities 383,451    (3,373)   353,517    (1,943)   736,968    (5,316)  
Other government-related securities 22,962    (669)   6,230    (1,322)   29,192    (1,991)  
States, municipals, and political subdivisions 56,470    (1,001)   12,907    (229)   69,377    (1,230)  
Corporate securities 3,176,489    (68,289)   2,886,648    (220,045)   6,063,137    (288,334)  
Redeemable preferred stocks —    —    16,689    (4,249)   16,689    (4,249)  
  $ 5,345,197    $ (85,800)   $ 3,826,458    $ (239,860)   $ 9,171,655    $ (325,660)  
As of March 31, 2020, the Company had securities in its available-for-sale portfolio which were rated below investment grade of $1.5 billion and had an amortized cost of $2.0 billion. In addition, included in the Company’s trading portfolio, the Company held $113.7 million of securities which were rated below investment grade. Approximately $196.2 million of below investment grade securities held by the Company were not publicly traded.
The change in unrealized gains (losses), net of income tax, on fixed maturities, classified as available-for-sale is summarized as follows:
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Fixed maturities $ (2,246,307)   $ 1,551,674   
21
The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of March 31, 2020 and December 31, 2019, are as follows:
As of March 31, 2020 Amortized
Cost 		Gross
Unrecognized
Holding
Gains 		Gross
Unrecognized
Holding
Losses 		Fair
Value
  (Dollars In Thousands)
Fixed maturities:        
Securities issued by affiliates:
Red Mountain, LLC $ 804,710    $ 54,013    $ —    $ 858,723   
Steel City, LLC 1,971,000    101,014    —    2,072,014   
  $ 2,775,710    $ 155,027    $ —    $ 2,930,737   
As of December 31, 2019 Amortized
Cost 		Gross
Unrecognized
Holding
Gains 		Gross
Unrecognized
Holding
Losses 		Fair
Value
(Dollars In Thousands)
Fixed maturities:        
Securities issued by affiliates:
Red Mountain, LLC $ 795,881    $ 81,022    $ —    $ 876,903   
Steel City, LLC 2,028,000    120,887    —    2,148,887   
  $ 2,823,881    $ 201,909    $ —    $ 3,025,790   
During the three months ended March 31, 2020 and 2019, the Company recorded no credit losses on held-to-maturity securities.
The Company’s held-to-maturity securities are issued by affiliates of the Company which are considered variable interest entities (“VIEs”). 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.

22

6. 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.
 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; and
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 estimates about the assumptions a market participant would use in pricing the asset or liability.

23

The following table presents the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis as of March 31, 2020:
  Measurement
Category 		Level 1 Level 2 Level 3 Total
  (Dollars In Thousands)
Assets:        
Fixed maturity securities - available-for-sale        
Residential mortgage-backed securities 4 $ —    $ 6,930,540    $ —    $ 6,930,540   
Commercial mortgage-backed securities 4 —    2,495,267    10,783    2,506,050   
Other asset-backed securities 4 —    1,218,709    436,329    1,655,038   
U.S. government-related securities 4 681,397    348,859    —    1,030,256   
State, municipals, and political subdivisions 4 —    4,563,619    —    4,563,619   
Other government-related securities 4 —    579,401    —    579,401   
Corporate securities 4 —    42,848,166    1,279,769    44,127,935   
Redeemable preferred stocks 4 63,618    16,280    —    79,898   
Total fixed maturity securities - available-for-sale 745,015    59,000,841    1,726,881    61,472,737   
Fixed maturity securities - trading        
Residential mortgage-backed securities 3 —    197,722    —    197,722   
Commercial mortgage-backed securities 3 —    181,870    —    181,870   
Other asset-backed securities 3 —    69,283    65,028    134,311   
U.S. government-related securities 3 33,332    11,740    —    45,072   
State, municipals, and political subdivisions 3 —    284,213    —    284,213   
Other government-related securities 3 —    27,596    —    27,596   
Corporate securities 3 —    1,539,695    13,012    1,552,707   
Redeemable preferred stocks 3 10,015    —    —    10,015   
Total fixed maturity securities - trading 43,347    2,312,119    78,040    2,433,506   
Total fixed maturity securities 788,362    61,312,960    1,804,921    63,906,243   
Equity securities 3 405,221    —    72,968    478,189   
Other long-term investments(1)
3 & 4 199,060    620,598    162,081    981,739   
Short-term investments 3 953,732    67,605    —    1,021,337   
Total investments 2,346,375    62,001,163    2,039,970    66,387,508   
Cash 3 381,447    —    —    381,447   
Assets related to separate accounts        
Variable annuity 3 10,493,017    —    —    10,493,017   
Variable universal life 3 915,750    —    —    915,750   
Total assets measured at fair value on a recurring basis $ 14,136,589    $ 62,001,163    $ 2,039,970    $ 78,177,722   
Liabilities:        
Annuity account balances(2)
3 $ —    $ —    $ 68,395    $ 68,395   
Other liabilities(1)
3 & 4 57,404    375,924    1,262,274    1,695,602   
Total liabilities measured at fair value on a recurring basis $ 57,404    $ 375,924    $ 1,330,669    $ 1,763,997   
(1) Includes certain freestanding and embedded derivatives.
(2) Represents liabilities related to fixed indexed annuities.
(3) Fair Value through Net Income
(4) Fair Value through Other Comprehensive Income (Loss)
24

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, 2019:
  Measurement
Category 		Level 1 Level 2 Level 3 Total
  (Dollars In Thousands)
Assets:        
Fixed maturity securities - available-for-sale        
Residential mortgage-backed securities 4 $ —    $ 5,931,341    $ —    $ 5,931,341   
Commercial mortgage-backed securities 4 —    2,629,639    10,029    2,639,668   
Other asset-backed securities 4 —    1,360,016    421,219    1,781,235   
U.S. government-related securities 4 662,581    369,815    —    1,032,396   
State, municipals, and political subdivisions 4 —    4,638,850    —    4,638,850   
Other government-related securities 4 —    597,169    —    597,169   
Corporate securities 4 —    45,435,387    1,373,714    46,809,101   
Redeemable preferred stocks 4 69,976    16,689    —    86,665   
Total fixed maturity securities - available-for-sale 732,557    60,978,906    1,804,962    63,516,425   
Fixed maturity securities - trading        
Residential mortgage-backed securities 3 —    209,521    —    209,521   
Commercial mortgage-backed securities 3 —    201,284    —    201,284   
Other asset-backed securities 3 —    77,954    65,407    143,361   
U.S. government-related securities 3 24,810    22,257    —    47,067   
State, municipals, and political subdivisions 3 —    293,791    —    293,791   
Other government-related securities 3 —    28,775    —    28,775   
Corporate securities 3 —    1,579,565    11,371    1,590,936   
Redeemable preferred stocks 3 12,832    —    —    12,832   
Total fixed maturity securities - trading 37,642    2,413,147    76,778    2,527,567   
Total fixed maturity securities 770,199    63,392,053    1,881,740    66,043,992   
Equity securities 3 480,750    —    72,970    553,720   
Other long-term investments(1)
3 & 4 52,225    733,425    209,843    995,493   
Short-term investments 3 1,255,384    65,480    —    1,320,864   
Total investments 2,558,558    64,190,958    2,164,553    68,914,069   
Cash 3 171,752    —    —    171,752   
Assets related to separate accounts        
Variable annuity 3 12,730,090    —    —    12,730,090   
Variable universal life 3 1,135,666    —    —    1,135,666   
Total assets measured at fair value on a recurring basis $ 16,596,066    $ 64,190,958    $ 2,164,553    $ 82,951,577   
Liabilities:        
Annuity account balances(2)
3 $ —    $ —    $ 69,728    $ 69,728   
Other liabilities(1)
3 & 4 19,561    509,645    1,017,972    1,547,178   
Total liabilities measured at fair value on a recurring basis $ 19,561    $ 509,645    $ 1,087,700    $ 1,616,906   
(1) Includes certain freestanding and embedded derivatives.
(2) Represents liabilities related to fixed indexed annuities.
(3) Fair Value through Net Income
(4) Fair Value through Other Comprehensive Income (Loss)



25

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.
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 92.4% 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. When using non-binding independent broker quotations, when available the Company obtains two quotes per security. Where multiple broker quotes are obtained, the Company reviews the quotes and selects the quote that provides the best estimate of the price a market participant would pay for these specific assets in an arm’s length transaction. 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. The Company’s assessment incorporates various metrics (yield curves, credit spreads, prepayment rates, etc.) along with other information available to the Company from both internal and external sources 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 three months ended March 31, 2020.

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 March 31, 2020, the Company held $11.1 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.
26

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 March 31, 2020, the Company held $512.1 million of Level 3 ABS, which included $447.1 million of other asset-backed securities classified as available-for-sale and $65.0 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. 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. In periods where market activity increases and there are transactions at a price that is not the result of a distressed or forced sale we consider those prices as part of our valuation. If the market activity during a period is solely the result of the issuer redeeming positions we consider those transactions in our valuation, but still consider them to be Level 3 measurements due to the nature of the transaction.
Corporate Securities, Redeemable Preferred Stocks, U.S. Government-Related Securities, States, Municipals, and Political Subdivisions, and Other Government-Related Securities
As of March 31, 2020, the Company classified approximately $50.2 billion of corporate securities, redeemable preferred stocks, 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 methodology that utilizes a cash flow analysis 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 March 31, 2020, the Company classified approximately $1.3 billion 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 March 31, 2020, the Company held approximately $73.0 million of equity securities classified as Level 3. Of this total, $73.0 million represents Federal Home Loan Bank (“FHLB”) stock. The Company believes that the cost of the FHLB stock approximates fair value.
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Other Long-Term Investments and Other Liabilities
Derivative Financial Instruments
Other long-term investments and other liabilities include free-standing and embedded derivative financial instruments. Refer to Note 7, 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 March 31, 2020, 86.2% 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 utilize observable market data inputs to the extent they are available. 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 swaps, options, and swaptions, which are traded over-the-counter. Level 2 also includes certain centrally cleared derivatives. 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.
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 of embedded derivatives are recorded as realized gains (losses) - investments/derivatives. Refer to Note 7, Derivative Financial Instruments for more information.

The fair value of the guaranteed living withdrawal benefits (“GLWB”) 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 Ruark 2015 ALB table, with attained age factors varying from 87.0% - 100.0% based on company experience. The present value of the cash flows is determined using the discount rate curve, which is based upon LIBOR plus a credit spread (to represent the Company’s non-performance risk). For expected lapse and utilization, assumptions are used and updated for actual experience, as necessary, using an internal predictive model developed by the Company. As a result of using significant unobservable inputs, the GLWB embedded derivative is categorized as Level 3. Policyholder assumptions are reviewed on an annual basis.
The balance of the fixed indexed annuity (“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 are used and updated for actual experience, as necessary. The Company assumes age-based mortality from the 2015 Ruark ALB mortality table with attained age factors varying from 87.0% - 100.0% based on company experience. 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.
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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, with attained age factors varying from 37.0% - 156.0% based on company experience. 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. Funds withheld arrangements related to such agreements contain embedded derivatives that are reported at fair value. Changes in their fair value are reported in realized gains (losses) - investments/derivatives. The fair value of embedded derivatives related to funds withheld under modified coinsurance agreements are a function of the unrealized gains or losses on the underlying assets and are calculated in a manner consistent with the terms of the agreements. The investments supporting certain of these agreements are designated as “trading securities”; therefore changes in their fair value are also reported in realized gains (losses) - investments/derivatives. The fair value of embedded derivatives is estimated based on market standard valuation methodology and is considered a Level 3 valuation.
The Company and certain of its 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 March 31, 2020 was $109.4 million and is included in other long-term investments. For information regarding realized gains on these derivatives please refer to Note 7, Derivative Financial Instruments.
The Interest Support Agreement provides that PLC will make payments to Golden Gate II Captive Insurance Company (“Golden Gate II”), a wholly owned subsidiary of the Company, 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 $55.7 million as of March 31, 2020. Golden Gate II recognized $2.4 million in gains related to payments made under this agreement for the three months ended March 31, 2020. As of March 31, 2020, certain interest support agreement obligations to Golden Gate II of approximately $5.5 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.
The YRT premium support agreements provide that PLC will make payments to Golden Gate Captive Insurance Company (“Golden Gate”), a wholly owned subsidiary of the Company, 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 March 31, 2020 was $52.2 million. Golden Gate II recognized $1.6 million in gains related to payments made under this agreement for the three months ended March 31, 2020.
The portfolio maintenance agreements provide that PLC will make payments to Golden Gate, Golden Gate V, and West Coast Life Insurance Company (“WCL”), a wholly owned subsidiary of the Company, in the event of other-than-temporary impairments on investments, measured in accordance with Statutory Accounting Principles, 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 March 31, 2020, was $1.4 million. As of March 31, 2020, no payments have been made under these agreements.
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The Funds Withheld derivative results from a reinsurance agreement with Shades Creek Captive Insurance Company (“Shades Creek”), a direct wholly owned subsidiary of PLC, 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 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 March 31, 2020, was a liability of $228.0 million.
Annuity Account Balances
The Company records a certain legacy block of FIA reserves at fair value. Based on the characteristics of these reserves, the Company believes that the fund value approximates fair value. The fair value measurement of these reserves is considered a Level 3 valuation due to the unobservable nature of the fund values.
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:
Fair Value
As of
March 31, 2020 		Valuation
Technique 		Unobservable
Input 		Range
(Weighted Average)
  (Dollars In Thousands)      
Assets:        
Commercial mortgage-backed securities $ 10,783    Discounted cash flow Spread over treasury
3.04%
Other asset-backed securities 436,329    Liquidation Liquidation value
$95.50 - $97.00 ($96.33)
Discounted cash flow Liquidity premium
0.29% - 2.31% (1.45%)
Paydown rate
8.87% - 12.75% (11.44%)
Corporate securities 1,279,769    Discounted cash flow Spread over treasury
0.00% - 6.60% (1.50%)
Liabilities:(1)
       
Embedded derivatives - GLWB(2)
596,619    Actuarial cash flow model Mortality
87% to 100% of
Ruark 2015 ALB Table

      Lapse PL-RBA Predictive Model
      Utilization PL-RBA Predictive Model
      Nonperformance risk
0.56% - 1.21%
Embedded derivative - FIA 307,013    Actuarial cash flow model Expenses
$195 per policy
      Withdrawal rate
0.4% - 1.2% prior to age 70, 100% of the RMD for ages 70+ or WB withdrawal rate. Assume underutilized RMD for non WB policies ages 70-81.
      Mortality
87% to 100% of Ruark 2015 ALB table
      Lapse
0.5% - 50.0%, depending on duration/surrender charge period
Dynamically adjusted for WB moneyness and projected market rates vs credited rates
      Nonperformance risk
0.56% - 1.21%
Embedded derivative - IUL 164,079    Actuarial cash flow model Mortality
37% - 156% of 2015
VBT Primary Tables
94% - 248% of duration 8 point in scale 2015 VBT Primary Tables, depending on type of business
      Lapse
0.5% - 10%, depending on
duration/distribution channel
and smoking class
      Nonperformance risk
0.56% - 1.21%
(1) Excludes modified coinsurance arrangements.
(2) The fair value for the GLWB embedded derivative is presented as a net liability.
The chart above excludes Level 3 financial instruments that are valued using broker quotes and for which book value approximates fair value. Unobservable inputs were weighted by the relative fair value of instruments, except for other asset-backed securities which were weighted by the relative par amounts.
The Company has considered all reasonably available quantitative inputs as of March 31, 2020, but the valuation techniques and inputs used by some brokers in pricing certain financial instruments are not shared with the Company. This resulted in $98.7 million of financial instruments being classified as Level 3 as of March 31, 2020, of which $85.7 million are other asset-backed securities and $13.0 million are corporate securities.
In certain cases the Company has determined that book value materially approximates fair value. As of March 31, 2020, the Company held $73.2 million of financial instruments where book value approximates fair value which was predominantly FHLB stock.
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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:
Fair Value
As of
December 31, 2019 		Valuation
Technique 		Unobservable
Input 		Range
(Weighted Average)
  (Dollars In Thousands)      
Assets:        
Commercial mortgage-backed securities $ 10,029    Discounted cash flow Spread over treasury
2.5%
Other asset-backed securities 421,219    Liquidation Liquidation value
$95.39 - $99.99 ($97.95)
Discounted cash flow Liquidity premium
0.34% - 2.28% (1.44%)
Paydown Rate
8.99% - 12.45% (11.28%)
Corporate securities 1,373,714    Discounted cash flow Spread over treasury
0.00% - 4.03% (1.60%)
Liabilities:(1)
       
Embedded derivatives - GLWB(2)
$ 186,038    Actuarial cash flow model Mortality
87% to 100% of
Ruark 2015 ALB Table
      Lapse Ruark Predictive Model
      Utilization
99%. 10% of policies have a one-time over-utilization of 400%
      Nonperformance risk
0.12% - 0.82%
Embedded derivative - FIA 336,826    Actuarial cash flow model Expenses
$195 per policy
      Withdrawal rate
0.4% - 1.2% prior to age 70 RMD for
ages 70+
or WB withdrawal rate
Assume underutilized RMD
for nonWB policies age 70-81
      Mortality
87% to 100% or Ruark 2015 ALB table
      Lapse
0.5% - 50.0%, depending on duration/surrender charge period
      Nonperformance risk
0.12% - 0.82%
Embedded derivative - IUL 151,765    Actuarial cash flow model Mortality
37% - 156% of 2015
VBT Primary Tables
94% - 248% of duration
8 point in scale 2015
VBT Primary Tables,
depending on type of business
      Lapse
0.5% - 10%, depending on duration/distribution channel and smoking class
      Nonperformance risk
0.12% - 0.82%
(1) Excludes modified coinsurance arrangements.
(2) The fair value for the GLWB embedded derivative is presented as a net liability.
The chart above excludes Level 3 financial instruments that are valued using broker quotes and for which book value approximates fair value.
The Company had considered all reasonably available quantitative inputs as of December 31, 2019, but the valuation techniques and inputs used by some brokers in pricing certain financial instruments are not shared with the Company. This resulted in $76.8 million of financial instruments being classified as Level 3 as of December 31, 2019, of which $65.4 million are other asset backed securities and $11.4 million are corporate securities.
In certain cases the Company has determined that book value materially approximates fair value. As of December 31, 2019, the Company held $73.0 million of financial instruments where book value approximates fair value which was predominantly FHLB stock.
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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’s 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 liquidation values for these securities are sensitive to the issuer’s available cash flows and ability to redeem the securities, as well as the current holders’ willingness to liquidate at the specified price.
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 GLWB 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 GLWB 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 and IUL embedded derivatives are predominantly impacted by observable inputs such as discount rates and equity returns. However, the fair value of the FIA and IUL embedded derivatives are 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 value of 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 March 31, 2020, 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 Operations related to Instruments still held at
the 
Reporting
Date
Beginning
Balance 		Included
in
Operations 		Included
in
Other
Comprehensive
Income (Loss) 		Included
in
Operations 		Included
in
Other
Comprehensive
Income (Loss) 		Purchases Sales Issuances Settlements Transfers
in/out of
Level 3 		Other Ending
Balance
  (Dollars In Thousands)
Assets:                          
Fixed maturity securities available-for-sale                          
Residential mortgage-backed securities $ —    $ —    $ —    $ —    $ —    $ —    $ —    $ —    $ —    $ —    $ —    $ —    $ —   
Commercial mortgage-backed securities 10,029    —    780    —    —    —    (20)   —    —    —    (6)   10,783    —   
Other asset-backed securities 421,219    —    —    —    (7,328)   —    (8)   —    —    22,187    259    436,329    —   
Corporate securities 1,373,714    —    1,634    —    (75,997)   24,000    (49,817)   —    —    7,342    (1,107)   1,279,769    —   
Total fixed maturity securities - available-for-sale 1,804,962    —    2,414    —    (83,325)   24,000    (49,845)   —    —    29,529    (854)   1,726,881    —   
Fixed maturity securities - trading                          
Other asset-backed securities 65,407    1    —    (1,730)   —    1,750    (429)   —    —    —    29    65,028    (1,729)  
Corporate securities 11,371    —    —    (415)   —    2,085    —    —    —    —    (29)   13,012    (416)  
Total fixed maturity securities - trading 76,778    1    —    (2,145)   —    3,835    (429)   —    —    —    —    78,040    (2,145)  
Total fixed maturity securities 1,881,740    1    2,414    (2,145)   (83,325)   27,835    (50,274)   —    —    29,529    (854)   1,804,921    (2,145)  
Equity securities 72,970    —    —    (2)   —    —    —    —    —    —    —    72,968    424   
Other long-term investments(1)
209,843    13,520    —    (57,210)   —    —    —    —    (4,072)   —    —    162,081    (47,762)  
Total investments 2,164,553    13,521    2,414    (59,357)   (83,325)   27,835    (50,274)   —    (4,072)   29,529    (854)   2,039,970    (49,483)  
Total assets measured at fair value on a recurring basis $ 2,164,553    $ 13,521    $ 2,414    $ (59,357)   $ (83,325)   $ 27,835    $ (50,274)   $ —    $ (4,072)   $ 29,529    $ (854)   $ 2,039,970    $ (49,483)  
Liabilities:                          
Annuity account balances(2)
$ 69,728    $ —    $ —    $ (535)   $ —    $ —    $ —    $ 125    $ 1,993    $ —    $ —    $ 68,395    $ —   
Other liabilities(1)
1,017,972    189,042    —    (433,344)   —    —    —    —    —    —    —    1,262,274    (244,302)  
Total liabilities measured at fair value on a recurring basis $ 1,087,700    $ 189,042    $ —    $ (433,879)   $ —    $ —    $ —    $ 125    $ 1,993    $ —    $ —    $ 1,330,669    $ (244,302)  
(1) Represents certain freestanding and embedded derivatives.
(2) Represents liabilities related to fixed indexed annuities.
For the three months ended March 31, 2020, there were $29.5 million of securities transferred into Level 3 from Level 2 and no securities transferred into Level 2 from Level 3.

 
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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 March 31, 2019, 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 Operations related to Instruments still held at
the 
Reporting
Date
Beginning
Balance 		Included
 in
Operations 		Included 
in
Other
Comprehensive
Income (Loss) 		Included 
in
Operations 		Included 
in
Other
Comprehensive
Income (Loss) 		Purchases Sales Issuances Settlements Transfers
in/out of
Level 3 		Other Ending
Balance
  (Dollars In Thousands)
Assets:                          
Fixed maturity securities available-for-sale                          
Residential mortgage-backed securities $ —    $ —    $ —    $ —    $ —    $ —    $ —    $ —    $ —    $ —    $ —    $ —    $ —   
Commercial mortgage-backed securities —    —    —    —    —    —    —    —    —    —    —    —    —   
Other asset-backed securities 421,642    446    8,147    (20)   (331)   —    (10,008)   —    —    —    215    420,091    —   
Corporate securities 638,276    —    18,585    —    (3,012)   34,000    (28,773)   —    —    (10,095)   (373)   648,608    —   
Total fixed maturity securities - available-for-sale 1,059,918    446    26,732    (20)   (3,343)   34,000    (38,781)   —    —    (10,095)   (158)   1,068,699    —   
Fixed maturity securities - trading                          
Other asset-backed securities 26,056    3,196    —    (116)   —    15,463    (5,111)   —    —    27,064    (68)   66,484    5,330   
Corporate securities 6,242    101    —    (31)   —    —    (1,036)   —    —    —    (25)   5,251    34   
Total fixed maturity securities - trading 32,298    3,297    —    (147)   —    15,463    (6,147)   —    —    27,064    (93)   71,735    5,364   
Total fixed maturity securities 1,092,216    3,743    26,732    (167)   (3,343)   49,463    (44,928)   —    —    16,969    (251)   1,140,434    5,364   
Equity securities 63,421    1    —    (13)   —    —    —    —    —    —    —    63,409    69   
Other long-term investments(1)
151,342    1,027    —    (18,675)   —    —    —    —    —    —    —    133,694    (17,648)  
Total investments 1,306,979    4,771    26,732    (18,855)   (3,343)   49,463    (44,928)   —    —    16,969    (251)   1,337,537    (12,215)  
Total assets measured at fair value on a recurring basis $ 1,306,979    $ 4,771    $ 26,732    $ (18,855)   $ (3,343)   $ 49,463    $ (44,928)   $ —    $ —    $ 16,969    $ (251)   $ 1,337,537    $ (12,215)  
Liabilities:                          
Annuity account balances(2)
$ 76,119    $ —    $ —    $ (326)   $ —    $ —    $ —    $ 11    $ 1,843    $ —    $ —    $ 74,613    $ —   
Other liabilities(1)
438,127    466    —    (168,994)   —    —    —    —    —    —    —    606,655    (168,528)  
Total liabilities measured at fair value on a recurring basis $ 514,246    $ 466    $ —    $ (169,320)   $ —    $ —    $ —    $ 11    $ 1,843    $ —    $ —    $ 681,268    $ (168,528)  
(1) Represents certain freestanding and embedded derivatives.
(2) Represents liabilities related to fixed indexed annuities.
For the three months ended March 31, 2019, there were $36.0 million of securities transferred into Level 3.
For the three months ended March 31, 2019, there were $19.0 million of securities transferred into Level 2 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 March 31, 2019.

35


Total realized and unrealized gains (losses) on Level 3 assets and liabilities are reported in either realized gains (losses) - investments/derivatives within the consolidated condensed statements of income 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 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:
As of
March 31, 2020 December 31, 2019
Fair Value
Level 		Carrying
Amounts 		Fair Values Carrying
Amounts 		Fair Values
    (Dollars In Thousands)
Assets:          
Mortgage loans on real estate(1)
3 $ 9,332,867    $ 9,373,562    $ 9,379,401    $ 9,584,487   
Policy loans 3 1,657,375    1,657,375    1,675,121    1,675,121   
Fixed maturities, held-to-maturity(2)
3 2,775,710    2,930,737    2,823,881    3,025,790   
  Other long-term investments(3)
2 1,179,811    1,204,927    1,216,996    1,246,889   
Liabilities:          
Stable value product account balances 3 $ 5,885,738    $ 5,959,400    $ 5,443,752    $ 5,551,195   
Future policy benefits and claims(4)
3 1,666,329    1,675,738    1,701,324    1,705,235   
Other policyholders’ funds(5)
3 111,181    114,958    127,084    130,259   
Debt:(6)
         
Non-recourse funding obligations(7)
3 $ 3,035,549    $ 3,187,116    $ 3,082,753    $ 3,298,580   
Subordinated funding obligations
3 110,000    109,130    110,000    113,286   
Except as noted below, fair values were estimated using quoted market prices.
(1) The carrying amount is net of allowance for credit losses.
(2) Securities purchased from unconsolidated affiliates, Red Mountain, LLC and Steel City, LLC.
(3) Other long-term investments represents a modco receivable, which is related to invested assets such as fixed income and structured securities, which are legally owned by the ceding company. The fair value is determined in a manner consistent with other similar invested assets held by the Company.
(4) Single premium immediate annuity without life contingencies.
(5) Supplementary contracts without life contingencies.
(6) Excludes capital lease obligations of $0.9 million and $1.0 million as of March 31, 2020 and December 31, 2019, respectively.
(7) As of March 31, 2020, carrying amount of $2.8 billion and a fair value of $2.9 billion related to non-recourse funding obligations issued by Golden Gate and Golden Gate V. As of December 31, 2019, carrying amount of $2.8 billion and a fair value of $3.0 billion related 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.
36

Policy loans
The Company believes the fair value of policy loans approximates book value. Policy loans are funds provided to policyholders 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 carrying value of policy loans approximates fair 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.
Other long-term investments
In addition to free standing and embedded derivative financial instruments discussed above, other long-term investments includes approximately $1.2 billion of amounts receivable under certain modified coinsurance agreements as of March 31, 2020 and December 31, 2019. These amounts represent funds withheld in connection with certain reinsurance agreements in which the Company acts as the reinsurer. Under the terms of these agreements, assets equal to statutory reserves are withheld and legally owned by the ceding company, and any excess or shortfall is settled periodically. In some cases, these modified coinsurance agreements contain embedded derivatives which are discussed in more detail above. The fair value of amounts receivable under modified coinsurance agreements, including the embedded derivative component, correspond to the fair value of the underlying assets withheld.
Stable value product and other investment contract balances
The Company estimates the fair value of stable value product account balances and other investment contract balances (included in Future policy benefits and claims as well as Other policyholders’ funds line items on our consolidated condensed balance sheet) 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.
Funding obligations
The Company estimates the fair value of its subordinated and 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.
7. 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, 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 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.
Derivatives Related to Foreign Currency Exchange Risk Management
Derivative instruments that are used as part of the Company’s foreign currency exchange risk management strategy include foreign currency swaps, foreign currency futures, foreign equity futures, and foreign equity options.
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 variable annuity (“VA”) contracts, fixed indexed annuities, and indexed universal life contracts:
37
•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 Agreements
•Total Return Swaps
•Foreign Currency Options
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 GLWB and guaranteed minimum death benefit (“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
GAAP requires that all derivative instruments be recognized in the balance sheet at fair value. The Company records its derivative financial instruments in the consolidated condensed balance sheet in other long-term investments and other liabilities. 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.
It is the Company's policy not to offset assets and liabilities associated with open derivative contracts. However, the Chicago Mercantile Exchange (“CME”) rules characterize variation margin transfers as settlement payments, as opposed to adjustments to collateral. As a result, derivative assets and liabilities associated with centrally cleared derivatives for which the CME serves as the central clearing party are presented as if these derivatives had been settled as of the reporting date.
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 (loss) and reclassified into operations in the same period during which the hedged item impacts operations. Any remaining gain or loss, the ineffective portion, is recognized in current operations. 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 operations. Effectiveness of the Company’s hedge relationships is assessed on a quarterly basis.
The Company reports changes in fair values of derivatives that are not part of a qualifying hedge relationship through operations in the period of change. Changes in the fair value of these derivatives are recognized in realized gains (losses) - investments/derivatives in the consolidated condensed statements of income.
Derivative Instruments Designated and Qualifying as Hedging Instruments
Cash-Flow Hedges
•To hedge a fixed rate note denominated in a foreign currency, the Company entered into a fixed-to-fixed foreign currency swap in order to hedge the foreign currency exchange risk associated with the note. The cash flows received on the swap are identical to the cash flows paid on the note.
•To hedge a floating rate note, the Company entered into an interest rate swap to exchange the floating rate on the note for a fixed rate in order to hedge the interest rate risk associated with the note. The cash flows received on the swap are identical to the cash flow variability paid on the note.
38
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 realized gains (losses) - investments/derivatives in the consolidated condensed statements of income.
Derivatives Related to Variable Annuity Contracts
•The Company uses equity futures, equity options, total return swaps, interest rate futures, interest rate swaps, interest rate swaptions, currency futures, currency options, volatility futures, volatility options, and variance swaps to mitigate the risk related to certain guaranteed minimum benefits, including GLWB, 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 markets certain VA products with a GLWB rider. The GLWB 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 GLWB 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 markets certain fixed indexed annuity products. The FIA component is considered an embedded derivative as it is 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 as it is not considered to be clearly and closely related to the host contract.
Other Derivatives
•The Company and certain of its subsidiaries have an interest support agreement, YRT premium support agreements, and portfolio maintenance agreements with PLC.
•The Company uses various swaps and other types of derivatives to manage risk related to other exposures.
•The Company is involved in various modified coinsurance and funds withheld arrangements which contain embedded derivatives. Changes in their fair value are recorded in realized gains (losses) - investments/derivatives in the consolidated condensed statements of income. 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. 
39
The following table sets forth realized gains (losses) - derivatives for the periods shown:
Realized gains (losses) - derivative financial instruments
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Derivatives related to VA contracts:  
Interest rate futures $ 858    $ (6,022)  
Equity futures 30,652    29,738   
Currency futures 12,162    2,244   
Equity options 280,479    (71,695)  
Interest rate swaps 409,515    74,861   
Total return swaps 139,767    (40,027)  
Embedded derivative - GLWB (410,580)   (33,387)  
Funds withheld derivative (261,414)   61,777   
Total derivatives related to VA contracts 201,439    17,489   
Derivatives related to FIA contracts:  
Embedded derivative 38,887    (38,814)  
Equity futures (8,152)   (429)  
Equity options (60,385)   —   
Other derivatives 200    42,050   
Total derivatives related to FIA contracts (29,450)   2,807   
Derivatives related to IUL contracts:  
Embedded derivative 38    (13,370)  
Equity futures (2,439)   171   
Equity options (14,449)   6,180   
Total derivatives related to IUL contracts (16,850)   (7,019)  
Embedded derivative - Modco reinsurance treaties 75,729    (84,998)  
Derivatives with PLC(1)
(1,948)   (1,653)  
Other derivatives 9,220    66   
Total realized gains (losses) - derivatives $ 238,140    $ (73,308)  
(1) These derivatives include the Interest, YRT premium support, and portfolio maintenance agreements between certain of the Company’s subsidiaries and PLC.
 

40
The following table presents the components of the gain or loss on derivatives that qualify as a cash flow hedging relationship.
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
Gains (Losses) Recognized in
Income (Loss) on
Derivatives
  (Effective Portion) (Effective Portion) (Ineffective Portion)
Benefits and settlement
expenses 		Realized gains (losses) - investments/derivatives
  (Dollars In Thousands)
For The Three Months Ended March 31, 2020      
Foreign currency swaps $ (5,494)   $ (395)   $ —   
Interest rate swaps (375)   (809)   —   
Total $ (5,869)   $ (1,204)   $ —   
For The Three Months Ended March 31, 2019      
Foreign currency swaps $ (1,893)   $ (207)   $ —   
Interest rate swaps (595)   (71)   —   
Total $ (2,488)   $ (278)   $ —   
Based on expected cash flows of the underlying hedged items, the Company expects to reclassify $2.8 million out of accumulated other comprehensive income (loss) into realized gains (losses) - investments/derivatives in the consolidated condensed statements of income during the next twelve months.

41
The table below presents 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:
As of
  March 31, 2020 December 31, 2019
Notional
Amount 		Fair
Value 		Notional
Amount 		Fair
Value
  (Dollars In Thousands)
Other long-term investments        
Derivatives not designated as hedging instruments:        
Interest rate swaps $ 2,328,000    $ 219,853    $ 2,228,000    $ 98,655   
Total return swaps
100,646    21,928    269,772    941   
Derivatives with PLC(1)
2,858,603    109,359    2,830,889    115,379   
Embedded derivative - Modco reinsurance treaties 304,016    4,961    1,280,189    31,926   
Embedded derivative - GLWB 538,604    45,314    1,147,436    62,538   
Embedded derivative - FIA 31,832    2,447    —    —   
Interest rate futures 194,506    19,603    896,073    7,557   
Equity futures 556,921    40,229    159,901    2,109   
Currency futures 318,629    5,238    72,593    131   
Equity options 7,241,869    512,807    6,685,670    676,257   
  $ 14,473,626    $ 981,739    $ 15,570,523    $ 995,493   
Other liabilities        
Cash flow hedges:
Interest rate swaps $ 350,000    $ —    $ 350,000    $ —   
Foreign currency swaps 117,178    34,672    117,178    11,373   
Derivatives not designated as hedging instruments:        
Interest rate swaps 150,000    —    50,000    —   
Total return swaps 491,104    59,275    579,675    3,229   
Embedded derivative - Modco reinsurance treaties 3,253,457    126,240    2,263,685    231,516   
Funds withheld derivative 1,831,520    228,017    1,845,649    70,583   
Embedded derivative - GLWB 3,425,839    641,933    2,892,926    248,577   
Embedded derivative - FIA 3,048,651    306,541    2,892,803    332,869   
Embedded derivative - IUL 315,629    164,079    301,598    151,765   
Interest rate futures 958,865    45,326    669,223    10,375   
Equity futures 65,533    11,421    174,743    2,376   
Currency futures —    —    192,306    1,836   
Equity options 5,156,443    54,617    4,827,714    429,434   
Other 226,987    23,481    199,387    53,245   
  $ 19,391,206    $ 1,695,602    $ 17,356,887    $ 1,547,178   
(1) These derivatives include the Interest, YRT premium support, and portfolio maintenance agreements between certain of the Company’s subsidiaries and PLC.

42
8. 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 10, Debt and Other Obligations for details of the Company’s repurchase agreement programs. 
Collateral received includes both cash and non-cash collateral. Cash collateral received by the Company is recorded on the consolidated condensed balance sheet as “cash”, with a corresponding amount recorded in “other liabilities” to represent the Company’s obligation to return the collateral. Non-cash collateral received by the Company is not recognized on the consolidated condensed balance sheet unless the Company exercises its right to sell or re-pledge the underlying asset. As of March 31, 2020 and December 31, 2019, the fair value of non-cash collateral received was $51.9 million and $21.3 million, respectively.
The tables below present the derivative instruments by assets and liabilities for the Company as of March 31, 2020.
Gross
Amounts of
Recognized
Assets 		Gross
Amounts
Offset in the
Balance Sheets 		Net Amounts
of Assets
Presented in
the
Balance Sheets 		Gross Amounts Not Offset
in the 
Balance Sheets
Financial
Instruments 		Collateral
Received 		Net Amount
  (Dollars In Thousands)
Offsetting of Assets            
Derivatives:            
Free-Standing derivatives $ 819,658    $ —    $ 819,658    $ 152,610    $ 355,888    $ 311,160   
Total derivatives, subject to a master netting arrangement or similar arrangement 819,658    —    819,658    152,610    355,888    311,160   
Derivatives not subject to a master netting arrangement or similar arrangement            
Embedded derivative - Modco reinsurance treaties 4,961    —    4,961    —    —    4,961   
Embedded derivative - GLWB 45,314    —    45,314    —    —    45,314   
Derivatives with PLC 109,359    —    109,359    —    —    109,359   
Other 2,447    —    2,447    —    —    2,447   
Total derivatives, not subject to a master netting arrangement or similar arrangement 162,081    —    162,081    —    —    162,081   
Total derivatives 981,739    —    981,739    152,610    355,888    473,241   
Total Assets $ 981,739    $ —    $ 981,739    $ 152,610    $ 355,888    $ 473,241   

43
Gross
Amounts of
Recognized
Liabilities 		Gross
Amounts
Offset in the
Balance Sheets 		Net Amounts
of Liabilities
Presented in
the
Balance Sheets 		Gross Amounts Not Offset
in the 
Balance Sheets
Financial
Instruments 		Collateral
Posted 		Net Amount
  (Dollars In Thousands)
Offsetting of Liabilities            
Derivatives:            
Free-Standing derivatives $ 205,311    $ —    $ 205,311    $ 152,610    $ 52,701    $ —   
Total derivatives, subject to a master netting arrangement or similar arrangement 205,311    —    205,311    152,610    52,701    —   
Derivatives, not subject to a master netting arrangement or similar arrangement            
Embedded derivative - Modco reinsurance treaties 126,240    —    126,240    —    —    126,240   
Funds withheld derivative 228,017    —    228,017    —    —    228,017   
Embedded derivative - GLWB 641,933    —    641,933    —    —    641,933   
Embedded derivative - FIA 306,541    —    306,541    —    —    306,541   
Embedded derivative - IUL 164,079    —    164,079    —    —    164,079   
Other 23,481    —    23,481    —    —    23,481   
Total derivatives, not subject to a master netting arrangement or similar arrangement 1,490,291    —    1,490,291    —    —    1,490,291   
Total derivatives 1,695,602    —    1,695,602    152,610    52,701    1,490,291   
Repurchase agreements(1)
—    —    —    —    —    —   
Total Liabilities $ 1,695,602    $ —    $ 1,695,602    $ 152,610    $ 52,701    $ 1,490,291   
(1) Borrowings under repurchase agreements are for a term less than 90 days.
The tables below present the derivative instruments by assets and liabilities for the Company as of December 31, 2019.
Gross
Amounts of
Recognized
Assets 		Gross
Amounts
Offset in the
Balance Sheets 		Net Amounts
of Assets
Presented in
the
Balance Sheets 		Gross Amounts Not Offset
in the Balance Sheets
Financial
Instruments 		Collateral
Received 		Net Amount
  (Dollars In Thousands)
Offsetting of Assets            
Derivatives:            
Free-Standing derivatives $ 785,650    $ —    $ 785,650    $ 452,562    $ 215,587    $ 117,501   
Total derivatives, subject to a master netting arrangement or similar arrangement 785,650    —    785,650    452,562    215,587    117,501   
Derivatives not subject to a master netting arrangement or similar arrangement            
Embedded derivative - Modco reinsurance treaties 31,926    —    31,926    —    —    31,926   
Embedded derivative - GLWB 62,538    —    62,538    —    —    62,538   
Derivatives with PLC 115,379    —    115,379    —    —    115,379   
Other —    —    —    —    —    —   
Total derivatives, not subject to a master netting arrangement or similar arrangement 209,843    —    209,843    —    —    209,843   
Total derivatives 995,493    —    995,493    452,562    215,587    327,344   
Total Assets $ 995,493    $ —    $ 995,493    $ 452,562    $ 215,587    $ 327,344   
44

Gross
Amounts of
Recognized
Liabilities 		Gross
Amounts
Offset in the
Balance Sheets 		Net Amounts
of Liabilities
Presented in
the
Balance Sheets 		Gross Amounts Not Offset
in the Statement of
Balance Sheets
Financial
Instruments 		Collateral
Posted 		Net Amount
  (Dollars In Thousands)
Offsetting of Liabilities            
Derivatives:            
Free-Standing derivatives $ 458,623    $ —    $ 458,623    $ 452,562    $ 4,791    $ 1,270   
Total derivatives, subject to a master netting arrangement or similar arrangement 458,623    —    458,623    452,562    4,791    1,270   
Derivatives not subject to a master netting arrangement or similar arrangement            
Embedded derivative - Modco reinsurance treaties 231,516    —    231,516    —    —    231,516   
Funds withheld derivative 70,583    —    70,583    —    —    70,583   
Embedded derivative - GLWB 248,577    —    248,577    —    —    248,577   
Embedded derivative - FIA 332,869    —    332,869    —    —    332,869   
Embedded derivative - IUL 151,765    —    151,765    —    —    151,765   
Other 53,245    —    53,245    —    —    53,245   
Total derivatives, not subject to a master netting arrangement or similar arrangement 1,088,555    —    1,088,555    —    —    1,088,555   
Total derivatives 1,547,178    —    1,547,178    452,562    4,791    1,089,825   
Repurchase agreements(1)
270,000    —    270,000    —    —    270,000   
Total Liabilities $ 1,817,178    $ —    $ 1,817,178    $ 452,562    $ 4,791    $ 1,359,825   
(1) Borrowings under repurchase agreements are for a term less than 90 days.

9. MORTGAGE LOANS
Mortgage Loans
The Company invests a portion of its investment portfolio in commercial mortgage loans. As of March 31, 2020, the Company’s mortgage loan holdings were approximately $9.3 billion, net of allowance for credit losses. The Company has specialized in making loans on credit-oriented commercial properties, credit-anchored strip shopping centers, senior living facilities, 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 the allowance for credit losses. See Note 2, Summary of Significant Accounting Policies, for a detailed discussion of the Company’s policies with respect to the measurement of the allowance for credit losses. 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.
45
Certain of the mortgage loans have call options that occur within the next 10 years. However, if interest rates were to significantly increase, the Company may be unable to exercise the call options on its existing mortgage loans commensurate with the significantly increased market rates. As of March 31, 2020, assuming the loans are called at their next call dates, approximately $114.3 million of principal would become due for the remainder of 2020, $647.7 million in 2021 through 2025 and $57.6 million in 2026 through 2029.
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 March 31, 2020 and December 31, 2019, approximately $694.9 million and $717.0 million, respectively, of the Company’s 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 months ended March 31, 2020 and 2019, the Company recognized $16.0 million and $2.2 million, respectively, of participating mortgage loan income.
As of March 31, 2020, the Company had no invested assets that consisted of nonperforming mortgage loans, restructured mortgage loans, or mortgage loans that were foreclosed and were converted to real estate properties. Non performing loans include loans that are greater than 90 days delinquent, or otherwise deemed uncollectible. During the three months ended March 31, 2020, the Company recognized no troubled debt restructurings as a result of granting concessions to borrowers which included loan terms unavailable from other lenders. During the three months ended March 31, 2020, the Company did not recognize any mortgage loans that were foreclosed and were converted to real estate properties. It is the Company’s policy to write off loan amounts that are deemed uncollectible. No amounts were written off during the three months ended March 31, 2020.
As of March 31, 2020, the amortized cost basis of the Company's mortgage loan receivables by origination year, net of the allowance, for credit losses is as follows:

Term Loans Amortized Cost Basis by Origination Year
2020 2019 2018 2017 2016 Prior Total
(Dollars In Thousands)
As of March 31, 2020
Commercial mortgage loans:
Performing $ 307,054    $ 2,493,801    $ 1,579,679    $ 1,351,404    $ 942,827    $ 2,658,102    $ 9,332,867   
Non-performing —    —    —    —    —    —    —   
Total commercial mortgage loans $ 307,054    $ 2,493,801    $ 1,579,679    $ 1,351,404    $ 942,827    $ 2,658,102    $ 9,332,867   
The Company also monitors indicators such as loan-to-value ratio (“LTV”), 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. As of March 31, 2020, by amortized cost basis and excluding the allowance for credit losses, approximately 2% of the Company's commercial mortgage loans had LTV of greater than 75%, 65% had LTV of between 50% and 75%, and 33% had LTV of less than 50%.

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As of January 1, 2020, the Company adopted ASU No. 2016-13, which resulted in the recognition of an allowance for credit losses (“ACL”) based on the Company's best estimate of future credit losses on its commercial mortgage loans and unfunded loan commitments. As of January 1, the Company established an additional reserve of $90.8 million upon adoption. The ACL increased by $95.4 million in the first quarter primarily as a result of deterioration in the macroeconomic forecasts, as a result of COVID-19, used in the measurement of the ACL since the initial allowance was established.
As of
March 31, 2020
(Dollars In Thousands)
Allowance for Funded Mortgage Loan Credit Losses
Beginning balance $ 4,884   
Cumulative effect adjustment 80,239   
Charge offs —   
Recoveries —   
Provision 86,093   
Ending balance $ 171,216   
Allowance for Unfunded Mortgage Commitments Credit Losses
Beginning balance $ —   
Cumulative effect adjustment 10,610   
Charge offs —   
Recoveries —   
Provision 9,304   
Ending balance $ 19,914   

An analysis of the delinquent loans is shown in the following chart:
      Greater  
30-59 Days 60-89 Days than 90 Days Total
As of March 31, 2020 Delinquent Delinquent Delinquent Delinquent
  (Dollars In Thousands)
Commercial mortgage loans $ 7,927    $ —    $ —    $ 7,927   
Number of delinquent commercial mortgage loans 2    —    —    2   
       
As of December 31, 2019        
Commercial mortgage loans $ 6,455    $ —    $ 710    $ 7,165   
Number of delinquent commercial mortgage loans 2    —    3    5   
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The Company limits accrued interest income on loans to ninety days of interest. For loans in nonaccrual status, interest income is recognized on a cash basis. For the three months ended March 31, 2020, an immaterial amount of accrued interest was excluded from the amortized cost basis pursuant to the Company's nonaccrual policy.
An analysis of loans in a nonaccrual status is shown in the following chart:
Recorded
Investment 		Unpaid
Principal
Balance 		Related
Allowance 		Average
Recorded
Investment 		Interest
Income
Recognized 		Cash Basis
Interest
Income
(Dollars In Thousands)
As of March 31, 2020
Commercial mortgage loans:            
With no related allowance recorded $ —    $ —    $ —    $ —    $ —    $ —   
With an allowance recorded $ 1,497    $ 2,554    $ 1,161    $ 1,497    $ 22    $ 29   
As of December 31, 2019
Commercial mortgage loans:            
With no related allowance recorded $ 710    $ 702    $ —    $ 237    $ 20    $ 28   
With an allowance recorded $ 16,209    $ 16,102    $ 4,884    $ 3,242    $ 841    $ 838   
Mortgage loans that were modified in a troubled debt restructuring as of December 31, 2019 are shown below. The Company did not have any mortgage loans that were modified in a troubled debt restructuring as of March 31, 2020.
Number of
Contracts 		Pre-Modification
Outstanding
Recorded
Investment 		Post-Modification
Outstanding
Recorded
Investment
  (Dollars In Thousands)
As of December 31, 2019
Troubled debt restructuring:
Commercial mortgage loans 2 $ 3,771    $ 3,771   

10. DEBT AND OTHER OBLIGATIONS
Under a revolving line of credit arrangement (the “Credit Facility”), the Company has the ability to borrow on an unsecured basis up to an aggregate principal amount of $1.0 billion under the Credit Facility. 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 $1.5 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 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 annual facility fee rate is 0.125% of the aggregate principal amount. 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 May 3, 2023. The Company is not aware of any non-compliance with the financial debt covenants of the Credit Facility as of March 31, 2020. PLC had a $200.0 million outstanding balance as of March 31, 2020. PLC did not have an outstanding balance as of December 31, 2019.
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Non-Recourse Funding Obligations
Non-recourse funding obligations outstanding as of March 31, 2020, on a consolidated basis, are shown in the following table:
Issuer Outstanding Principal
Carrying Value(1)
Maturity
Year 		Year-to-Date
Weighted-Avg
Interest Rate
  (Dollars In Thousands)    
Golden Gate Captive Insurance Company(2)(3)
$ 1,971,000    $ 1,971,000    2039 4.70  %
Golden Gate II Captive Insurance Company 329,949    275,267    2052 4.87  %
Golden Gate V Vermont Captive Insurance Company(2)(3)
730,000    787,029    2037 5.12  %
MONY Life Insurance Company(3)
1,885    2,253    2024 6.19  %
Total $ 3,032,834    $ 3,035,549       
(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. Changes in Golden Gate and Golden Gate V are non-cash items.
(3) Fixed rate obligations.
Non-recourse funding obligations outstanding as of December 31, 2019, on a consolidated basis, are shown in the following table:
Issuer Outstanding Principal
Carrying Value(1)
Maturity
Year 		Year-to-Date
Weighted-Avg
Interest Rate
  (Dollars In Thousands)    
Golden Gate Captive Insurance Company(2)(3)
$ 2,028,000    $ 2,028,000    2039 4.70  %
Golden Gate II Captive Insurance Company 329,949    274,955    2052 5.06  %
Golden Gate V Vermont Captive Insurance Company(2)(3)
720,000    777,527    2037 5.12  %
MONY Life Insurance Company(3)
1,885    2,271    2024 6.19  %
Total $ 3,079,834    $ 3,082,753       
(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. Changes in Golden Gate and Golden Gate V are non-cash items.
(3) Fixed rate obligations.
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Secured Financing Transactions
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 provide for net settlement in the event of default or on termination of the agreements. As of March 31, 2020, the Company did not have any outstanding repurchase agreements. During the three months ended March 31, 2020, the maximum balance outstanding at any one point in time related to these programs was $440.0 million. The average daily balance was $65.7 million (at an average borrowing rate of 163 basis points) during the three months ended March 31, 2020. As of December 31, 2019, the fair value of securities pledged under the repurchase program was $282.2 million, and the repurchase obligation of $270.0 million was included in the Company’s consolidated condensed balance sheets (at an average borrowing rate of 163 basis points). During 2019, the maximum balance outstanding at any one point in time related to these programs was $900.0 million. The average daily balance was $212.2 million (at an average borrowing rate of 214 basis points) during the year ended December 31, 2019.
Securities Lending
The Company participates in securities lending, primarily as an investment yield enhancement, whereby securities that are held as investments are loaned out to third parties for short periods of time. The Company requires collateral at least equal to 102% of the fair value of the loaned securities to be separately maintained. The loaned securities’ fair value is monitored on a daily basis and collateral is adjusted accordingly. The Company maintains ownership of the securities at all times and is entitled to receive from the borrower any payments for interest received on such securities during the loan term. Securities lending transactions are accounted for as secured borrowings. As of March 31, 2020, securities with a fair value of $66.1 million were loaned under this program. As collateral for the loaned securities, the Company receives cash which is primarily reinvested in short-term repurchase agreements, which are also collateralized by U.S. Government or U.S. Government Agency securities, and government money market funds. These investments are recorded in short-term investments with a corresponding liability recorded in secured financing liabilities to account for its obligation to return the collateral. As of March 31, 2020, the fair value of the collateral related to this program was $67.6 million and the Company has an obligation to return $67.6 million of collateral to the securities borrowers.

The following table provides the fair value of collateral pledged for repurchase agreements, grouped by asset class as of March 31, 2020 and December 31, 2019:

Repurchase Agreements, Securities Lending Transactions, and Repurchase-to-Maturity Transactions
Accounted for as Secured Borrowings
  Remaining Contractual Maturity of the Agreements
  As of March 31, 2020
  (Dollars In Thousands)
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 $ —    $ —    $ —    $ —    $ —   
Total repurchase agreements and repurchase-to-maturity transactions —    —    —    —    —   
Securities lending transactions
Corporate securities 50,544    —    —    —    50,544   
Equity securities 14,798    —    —    —    14,798   
Other government related securities 747    —    —    —    747   
Total securities lending transactions 66,089    —    —    —    66,089   
Total securities $ 66,089    $ —    $ —    $ —    $ 66,089   
50
Repurchase Agreements, Securities Lending Transactions, and Repurchase-to-Maturity Transactions
Accounted for as Secured Borrowings
  Remaining Contractual Maturity of the Agreements
  As of December 31, 2019
  (Dollars In Thousands)
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 $ 282,198    $ —    $ —    $ —    $ 282,198   
Total repurchase agreements and repurchase-to-maturity transactions 282,198    —    —    —    282,198   
Securities lending transactions
Fixed maturity securities 55,720    —    —    —    55,720   
Equity securities 7,120    —    —    —    7,120   
Total securities lending transactions 62,840    —    —    —    62,840   
Total securities $ 345,038    $ —    $ —    $ —    $ 345,038   

11. COMMITMENTS AND CONTINGENCIES
The Company leases administrative and marketing office space in approximately 16 cities (excluding the home office building), as well as various office equipment. Most leases have terms ranging from two years to twenty-five years. Leases with an initial term of 12 months or less are not recorded on the consolidated condensed balance sheet. The Company accounts for lease components separately from non-lease components (e.g., common area maintenance). Certain of the Company’s lease agreements include options to renew at the Company’s discretion. Management has concluded that the Company is not reasonably certain to elect any of these renewal options. The Company will use the interest rates received on its funding agreement backed notes as the collateralized discount rate when calculating the present value of remaining lease payments when the rate implicit in the lease is unavailable.

Under the 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. In addition, legislation may be introduced in various states with respect to guaranty fund assessment laws related to insurance products, including long term care insurance and other specialty products, that increases the cost of future assessments or alters future premium tax offsets received in connection with guaranty fund assessments. The Company cannot predict the amount, nature or timing of any future assessments or legislation, any of which could have a material and adverse impact on the Company’s financial condition or results of operations.

A number of civil jury verdicts have been returned against insurers, broker-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 and 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. 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.

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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.
The Company and certain of its 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 the early stages of the audits being conducted, and uncertainty as to whether the Company or other companies are responsible for the liabilities, if any, arising in connection with certain co-insured policies. The Company will continue to monitor the matter for any developments that would make the loss contingency associated with the audits reasonably estimable.
Advance Trust & Life Escrow Services, LTA, as Securities Intermediary of Life Partners Position Holder Trust v. Protective Life Insurance Company, Case No. 2:18-CV-01290, is a putative class action that was filed on August 13, 2018 in the United States District Court for the Northern District of Alabama. Plaintiff alleges that the Company required policyholders to pay unlawful and excessive cost of insurance charges. Plaintiff seeks to represent all owners of universal life and variable universal life policies issued or administered by the Company or its predecessors that provide that cost of insurance rates are to be determined based on expectations of future mortality experience. The plaintiff seeks class certification, compensatory damages, pre-judgment and post judgment interest, costs, and other unspecified relief. The Company is vigorously defending this matter and cannot predict the outcome of or reasonably estimate the possible loss or range of loss that might result from this litigation.

Scottish Re (U.S.), Inc. ("SRUS") was placed in rehabilitation on March 6, 2019 by the State of Delaware. Under the related order, the Insurance Commissioner of the State of Delaware has been appointed the receiver of SRUS and provided with authority to conduct and continue the business of SRUS in the interest of its cedents, creditors, and stockholder. The order was accompanied by an injunction requiring the continued payment of reinsurance premiums to SRUS and temporarily prohibiting cedents, including the Company, from offsetting premiums payable against receivables from SRUS. On June 20, 2019, the Delaware Court of Chancery entered an order approving a Revised Offset Plan, which allows cedents, including the Company, to offset premiums under certain circumstances. The plan of rehabilitation was scheduled to be provided by March 30, 2020 but given the impact of COVID-19, Scottish Re has requested more time and to date, the plan of rehabilitation has not been filed.

The Company continues to monitor SRUS and the actions of the receiver through discussions with legal counsel and review of publicly available information. An allowance for credit losses related to SRUS is included in the overall reinsurance allowance for credit losses. See Note 2, Summary of Significant Accounting Policies. As of March 31, 2020, management does not believe that the ultimate outcome of the rehabilitation process will have a material impact on the Company’s financial position or results of operations.

52
12. 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 March 31, 2020 and December 31, 2019.
Changes in Accumulated Other Comprehensive Income (Loss) by Component 
Unrealized
Gains and Losses
on Investments(2)
Accumulated
Gain and Loss
Derivatives 		Total
Accumulated
Other
Comprehensive
Income (Loss)
  (Dollars In Thousands, Net of Tax)
Balance, December 31, 2018 $ (1,404,209)   $ (7)   $ (1,404,216)  
Other comprehensive income (loss) before reclassifications 2,833,888    (9,781)   2,824,107   
Other comprehensive income (loss) relating to other-than-temporary impaired investments for which a portion has been recognized in earnings (3,574)   —    (3,574)  
Amounts reclassified from accumulated other comprehensive income (loss)(1)
(10,474)   1,799    (8,675)  
Balance, December 31, 2019 $ 1,415,631    $ (7,989)   $ 1,407,642   
Other comprehensive income (loss) before reclassifications (1,473,362)   (4,636)   (1,477,998)  
Other comprehensive income (loss) on investments for which a credit loss has been recognized in earnings (6,529)   —    (6,529)  
Amounts reclassified from accumulated other comprehensive income (loss)(1)
9,972    951    10,923   
Balance, March 31, 2020 $ (54,288)   $ (11,674)   $ (65,962)  
(1)  See Reclassifications Out of Accumulated Other Comprehensive Income (Loss) table below for details.
(2)  As of March 31, 2020 and December 31, 2019, net unrealized losses reported in AOCI were offset by $(37.6) million and $(776.9) million, respectively, 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 months ended March 31, 2020 and 2019.
Reclassifications Out of Accumulated Other Comprehensive Income (Loss)
For The
Three Months Ended
March 31,
Gains (losses) in net income: Affected Line Item in the
Consolidated Condensed Statements of Income 		2020 2019
(Dollars In Thousands)
Derivative instruments
Benefits and settlement expenses, net of reinsurance ceded(1)
$ (1,204)   $ (278)  
Tax (expense) benefit 253    58   
$ (951)   $ (220)  
     
Unrealized gains and losses on available-for-sale securities Realized gains (losses) - investments $ 39,170    $ 5,137   
Net credit losses recognized in operations (51,793)   —   
Net impairment losses recognized in operations —    (3,142)  
  Tax (expense) benefit 2,651    (419)  
  $ (9,972)   $ 1,576   
(1) See Note 7, Derivative Financial Instruments for additional information
53

13. INCOME TAXES
The Company used its respective estimates for its annual 2020 and 2019 incomes in computing its effective income tax rates for the three months ended March 31, 2020 and 2019. The effective tax rates for the three months ended March 31, 2020 and 2019, were 19.1% and 19.6%, respectively.
On March 27, 2020, H.R. 748, the Coronavirus Aid, Relief, and Economic Security Act ("the CARES Act") was signed into legislation which includes tax provisions relevant to businesses. The Company is required to recognize the effect on the consolidated financial statements in the period the law was enacted, which is the period ended March 31, 2020. For the period ended March 31, 2020, the CARES Act was not material to the Company's consolidated financial statements; however, if we were to have a taxable loss for the year ended December 31, 2020, we would be able to carryback those losses to prior periods. At this time, the Company does not expect the impact of the CARES Act to be material to the Company's consolidated financial statements for the year ended December 31, 2020.
In April, 2019, the IRS proposed favorable and unfavorable adjustments to the Company’s 2014 through 2016 reported taxable income. The Company agreed to these adjustments. The resulting taxes have been settled, other than interest, the settlement of interest will not materially impact the Company or its effective tax rate.
Due to IRS adjustments to the Company's pre-2017 taxable income, the Company has amended certain of its 2014 through 2016 state income tax returns. Such amendments will cause such years to remain open, pending the states' acceptances of the returns.
In general, the Company is no longer subject to income tax examinations by taxing authorities for tax years that began before 2017.
There have been no changes to the balance of unrecognized tax benefits during the quarter ended March 31, 2020. The Company believes that in the next twelve months, none of the unrecognized tax benefits will be reduced.
14. 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 and makes adjustments to its segment reporting as needed. A brief description of each segment follows.

In Q1 2020, as a result of changes in the way the chief operating decision maker makes decisions about the allocation of resources and assesses the performance of the business, the Company combined two of its former six segments into one segment, Retail Life and Annuity. These changes enable the Company to better serve the needs of its customer and to help achieve the goals of the organization.

Prior period amounts were adjusted retrospectively to reflect the change in the Company’s reportable segments.

•The Retail Life and Annuity segment primarily markets fixed universal life (“UL”), indexed universal life (“IUL”), variable universal life (“VUL”), level premium term insurance (“traditional”), fixed annuity, and variable annuity (“VA”) 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 and contracts 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, however, some recent acquisitions have included ongoing new business activities. Ongoing new product sales written by the Company from these acquisitions are included in the Retail Life and Annuity segment. As a result, earnings and account values are expected to decline as the result of lapses, deaths, and other terminations of coverage unless new acquisitions are made.
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•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. This 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, GAP products, credit life and disability insurance, and other specialized ancillary products to protect consumers’ investments in automobiles and recreational vehicles. GAP products are designed to cover the difference between the scheduled loan pay-off amount and an asset’s actual cash value in the case of a total loss. Each type of specialized ancillary product protects against damage or other loss to a particular aspect of the underlying asset.
•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 financing and investment-related transactions, and the operations of several small subsidiaries.
 The Company’s management and Board of Directors analyzes and assesses the operating performance of each segment using pre-tax adjusted operating income (loss) and after-tax adjusted operating income (loss). Consistent with GAAP accounting guidance for segment reporting, pre-tax adjusted operating income (loss) is the Company’s measure of segment performance. Pre-tax adjusted 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,
•changes in the GLWB embedded derivatives exclusive of the portion attributable to the economic cost of the GLWB,
•actual GLWB incurred claims, and
•the amortization of DAC, VOBA, and certain policy liabilities that is impacted by the exclusion of these items.
The items excluded from adjusted operating income (loss) are important to understanding the overall results of operations. Pre-tax adjusted operating income (loss) and after-tax adjusted operating income (loss) are not substitutes for income before income taxes or net income (loss), respectively. These measures may not be comparable to similarly titled measures reported by other companies. The Company believes that pre-tax and after-tax adjusted operating income (loss) enhances management’s and the Board of Directors’ understanding of the ongoing operations, the underlying profitability of each segment, and helps facilitate the allocation of resources.
After-tax adjusted operating income (loss) is derived from pre-tax adjusted operating income (loss) with the inclusion of income tax expense or benefits associated with pre-tax adjusted operating income. Income tax expense or benefits is allocated to the items excluded from pre-tax adjusted operating income (loss) at the statutory federal income tax rate for the associated period. Income tax expense or benefits allocated to after-tax adjusted operating income (loss) can vary period to period based on changes in the Company’s effective income tax rate.
In determining the components of the pre-tax adjusted operating income (loss) for each segment, premiums and policy fees, other income, benefits and settlement expenses, and amortization of 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 gains (losses) - investments/derivatives 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 months ended March 31, 2020 and 2019.
The following tables present a summary of results and reconciles pre-tax adjusted operating income (loss) to consolidated income before income tax and net income: 
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For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Revenues  
Retail Life and Annuity $ 776,644    $ 592,754   
Acquisitions 799,601    609,942   
Stable Value Products 36,602    59,579   
Asset Protection 72,489    73,195   
Corporate and Other (450)   29,335   
Total revenues $ 1,684,886    $ 1,364,805   
Pre-tax Adjusted Operating Income (Loss)  
Retail Life and Annuity $ (12,320)   47,012   
Acquisitions 75,125    74,912   
Stable Value Products 25,325    22,239   
Asset Protection 10,627    8,849   
Corporate and Other (40,875)   (44,206)  
Pre-tax adjusted operating income 57,882    108,806   
Realized gains (losses) and adjustments 33,591    67,921   
Income before income tax 91,473    176,727   
Income tax expense (17,508)   (34,629)  
Net income $ 73,965    $ 142,098   
Pre-tax adjusted operating income $ 57,882    $ 108,806   
Adjusted operating income tax expense (10,454)   (20,365)  
After-tax adjusted operating income 47,428    88,441   
Realized gains (losses) and adjustments 33,591    67,921   
Income tax (expense) benefit on adjustments (7,054)   (14,264)  
Net income $ 73,965    $ 142,098   
Realized gains (losses) and adjustments:
Derivative financial instruments $ 238,140    $ (73,308)  
Investments (276,251)   126,386   
Less: related amortization(1)
(58,426)   (4,361)  
Less: VA GLWB economic cost (13,276)   (10,482)  
Total realized gains (losses) and adjustments $ 33,591    $ 67,921   
(1)  Includes amortization of DAC/VOBA and benefits and settlement expenses that are impacted by realized gains (losses).

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For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Net investment income  
Retail Life and Annuity $ 252,419    $ 230,898   
Acquisitions 416,427    324,511   
Stable Value Products 62,670    57,621   
Asset Protection 7,215    6,802   
Corporate and Other 14,249    21,590   
Total net investment income $ 752,980    $ 641,422   
Amortization of DAC and VOBA  
Retail Life and Annuity $ (13,756)   14,948   
Acquisitions 51,961    (1,076)  
Stable Value Products 797    873   
Asset Protection 14,961    15,628   
Corporate and Other —    —   
Total amortization of DAC and VOBA $ 53,963    $ 30,373   

Operating Segment Assets
As of March 31, 2020
  (Dollars In Thousands)
Retail Life & Annuity Acquisitions Stable Value
Products
Investments and other assets $ 35,487,628    $ 52,420,826    $ 5,760,834   
DAC and VOBA 2,606,704    978,587    4,424   
Other intangibles 392,895    35,518    6,556   
Goodwill 558,501    23,862    113,924   
Total assets $ 39,045,728    $ 53,458,793    $ 5,885,738   

Asset
Protection 		Corporate
and Other 		Total
Consolidated
Investments and other assets $ 866,728    $ 15,801,103    $ 110,337,119   
DAC and VOBA 171,068    —    3,760,783   
Other intangibles 109,360    29,829    574,158   
Goodwill 129,224    —    825,511   
Total assets $ 1,276,380    $ 15,830,932    $ 115,497,571   

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Operating Segment Assets
As of December 31, 2019
  (Dollars In Thousands)
Retail Life & Annuity Acquisitions Stable Value
Products
Investments and other assets $ 37,448,239    $ 54,074,450    $ 5,317,885   
DAC and VOBA 2,416,616    924,090    5,221   
Other intangibles 401,178    36,321    6,722   
Goodwill 558,501    23,862    113,924   
Total assets $ 40,824,534    $ 55,058,723    $ 5,443,752   

Asset
Protection 		Corporate
and Other 		Total
Consolidated
Investments and other assets $ 878,386    $ 17,830,217    $ 115,549,177   
DAC and VOBA 173,628    —    3,519,555   
Other intangibles 112,032    27,173    583,426   
Goodwill 129,224    —    825,511   
Total assets $ 1,293,270    $ 17,857,390    $ 120,477,669   

15. SUBSEQUENT EVENTS
The Company has evaluated the effects of events subsequent to March 31, 2020, and through the date the Company filed its consolidated condensed financial statements with the United States Securities and Exchange Commission. All accounting and disclosure requirements related to subsequent events are included in the Company's 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, 2019, included in our most recent 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”).
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. Actual results could differ materially from those expressed in or implied by such forward-looking statements due to a variety of factors, including:
General
•the impact of the novel coronavirus (COVID-19) global pandemic including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic;
•exposure to risks related to natural and man-made disasters and catastrophes, such as diseases, epidemics, pandemics (including the novel coronavirus COVID-19), malicious acts, cyber attacks, terrorist acts, and climate change, which could adversely affect our operations and results;
•a disruption or cyber attack affecting the electronic, communication and information technology systems or other technologies of the Company or those on whom the Company relies could adversely affect our business, financial condition, and results of operations;
•confidential information maintained in the systems of the Company or other parties upon which we rely could be compromised or misappropriated as a result of security breaches or other related lapses or incidents, 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 models, assumptions, or estimates;
•compliance with existing and emerging privacy regulations could result in increased compliance costs and/or lead to changes in business practices and policies, and any failure to protect the confidentiality of consumer information could adversely affect our reputation and have a material adverse effect on our business, financial condition, and results of operations;
•we may not realize our anticipated financial results from our acquisitions strategy;
•we may experience competition in our Acquisition segment;
•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;
•events that damage our reputation or the reputation of our industry could adversely impact our business, results of operations, or financial condition;
•we may not be able to protect our intellectual property and may be subject to infringement claims;
•developments in technology may impact our business;
Financial Environment
•interest rate fluctuations and sustained periods of low or high interest rates could negatively affect our interest earnings and spread income, or otherwise impact our business;
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•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;
•climate change may adversely affect our investment portfolio;
•elimination of London Inter-Bank Offered Rate (“LIBOR”) may adversely affect the interest rates on and value of certain derivatives and floating rate securities we hold and floating rate securities we have issued, the value and profitability of certain real estate lending and other activities we conduct, and any other assets or liabilities whose value is tied to LIBOR;
•credit market volatility or disruption could adversely impact the Company’s financial condition or results from operations;
•disruption of the capital and credit markets could negatively affect the Company’s ability to meet its liquidity and financial needs;
•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;
•our ability to grow depends in large part upon the continued availability of capital;
•we could be forced to sell investments at a loss to cover policyholder withdrawals;
•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 have a material adverse effect on our results of operations, financial condition, and capital position;
•we could be adversely affected by an inability to access our credit facility;
•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;
•we could be adversely affected by a ratings downgrade or other negative action by a rating organization;
•we operate as a holding company and depend on the ability of our subsidiaries to transfer funds to us to meet our obligations;
•we could be adversely affected by an inability to access FHLB lending;
•our securities lending program may subject us to liquidity and other risks;
•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;
Industry and Regulation
•the business of our company is highly regulated and is subject to routine audits, examinations, and actions by regulators, law enforcement agencies, and self-regulatory organizations;
•we may be subject to regulations of, or regulations influenced by, 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;
•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 laws, rules and regulations that could adversely affect our financial condition or results of operations;
•we are subject to insurable interest laws, rules and regulations 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;
•new and amended regulations regarding the standard of care or standard of conduct applicable to investment professionals, insurance agencies, and financial institutions that recommend or sell annuities or life insurance products may have a material adverse impact on our ability to sell annuities and other products and to retain in-force business and on our financial condition or results of operations;
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•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;
•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 granting 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;
•developments in technology may impact our business; and
•our ability to maintain competitive unit costs is dependent upon the level of new sales and persistency of existing business.
For more information about the risks, uncertainties, and other factors that could affect our future results, please see Part II, Item 1A, Risk Factors of this report and Part I, Item 1A, Risk Factors of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019. 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.
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. We are an electronic filer and the SEC maintains an internet site at http://www.sec.gov that contains our annual, quarterly, and current reports and other information filed electronically by the Company.
We make available through PLC’s website, http://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. The information found on PLC’s website is not part of this or any other report 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, 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 PLC’s website, www.protective.com. We encourage investors, the media and others interested in us and our affiliates to review the information we post on PLC’s website. The information found on PLC’s website is not part of this or any other report filed with or furnished to the SEC.
OVERVIEW
Our Business
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 (now known as Dai-ichi Life Holdings, Inc., “Dai-ichi Life”), when DL Investment (Delaware), Inc., a wholly owned subsidiary of Dai-ichi Life, merged with and into PLC. Prior to February 1, 2015, PLC’s stock was publicly traded on the New York Stock Exchange. Subsequent to the Merger, PLC remained an SEC registrant within the United States until January 23, 2020, when PLC suspended its reporting obligations with the SEC under the Securities Exchange Act of 1934. Subsequent to the Merger, the Company has continued to be an SEC registrant 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.
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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 and make adjustments to our segment reporting as needed.

In Q1 2020, as a result of changes in the way the chief operating decision maker makes decisions about the allocation of resources and assesses the performance of the business, the Company combined two of its former six segments into one segment, Retail Life and Annuity. These changes enable the Company to better serve the needs of its customers and to help achieve the goals of the organization.

Prior period amounts were adjusted retrospectively to reflect the change in our reportable segments.
Our operating segments are Retail Life and Annuity, Acquisitions, Stable Value Products, and Asset Protection. We have an additional reporting segment referred to as Corporate and Other.
•Retail Life and Annuity - We primarily market fixed universal life (“UL”), indexed universal life (“IUL”), variable universal life (“VUL”), level premium term insurance (“traditional”), fixed annuity, and variable annuity (“VA”) products on a national basis primarily through networks of independent insurance agents and brokers, broker-dealers, financial institutions, independent distribution organizations, and affinity groups.
•Acquisitions - We focus on acquiring, converting, and/or servicing policies and contracts 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, however, some recent acquisitions have included ongoing new business activities. Ongoing new product sales written by the Company from these acquisitions are included in the Retail Life and Annuity segment. As a result, earnings and account values are expected to decline as the result of lapses, deaths, and other terminations of coverage unless new acquisitions are made.
•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, guaranteed asset protection (“GAP”) products, credit life and disability insurance, and other specialized ancillary products to protect consumers’ investments in automobiles and recreational vehicles. GAP products are designed to cover the difference between the scheduled loan pay-off amount and an asset’s actual cash value in the case of a total loss. Each type of specialized ancillary product protects against damage or other loss to a particular aspect of the underlying asset.
•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, financing and investment-related transactions, and the operations of several small subsidiaries.
Impact of COVID-19
In December 2019, a novel strain of coronavirus (COVID-19) was reported in Wuhan, China. COVID-19 has since spread, and infections have been found around the world, including the United States. On March 11, 2020, the World Health Organization declared the outbreak to constitute a pandemic based on the global spread of the disease, the severity of illnesses it causes, and its effects on society. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and continued spread of the outbreak, regulatory and private sector responses, which may be precautionary, and the impact on our customers, workforce, and vendors, all of which are uncertain and cannot be predicted. The COVID-19 outbreak is disrupting supply chains and affecting production and sales across a range of industries, and it could materially adversely impact the mortality, morbidity, or other experience of the Company or its reinsurers or have a material adverse effect on lapses and surrenders of existing policies, as well as sales of new policies. The macroeconomic effects of the COVID-19 outbreak could also materially adversely affect the Company’s asset portfolio, as well as many other aspects of the Company’s business, financial condition, and results of operations.
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The pre-tax adjusted operating (income) loss in the Retail Life and Annuity and Acquisitions segments was affected primarily by the impact of the COVID-19 pandemic on the equity markets which resulted in lower variable account values. Declining variable account values accelerated the amortization of deferred policy acquisition costs (“DAC”) and value of business acquired (“VOBA”), resulted in higher guaranteed benefit reserves and generated lower fee income. Lower fee income is expected to continue until variable account values increase with improvement in equity market performance. As variable account values increase, our exposure to claims related to guaranteed benefits will decline which in turn will result in lowering the required reserves associated with these guaranteed benefits.

The Asset Protection segment did not experience a material impact from the COVID-19 crisis in the first quarter of 2020. While there is significant uncertainty around the potential effect of the COVID-19 pandemic on the segment’s 2020 results, the potential impact in future periods includes: 1) lower sales based on the significant decrease in auto sales that began in late March/early April, 2) a potential reduction in vehicle service contracts and GAP claims as a result of the effect of less miles driven, and 3) a potential increase in GAP claims as a result of lower used car prices.
RECENT SIGNIFICANT TRANSACTIONS
Great-West Life & Annuity Insurance Company
On January 23, 2019, we entered into a Master Transaction Agreement (the “GWL&A Master Transaction Agreement”) with Great-West Life & Annuity Insurance Company (“GWL&A”), Great-West Life & Annuity Insurance Company of New York (“GWL&A of NY”), The Canada Life Assurance Company (“CLAC”), and The Great-West Life Assurance Company (“GWL” and, together with GWL&A, GWL&A of NY, and CLAC, the “Sellers”), pursuant to which we acquired via reinsurance (the “Transaction”) substantially all of the Sellers’ individual life insurance and annuity business (the “Individual Life Business”).
On June 3, 2019, the Company and PLAIC completed the Transaction (the “GWL&A Closing”). Pursuant to the GWL&A Master Transaction Agreement, the Company and Protective Life and Annuity Insurance Company (“PLAIC”), entered into reinsurance agreements (the “GWL&A Reinsurance Agreements”) and related ancillary documents at the GWL&A Closing. On the terms and subject to the conditions of the GWL&A Reinsurance Agreements, the Sellers ceded to the Company and PLAIC, effective as of the date of the GWL&A Closing, substantially all of the insurance policies relating to the Individual Life Business. The aggregate ceding commission for the reinsurance of the Individual Life Business paid at the GWL&A Closing was $765.7 million, which amount is subject to adjustment in accordance with the GWL&A Master Transaction Agreement. All policies issued in states other than New York were ceded to the Company under reinsurance agreements between the applicable Seller and the Company, and all policies issued in New York were ceded to PLAIC under a reinsurance agreement between GWL&A of NY and PLAIC. The aggregate statutory reserves of the Sellers ceded to the Company and PLAIC as of the GWL&A Closing were approximately $20.4 billion, which amount was based on initial estimates and is subject to adjustment following the GWL&A Closing. To support its obligations under the GWL&A Reinsurance Agreements, the Company established trust accounts for the benefit of GWL&A, CLAC and GWL, and PLAIC established a trust account for the benefit of GWL&A of NY. The Sellers will retain a block of participating policies, which will be administered by PLC.

The GWL&A Master Transaction Agreement and other transaction documents contain certain customary representations and warranties made by each of the parties, and certain customary covenants regarding the Sellers and the Individual Life Business, and provide for indemnification, among other things, for breaches of those representations, warranties, and covenants.

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, 2019.
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RESULTS OF OPERATIONS
Our management and Board of Directors analyze and assess the operating performance of each segment using pre-tax adjusted operating income (loss) and after-tax adjusted operating income (loss). Consistent with GAAP accounting guidance for segment reporting, pre-tax adjusted operating income (loss) is our measure of segment performance. Pre-tax adjusted 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,
•changes in the guaranteed living withdrawal benefits (“GLWB”) embedded derivatives exclusive of the portion attributable to the economic cost of the GLWB,
•actual GLWB incurred claims, and
•the amortization of DAC, VOBA, and certain policy liabilities that is impacted by the exclusion of these items.

After-tax adjusted operating income (loss) is derived from pre-tax adjusted operating income (loss) with the inclusion of income tax expense or benefits associated with pre-tax adjusted operating income. Income tax expense or benefits is allocated to the items excluded from pre-tax adjusted operating income (loss) at the statutory federal income tax rate for the associated period. Income tax expense or benefits allocated to after-tax adjusted operating income (loss) can vary period to period based on changes in our effective income tax rate.
The items excluded from adjusted operating income (loss) are important to understanding the overall results of operations. Pre-tax adjusted operating income (loss) and after-tax adjusted operating income (loss) are not substitutes for income before income taxes or net income (loss), respectively. These measures may not be comparable to similarly titled measures reported by other companies. Our belief is that pre-tax and after-tax adjusted operating income (loss) enhances management’s and the Board of Directors’ understanding of the ongoing operations, the underlying profitability of each segment, and helps facilitate the allocation of resources.
In determining the components of the pre-tax adjusted operating income (loss) for each segment, premiums and policy fees, other income, benefits and settlement expenses, and amortization of 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 gains (losses) - investments/derivatives 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 policy liabilities net of associated policy assets, while DAC/VOBA and goodwill are shown in the segments to which they are attributable.
We periodically review and update as appropriate our key assumptions used to measure certain balances related to insurance products, including future mortality, expenses, lapses, premium persistency, benefit utilization, investment yields, interest rates, and separate account fund returns. Changes to these assumptions result in adjustments which increase or decrease DAC and VOBA amortization and/or benefits and expenses. Assumptions may be updated as part of our annual assumption review process, as well as during our quarterly update of historical business activity. This periodic review and updating of assumptions is collectively referred to as “unlocking”. When referring to unlocking the reference is to changes in all balance sheet components associated with these changes. The adjustments associated with unlocking can create significant variability from period to period in the profitability of certain of the Company’s operating segments.

Level term policies are policies in which premium rate remains the same for our established level term period (e.g. 20 years). At the end of the level term period, premium rates typically increase significantly and policyholder lapse rates are typically high. Since most of our reinsurance premiums are paid on an annual in advance basis, at each period end, we establish an accrual to adjust for the income effect of policies expected to lapse in the next period. Total estimated refunds from reinsurers for premiums was approximately $315.7 million for the three months ended March 31, 2020 and $116.6 million for the three months ended March 31, 2019. Premiums paid to and refunded by reinsurers is included in reinsurance ceded, while adjustments from the accrual for post level policy lapses is included in the benefits and settlement expenses line in the statements of income. As a result, over time there can be significant volatility in these individual line items due to the impact of business entering the post level period.
The following table presents a summary of results and reconciles pre-tax adjusted operating income (loss) to consolidated income before income tax and net income:
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For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Pre-tax Adjusted Operating Income (Loss)  
Retail Life & Annuity $ (12,320)   $ 47,012   
Acquisitions 75,125    74,912   
Stable Value Products 25,325    22,239   
Asset Protection 10,627    8,849   
Corporate and Other (40,875)   (44,206)  
Pre-tax adjusted operating income 57,882    108,806   
Realized gains (losses) and adjustments 33,591    67,921   
Income before income tax 91,473    176,727   
Income tax expense (17,508)   (34,629)  
Net income $ 73,965    $ 142,098   
Pre-tax adjusted operating income $ 57,882    $ 108,806   
Adjusted operating income tax expense (10,454)   (20,365)  
After-tax adjusted operating income 47,428    88,441   
Realized gains (losses) and adjustments 33,591    67,921   
Income tax expense on adjustments (7,054)   (14,264)  
Net income $ 73,965    $ 142,098   
Realized gains (losses) and adjustments:
Derivative financial instruments $ 238,140    $ (73,308)  
Investments (276,251)   126,386   
Less: related amortization(1)
(58,426)   (4,361)  
Less: VA GLWB economic cost (13,276)   (10,482)  
Total realized gains (losses) and adjustments $ 33,591    $ 67,921   
(1)  Includes amortization of DAC/VOBA and benefits and settlement expenses that are impacted by realized gains (losses).
For The Three Months Ended March 31, 2020 as compared to The Three Months Ended March 31, 2019

Net income for the three months ended March 31, 2020 included a $50.9 million, or 46.8%, decrease in pre-tax adjusted operating income. The decrease consisted of a $59.3 million decrease in the Retail Life and Annuity segment, which was partially offset by a $3.3 million improvement in the Corporate and Other segment, a $0.2 million increase in the Acquisition segment, a $1.8 million increase in the Asset Protection segment, and a $3.1 million increase in the Stable Value Products segment.

•The Retail Life & Annuity segment pre-tax adjusted operating loss was $12.3 million for the three months ended March 31, 2020, representing a decrease of $59.3 million as compared to the three months ended March 31, 2019. This decrease was primarily due to unfavorable unlocking driven by lower equity markets, an unfavorable change in guaranteed benefit reserves, and higher claims in the universal life block, partially offset by higher investment income, favorable single premium immediate annuity product (“SPIA”) mortality, and favorable post level activity in the traditional life block. Segment results were negatively impacted by $52.9 million of unfavorable unlocking for the three months ended March 31, 2020, as compared to $12.3 million of favorable unlocking for the three months ended March 31, 2019.

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•Acquisitions segment pre-tax adjusted operating income was $75.1 million for the three months ended March 31, 2020, an increase of $0.2 million as compared to the three months ended March 31, 2019. The pre-tax adjusted operating income was consistent with the prior year.

•Stable Value segment pre-tax adjusted operating income was $25.3 million, an increase of $3.1 million, or 13.9%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. The increase in pre-tax adjusted operating income primarily resulted from higher participating mortgage income, partially offset by higher credited interest. Participating mortgage income for the three months ended March 31, 2020, was $7.1 million as compared to $0.8 million for the three months ended March 31, 2019. The adjusted operating spread, which excludes participating income, decreased by 29 basis points for the three months ended March 31, 2020, from the prior year, due primarily to a decrease in overall yields earned on investments.

•Asset Protection segment pre-tax adjusted operating income was $10.6 million, representing an increase of $1.8 million, or 20.1%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Service contract earnings increased $1.8 million primarily due to higher administrative fees and investment income. Earnings from the GAP product line increased $0.5 million primarily due to lower loss ratios. Earnings from the credit insurance product line decreased $0.5 million primarily due to lower volume and higher loss ratios.
•The Corporate and Other segment pre-tax adjusted operating loss was $40.9 million for the three months ended March 31, 2020, as compared to a pre-tax adjusted operating loss of $44.2 million for the three months ended March 31, 2019. The decreased operating loss was primarily due to a decrease in operating expenses, partially offset by a decrease in investment income due to lower invested asset balances and yields.

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Retail Life and Annuity
Segment Results of Operations
Segment results were as follows:
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
REVENUES  
Gross premiums and policy fees $ 437,149    $ 521,535   
Reinsurance ceded 15,277    (226,424)  
Net premiums and policy fees 452,426    295,111   
Net investment income 252,419    230,898   
Realized gains (losses) - investments/derivatives (10,417)   (10,482)  
Other income 41,268    39,412   
Total operating revenues 735,696    554,939   
Realized gains (losses) - investments/derivatives 40,948    37,815   
Total revenues 776,644    592,754   
BENEFITS AND EXPENSES    
Benefits and settlement expenses 630,824    427,777   
Amortization of DAC/VOBA 67,813    25,822   
Other operating expenses 49,379    54,328   
Operating benefits and settlement expenses 748,016    507,927   
Benefits and settlement expenses related to realized gains (losses) (24,329)   3,956   
Amortization of DAC/VOBA related to realized gains (losses) (81,569)   (10,874)  
Total benefits and expenses 642,118    501,009   
INCOME (LOSS) BEFORE INCOME TAX 134,526    91,745   
Less: realized gains (losses) - investments/derivatives 40,948    37,815   
Less: related benefits and settlement expenses 24,329    (3,956)  
Less: related amortization of DAC/VOBA 81,569    10,874   
PRE-TAX ADJUSTED OPERATING INCOME (LOSS) $ (12,320)   $ 47,012   
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The following table summarizes key data for the Retail Life and Annuity segment:
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Sales By Product
Traditional life(1)
$ 69,581    $ 14,145   
Universal life(1)
11,832    28,097   
Fixed annuity(2)
612,876    332,578   
Variable annuity(2)
55,314    45,333   
  $ 749,603    $ 420,153   
Average Account Values
Universal life $ 7,739,640    $ 7,794,474   
Variable universal life 769,254    743,377   
Fixed annuity(3)
10,464,190    9,531,961   
Variable annuity 11,093,582    11,963,395   
$ 30,066,666    $ 30,033,207   
Average Life Insurance In-force(4)
   
Traditional $ 367,307,611    $ 357,069,540   
Universal life 288,890,478    285,422,652   
  $ 656,198,089    $ 642,492,192   
Interest Spread - Fixed Annuities(5)
   
Net investment income yield 3.92  % 3.78  %
Interest credited to policyholders 2.45  % 2.46  %
Interest spread 1.47  % 1.32  %
As of
March 31, 2020 December 31, 2019
(Dollars In Thousands)
VA GLWB Benefit Base $ 9,681,345    $ 9,850,644   
Account value subject to GLWB rider $ 6,978,452    $ 8,403,428   
(1)  Sales data for traditional life insurance, other than Single Premium Whole life insurance, is based on annualized premiums. Single Premium Whole Life insurance sales for the quarter ending March 31, 2020 are based on total single premium dollars received in the period and were $44.9 million and is not comparable to the 2019 sales reporting methodology. Single Premium Whole life insurance sales for the quarter ending March 31, 2019 were based on 10% of the single premium dollars received during the period and were $4.2 million or $41.5 million of total single premium dollars for the period. Universal life sales are based on annualized planned premiums, or “target” premiums if lesser, plus 6% of amounts received in excess of target premiums and 10% of single premiums. “Target” premiums for universal life are those premiums upon which full first year commissions are paid..
(2)  Sales are measured based on the amount of purchase payments received less first year surrenders.
(3)  Includes general account balances held within VA products. Fixed annuity account value is net of reinsurance ceded.
(4)  Amounts are not adjusted for reinsurance ceded.
(5)  Interest spread on average general account values.
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For The Three Months Ended March 31, 2020, as compared to The Three Months Ended March 31, 2019
Pre-tax adjusted operating income (loss)
Pre-tax adjusted operating loss was $12.3 million for the three months ended March 31, 2020, representing a decrease of $59.3 million as compared to the three months ended March 31, 2019. This decrease was primarily due to unfavorable unlocking driven by lower equity markets, an unfavorable change in guaranteed benefit reserves, and higher claims in the universal life block, partially offset by higher investment income, favorable SPIA mortality, and favorable post level activity in the traditional life block. Segment results were negatively impacted by $52.9 million of unfavorable unlocking for the three months ended March 31, 2020, as compared to $12.3 million of favorable unlocking for the three months ended March 31, 2019.

Operating revenues
Total operating revenues for the three months ended March 31, 2020, increased $180.8 million, or 32.6%, as compared to the three months ended March 31, 2019. This increase was driven by post level activity in the traditional life block net premiums and higher investment income due to participating mortgage income.
Net premiums and policy fees
Net premiums and policy fees increased by $157.3 million, or 53.3%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, driven by a favorable impact due to post level activity in the traditional life block.
Net investment income
Net investment income in the segment increased $21.5 million, or 9.3%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, driven by participating mortgage income and higher liability balances.

Other income

Other income increased $1.9 million, or 4.7%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, due to higher annuity guaranteed benefit rider charges.
Benefits and settlement expenses
Benefits and settlement expenses increased by $203.0 million, or 47.5%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, driven by post level impacts in the traditional life block, higher claims in the universal life block, and an increase in variable annuity guaranteed benefit reserves.

Amortization of DAC/VOBA

DAC/VOBA amortization increased $42.0 million for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, primarily due to unfavorable unlocking in the variable universal life and variable annuity blocks. DAC and VOBA unlocking was $44.3 million unfavorable for the three months ended March 31, 2020, as compared to $10.6 million favorable for the three months ended March 31, 2019.
Other operating expenses
Other operating expenses decreased $4.9 million for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. This decrease was driven by higher ceding allowances and lower commissions, partly offset by higher new business costs after capitalization.

Sales

Sales for the segment increased $329.5 million for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, due to an increase in fixed annuity sales.

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Reinsurance
Currently, the Retail Life and Annuity 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 adjusted 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 the estimated ceded premiums of the policies in-force. Thus, deferred reinsurance allowances may impact DAC amortization.
Impact of reinsurance
Reinsurance impacted the Retail Life and Annuity segment line items as shown in the following table:
Retail Life and Annuity Segment
Line Item Impact of Reinsurance
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
REVENUES  
Reinsurance ceded $ 15,277    $ (226,424)  
Realized gains (losses) - derivatives 10,034    10,625   
Total operating revenues 25,311    (215,799)  
Realized gains (losses) - derivatives, net of economic cost 253,456    37,391   
Total revenues 278,767    (178,408)  
BENEFITS AND EXPENSES
Benefits and settlement expenses 69,111    (167,360)  
Amortization of DAC/VOBA (1,032)   (1,165)  
Other operating expenses(1)
(51,307)   (43,821)  
Operating benefits and expenses 16,772    (212,346)  
Benefits and settlement expenses related to realized gains (losses) (2,099)   131   
Amortization of DAC/VOBA related to realized gains (losses) 4,821    1,058   
Total benefits and expenses 19,494    (211,157)  
NET IMPACT OF REINSURANCE $ 259,273    $ 32,749   
(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. The Retail Life and Annuity segment’s reinsurance programs do not materially impact the other income line of our income statement.
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For The Three Months Ended March 31, 2020, as compared to The Three Months Ended March 31, 2019

The lower ceded premium and policy fees for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, was caused primarily by lower ceded traditional life premiums of $246.6 million, primarily due fluctuations in the number of policies entering their post level period.

Ceded benefits and settlement expenses were lower for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, due to lower ceded reserves of $243.2 million in the traditional life block, due to fluctuations in the number of policies entering their post level period.

Ceded amortization of DAC and VOBA decreased slightly for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019.

Ceded other operating expenses increased for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, primarily due to higher ceding allowances on the universal life block. Ceded other operating expenses reflect the impact of reinsurance allowances, net of amounts deferred.

Ceded realized gains (losses) on derivatives were more favorable for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, primarily due to the net impact of ceded changes in the derivative liability and hedge gains generated due to equity market performance.
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Acquisitions
Segment Results of Operations
Segment results were as follows:
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
REVENUES  
Gross premiums and policy fees $ 380,784    $ 323,372   
Reinsurance ceded (22,888)   (60,932)  
Net premiums and policy fees 357,896    262,440   
Net investment income 416,427    324,511   
Realized gains (losses) - investments/derivatives (2,859)   —   
Other income 50,004    3,768   
Total operating revenues 821,468    590,719   
Realized gains (losses) - investments/derivatives (21,867)   19,223   
Total revenues 799,601    609,942   
BENEFITS AND EXPENSES    
Benefits and settlement expenses 670,737    476,657   
Amortization of VOBA 11,085    (1,470)  
Other operating expenses 64,521    40,620   
Operating benefits and expenses 746,343    515,807   
Benefits and settlement expenses related to realized gains (losses) 6,596    2,163   
Amortization of VOBA related to realized gains (losses) 40,876    394   
Total benefits and expenses 793,815    518,364   
INCOME BEFORE INCOME TAX 5,786    91,578   
Less: realized gains (losses) - investments/derivatives (21,867)   19,223   
Less: related benefits and settlement expenses (6,596)   (2,163)  
Less: related amortization of VOBA (40,876)   (394)  
PRE-TAX ADJUSTED OPERATING INCOME $ 75,125    $ 74,912   
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The following table summarizes key data for the Acquisitions segment:
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Average Life Insurance In-Force(1)
 
Traditional $ 250,647,964    $ 224,558,834   
Universal life 67,618,422    31,826,162   
  $ 318,266,386    $ 256,384,996   
Average Account Values          
Universal life $ 15,996,274    $ 7,294,347   
Variable universal life 7,218,300    715,533   
Fixed annuity(2)
12,573,829    11,650,096   
Variable annuity 4,438,336    1,067,411   
  $ 40,226,739    $ 20,727,387   
Interest Spread - Fixed Annuities    
Net investment income yield 4.42  % 4.28  %
Interest credited to policyholders 4.16  % 3.55  %
Interest spread(3)
0.26  % 0.73  %
(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 March 31, 2020 as compared to The Three Months Ended March 31, 2019
Pre-tax adjusted operating income
Pre-tax adjusted operating income was $75.1 million for the three months ended March 31, 2020, an increase of $0.2 million as compared to the three months ended March 31, 2019. The pre-tax adjusted operating income was consistent with the prior year.
Operating revenues
Net premiums and policy fees increased $95.5 million, or 36.4%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, primarily due to the premiums associated with the GWL&A reinsurance transactions more than offsetting the expected runoff of the in-force blocks of business. Net investment income increased $91.9 million, or 28.3%, for the three months ended March 31, 2020, primarily due to the $104.9 million impact of the GWL&A reinsurance transaction, partly offset by the expected runoff of the other in-force blocks of business. Other income increased $46.2 million for the three months ended March 31, 2020, primarily due to the GWL&A reinsurance transaction, which added $32.7 million as compared to the three months ended March 31, 2019.

Total benefits and expenses

Total benefits and expenses increased $275.5 million, or 53.1%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. The increase was primarily due to the GWL&A reinsurance transaction, which increased benefits and expenses $186.9 million. This was partly offset by the expected runoff of the in-force blocks of business.


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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, 2019.
Impact of reinsurance
Reinsurance impacted the Acquisitions segment line items as shown in the following table:
Acquisitions Segment
Line Item Impact of Reinsurance
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
REVENUES  
Reinsurance ceded $ (22,888)   $ (60,932)  
BENEFITS AND EXPENSES
Benefits and settlement expenses (9,956)   (59,469)  
Amortization of VOBA (200)   (124)  
Other operating expenses (7,181)   (7,552)  
Total benefits and expenses (17,337)   (67,145)  
NET IMPACT OF REINSURANCE(1)
$ (5,551)   $ 6,213   
(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 our 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 lower ceded premium and policy fees for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, was caused primarily by lower ceded traditional life premiums of $37.7 million, primarily due to fluctuations in the number of policies entering their post level period.
Ceded benefits and settlement expenses were lower for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, primarily due to lower ceded reserves of $32.7 million in the traditional life block, due to fluctuations in the number of policies entering their post level period and lower ceded benefits of $14.0 million.
Ceded amortization of VOBA decreased slightly for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019.
Ceded other operating expenses decreased slightly for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019.


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Stable Value Products
Segment Results of Operations
Segment results were as follows:
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
REVENUES  
Net investment income $ 62,670    $ 57,621   
Other income —    —   
Total operating revenues 62,670    57,621   
Realized gains (losses) - investments/derivatives (26,068)   1,958   
Total revenues 36,602    59,579   
BENEFITS AND EXPENSES  
Benefits and settlement expenses 35,922    33,840   
Amortization of DAC 797    873   
Other operating expenses 626    669   
Total benefits and expenses 37,345    35,382   
INCOME BEFORE INCOME TAX (743)   24,197   
Less: realized gains (losses) (26,068)   1,958   
PRE-TAX ADJUSTED OPERATING INCOME $ 25,325    $ 22,239   

The following table summarizes key data for the Stable Value Products segment: 
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Sales(1)
 
GIC $ 3,000    $ —   
GFA 500,000    650,000   
  $ 503,000    $ 650,000   
Average Account Values $ 5,669,615    $ 5,453,739   
Ending Account Values $ 5,885,738    $ 5,527,816   
Operating Spread  
Net investment income yield 4.42  % 4.22  %
Interest credited 2.53    2.48   
Operating expenses 0.10    0.11   
Operating spread 1.79  % 1.63  %
Adjusted operating spread(2)
1.28  % 1.57  %
(1)  Sales are measured at the time the purchase payments are received.
(2)  Excludes participating mortgage loan income.
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For The Three Months Ended March 31, 2020, as compared to The Three Months Ended March 31, 2019
Pre-tax adjusted operating income
Pre-tax adjusted operating income was $25.3 million, an increase of $3.1 million, or 13.9%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. The increase in pre-tax adjusted operating income primarily resulted from higher participation mortgage income, partially offset by higher credited interest. Participating mortgage income for the three months ended March 31, 2020, was $7.1 million as compared to $0.8 million for the three months ended March 31, 2019. The adjusted operating spread, which excludes participating income, decreased by 29 basis points for the three months ended March 31, 2020, from the prior year, due primarily to a decrease in average yields on investments.


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Asset Protection
Segment Results of Operations
Segment results were as follows: 
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
REVENUES  
Gross premiums and policy fees $ 75,219    $ 75,535   
Reinsurance ceded (45,707)   (44,045)  
Net premiums and policy fees 29,512    31,490   
Net investment income 7,215    6,802   
Other income 35,762    34,903   
Total operating revenues 72,489    73,195   
BENEFITS AND EXPENSES    
Benefits and settlement expenses 20,904    23,599   
Amortization of DAC/VOBA 14,961    15,628   
Other operating expenses 25,997    25,119   
Total benefits and expenses 61,862    64,346   
INCOME BEFORE INCOME TAX 10,627    8,849   
PRE-TAX ADJUSTED OPERATING INCOME $ 10,627    $ 8,849   
The following table summarizes key data for the Asset Protection segment:
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Sales(1)
 
Credit insurance $ 1,708    $ 2,280   
Service contracts 94,993    86,090   
GAP 18,089    16,726   
  $ 114,790    $ 105,096   
Loss Ratios(2)
   
Credit insurance 45.1  % 26.2  %
Service contracts 59.2    33.7   
GAP 121.0    128.9   
(1) Sales are based on the amount of single premiums and fees received
(2) Incurred claims as a percentage of earned premiums
77
For The Three Months Ended March 31, 2020, as compared to The Three Months Ended March 31, 2019
Pre-tax adjusted operating income
Pre-tax adjusted operating income was $10.6 million, representing an increase of $1.8 million, or 20.1%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Service contract earnings increased $1.8 million primarily due to higher administrative fees and investment income. Earnings from the GAP product line increased $0.5 million primarily due to lower loss ratios. Earnings from the credit insurance product line decreased $0.5 million primarily due to lower volume and higher loss ratios.

Net premiums and policy fees

Net premiums and policy fees decreased $2.0 million, or 6.3%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. GAP premiums decreased $2.4 million mainly due to decreasing sales in prior years and the related impact on earned premiums. Credit insurance premiums decreased $0.4 million as a result of lower sales. Service contract premiums increased $0.8 million due to higher sales.
Other income
Other income increased $0.9 million, or 2.5% for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Other income from the service contract line increased $1.0 million due to higher sales. Other income from the GAP product line decreased $0.1 million.
Benefits and settlement expenses
Benefits and settlement expenses decreased $2.7 million, or 11.4%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. GAP claims decreased $3.5 million due to lower volume as a result of discontinuing the relationship with two significant distribution partners and lower loss ratios. Service contract claims increased $0.7 million mainly due to higher volume. Credit insurance claims increased $0.1 million.

Amortization of DAC and VOBA and Other operating expenses

Amortization of DAC and VOBA decreased $0.7 million and other operating expenses increased $0.8 million for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019.

Sales

Total segment sales increased $9.7 million, or 9.2%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. Service contract sales increased $8.9 million due to higher volume. GAP sales increased $1.4 million as a result of fewer cancels from two discontinued distribution partner. Credit insurance sales decreased $0.6 million due to decreasing demand for the product.



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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 the segment’s exposure and allow the PARCs to share in the underwriting income of the product. Reinsurance contracts do not relieve the Asset Protection segment from obligations to 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 the Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Impact of Reinsurance
Reinsurance impacted the Asset Protection segment line items as shown in the following table:
Asset Protection Segment
Line Item Impact of Reinsurance
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
REVENUES  
Reinsurance ceded $ (45,707)   $ (44,045)  
BENEFITS AND EXPENSES
Benefits and settlement expenses (20,516)   (18,720)  
Amortization of DAC/VOBA (1,053)   (793)  
Other operating expenses (1,122)   (1,141)  
Total benefits and expenses (22,691)   (20,654)  
NET IMPACT OF REINSURANCE(1)
$ (23,016)   $ (23,391)  
(1)  Assumes no investment income on reinsurance. Foregone investment income would substantially change the impact of reinsurance.
For The Three Months Ended March 31, 2020, as compared to The Three Months Ended March 31, 2019
Reinsurance premiums ceded increased $1.7 million, or 3.8%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. The increase was primarily due to an increase in ceded service contract and ceded GAP premiums.
Benefits and settlement expenses ceded increased $1.8 million, or 9.6%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. The increase was primarily due to higher ceded losses in the service contract and GAP product lines.
Amortization of DAC and VOBA ceded increased $0.3 million for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, mainly as the result of changes in ceded activity in the GAP product line. Other operating expenses ceded were consistent for the three months ended March 31, 2020 as compared to the three months ended March 31, 2019.
Net investment income has no direct impact on reinsurance cost. However, by ceding business to the assuming companies, the Asset Protection segment forgoes investment income on the assets backing the reserves ceded. Conversely, the assuming companies will receive investment income on the assets backing the reserves assumed which generally will increase the assuming companies’ profitability on business ceded. The net investment income impact has not been quantified as it is not reflected in the consolidated condensed financial statements.

79
Corporate and Other
Segment Results of Operations
Segment results were as follows:
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
REVENUES  
Gross premiums and policy fees $ 3,013    $ 3,244   
Reinsurance ceded —    (116)  
Net premiums and policy fees 3,013    3,128   
Net investment income 14,249    21,590   
Other income 136    53   
Total operating revenues 17,398    24,771   
Realized gains (losses) - investments/derivatives (17,848)   4,564   
Total revenues (450)   29,335   
BENEFITS AND EXPENSES    
Benefits and settlement expenses 3,508    5,162   
Amortization of DAC/VOBA —    —   
Other operating expenses 54,765    63,815   
Total benefits and expenses 58,273    68,977   
INCOME (LOSS) BEFORE INCOME TAX (58,723)   (39,642)  
Less: realized gains (losses) - investments/derivatives (17,848)   4,564   
PRE-TAX ADJUSTED OPERATING INCOME (LOSS) $ (40,875)   $ (44,206)  
For The Three Months Ended March 31, 2020 as compared to The Three Months Ended March 31, 2019
Pre-tax adjusted operating income (loss)
Pre-tax adjusted operating loss was $40.9 million for the three months ended March 31, 2020, as compared to a pre-tax adjusted operating loss of $44.2 million for the three months ended March 31, 2019. The decreased operating loss was primarily due to a decrease in operating expenses, partially offset by a decrease in investment income due to lower invested asset balances and yields.
Operating revenues
Net investment income for the segment decreased $7.3 million or 34.0% for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019. The decrease was primarily due to a decrease in invested asset balances and yields.

Total benefits and expenses

Total benefits and expenses decreased $10.7 million, or 15.5%, for the three months ended March 31, 2020, as compared to the three months ended March 31, 2019, primarily due to a decrease in corporate overhead expenses and benefit and settlement expenses related to blocks in runoff, partially offset by an increase in interest expenses


80
CONSOLIDATED INVESTMENTS
As of March 31, 2020, our investment portfolio was approximately $81.7 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.
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 $61.5 billion, or 92.2%, of our fixed maturities as “available-for-sale” as of March 31, 2020. These securities are carried at fair value on our consolidated condensed balance sheets. 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 due to credit losses 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).
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 $2.4 billion, or 3.6%, of our fixed maturities and $91.4 million of short-term investments as of March 31, 2020. Changes in fair value on the Modco trading portfolios, including gains and losses from sales, are passed to third party reinsurers through the contractual terms of the related reinsurance arrangements. Partially offsetting these amounts are corresponding changes in the fair value of the embedded derivative associated with the underlying reinsurance arrangement.
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 4.2%, of our fixed maturities as “held-to-maturity” as of March 31, 2020. These securities are carried at amortized cost on our consolidated condensed balance sheets.
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. For more information about the fair values of our investments please refer to Note 6, Fair Value of Financial Instruments, to the financial statements.
The following table presents the reported values of our invested assets:
As of
March 31, 2020 December 31, 2019
  (Dollars In Thousands)
Publicly issued bonds (amortized cost: 2020 - $42,728,231; 2019 - $42,681,872) $ 42,785,560    52.4  % $ 44,737,950    53.1  %
Privately issued bonds (amortized cost: 2020 - $23,924,678; 2019 - $23,310,601) 23,806,480    29.1    24,030,426    28.5   
Redeemable preferred stocks (amortized cost: 2020 - $97,139; 2019 - $100,068)
89,913    0.1    99,497    0.1   
Fixed maturities 66,681,953    81.6  % 68,867,873    81.7  %
Equity securities (cost: 2020 - $502,063; 2019 - $534,463) 478,189    0.6    553,720    0.7   
Mortgage loans 9,332,867    11.4    9,379,401    11.1   
Investment real estate 10,279    —    10,321    —   
Policy loans 1,657,375    2.0    1,675,121    2.0   
Other long-term investments 2,561,893    3.1    2,479,520    2.9   
Short-term investments 1,021,337    1.3    1,320,864    1.6   
Total investments $ 81,743,893    100.0  % $ 84,286,820    100.0  %
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Included in the preceding table are $2.4 billion and $2.5 billion of fixed maturities and $91.4 million and $91.2 million of short-term investments classified as trading securities as of March 31, 2020 and December 31, 2019, respectively. All of the fixed maturities in the trading portfolio are invested assets that are held pursuant to Modco arrangements under which the economic risks and benefits of the investments are passed to third party reinsurers.
Fixed Maturity Investments
As of March 31, 2020, our fixed maturity investment holdings were approximately $66.7 billion. The approximate percentage distribution of our fixed maturity investments by quality rating is as follows:
  As of
Rating March 31, 2020 December 31, 2019
(Dollars In Thousands)
AAA $ 10,070,102    15.1  % $ 9,371,614    13.6  %
AA 7,224,578    10.8    7,587,879    11.0   
A 22,492,606    33.7    22,861,846    33.2   
BBB 22,467,270    33.7    24,484,792    35.6   
Below investment grade 1,651,687    2.5    1,737,861    2.5   
Not rated(1)
2,775,710    4.2    2,823,881    4.1   
  $ 66,681,953    100.0  % $ 68,867,873    100.0  %
(1) Our “not rated” securities are $2.8 billion or 4.2% of our fixed maturity investments, of held-to-maturity securities issued by affiliates of the Company which are considered variable interest entities (“VIEs”) and are discussed in Note 5, Investment Operations, to the consolidated condensed financial statements. We are not the primary beneficiary of these entities and thus these securities are not eliminated in consolidation. These securities are collateralized by non-recourse funding obligations issued by captive insurance companies that are wholly owned subsidiaries of the Company.
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.
The distribution of our fixed maturity investments by type is as follows: 
  As of
Type March 31, 2020 December 31, 2019
  (Dollars In Thousands)
Corporate securities $ 45,680,641    68.5  % $ 48,400,037    70.3  %
Residential mortgage-backed securities 7,128,262    10.7    6,140,862    8.9   
Commercial mortgage-backed securities 2,687,920    4.0    2,840,952    4.1   
Other asset-backed securities 1,789,349    2.7    1,924,596    2.8   
U.S. government-related securities 1,075,328    1.6    1,079,463    1.6   
Other government-related securities 606,998    0.9    625,944    0.9   
States, municipals, and political subdivisions 4,847,832    7.3    4,932,641    7.2   
Redeemable preferred stocks 89,913    0.1    99,497    0.1   
Securities issued by affiliates 2,775,710    4.2    2,823,881    4.1   
Total fixed income portfolio $ 66,681,953    100.0  % $ 68,867,873    100.0  %
82
The industry segment composition of our fixed maturity securities is presented in the following table:
As of March 31, 2020 % Fair
Value 		As of December 31, 2019 % Fair
Value
  (Dollars In Thousands)
Banking $ 6,249,344    9.3  % $ 6,403,157    9.3  %
Other finance 953,645    1.3    969,368    1.4   
Electric utility 5,198,006    7.8    5,447,830    7.9   
Energy 3,776,449    5.7    4,939,246    7.2   
Natural gas 1,063,458    1.6    1,120,052    1.6   
Insurance 4,789,589    7.2    4,969,799    7.2   
Communications 2,512,666    3.8    2,654,395    3.9   
Basic industrial 1,979,047    3.0    2,176,559    3.2   
Consumer noncyclical 6,319,597    9.5    6,492,483    9.4   
Consumer cyclical 2,473,820    3.7    2,597,772    3.8   
Finance companies 213,387    0.3    228,037    0.3   
Capital goods 3,269,014    4.9    3,425,996    5.0   
Transportation 2,064,387    3.1    2,128,364    3.1   
Other industrial 649,898    1.0    646,210    0.9   
Brokerage 1,342,722    2.0    1,347,694    2.0   
Technology 2,361,335    3.5    2,383,634    3.5   
Real estate 517,538    0.8    531,000    0.8   
Other utility 36,652    0.1    37,938    0.1   
Commercial mortgage-backed securities 2,687,920    4.0    2,840,952    4.1   
Other asset-backed securities 1,789,349    2.7    1,924,596    2.8   
Residential mortgage-backed non-agency securities 6,019,384    9.0    5,265,776    7.6   
Residential mortgage-backed agency securities 1,108,878    1.7    875,086    1.3   
U.S. government-related securities 1,075,328    1.6    1,079,463    1.6   
Other government-related securities 606,998    0.9    625,944    0.9   
State, municipals, and political divisions 4,847,832    7.3    4,932,641    7.1   
Securities issued by affiliates 2,775,710    4.2    2,823,881    4.0   
Total $ 66,681,953    100.0  % $ 68,867,873    100.0  %
The total Modco trading portfolio fixed maturities by rating is as follows:
  As of
Rating March 31, 2020 December 31, 2019
(Dollars In Thousands)
AAA $ 282,510    11.6  % $ 280,067    11.1  %
AA 297,681    12.2    309,165    12.2   
A 787,469    32.4    834,808    33.0   
BBB 952,113    39.1    979,157    38.7   
Below investment grade 113,733    4.7    124,370    5.0   
  $ 2,433,506    100.0  % $ 2,527,567    100.0  %
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 March 31, 2020, were approximately $11.6 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.
83
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 March 31, 2020 and December 31, 2019.
As of March 31, 2020
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 $ 5,947.3    $ 6,042.1    $ 2.9    $ 2.9    $ 1,631.5    $ 1,635.1    $ 617.4    $ 620.1    $ 8,199.1    $ 8,300.2   
AA 0.4    0.4    0.1    0.1    507.3    538.2    254.1    254.8    761.9    793.5   
A 1,105.6    1,058.0    8.2    7.9    473.1    464.4    762.4    828.6    2,349.3    2,358.9   
BBB 4.4    4.3    1.6    1.7    66.5    75.1    129.2    133.4    201.7    214.5   
Below 27.1    29.8    30.6    31.6    9.6    10.0    26.2    28.5    93.5    99.9   
$ 7,084.8    $ 7,134.6    $ 43.4    $ 44.2    $ 2,688.0    $ 2,722.8    $ 1,789.3    $ 1,865.4    $ 11,605.5    $ 11,767.0   
Rating %
AAA 83.9  % 84.7  % 6.7  % 6.5  % 60.7  % 60.1  % 34.5  % 33.2  % 70.6  % 70.5  %
AA —    —    0.2    0.2    18.9    19.8    14.2    13.7    6.6    6.7   
A 15.6    14.8    18.9    17.8    17.6    17.1    42.6    44.4    20.2    20.0   
BBB 0.1    0.1    3.8    3.7    2.5    2.7    7.2    7.2    1.7    1.8   
Below 0.4    0.4    70.4    71.8    0.3    0.3    1.5    1.5    0.9    1.0   
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
2016 and prior $ 2,163.3    $ 2,161.2    $ 40.5    $ 41.3    $ 2,246.3    $ 2,274.8    $ 1,102.5    $ 1,111.9    $ 5,552.6    $ 5,589.2   
2017 784.0    804.0    2.9    2.9    249.1    250.4    417.1    464.7    1,453.1    1,522.0   
2018 1,291.3    1,305.4    —    —    139.5    136.3    187.8    199.5    1,618.6    1,641.2   
2019 1,639.5    1,652.1    —    —    50.7    58.4    78.9    86.7    1,769.1    1,797.2   
2020 1,206.7    1,211.9    —    —    2.4    2.9    3.0    2.6    1,212.1    1,217.4   
Total $ 7,084.8    $ 7,134.6    $ 43.4    $ 44.2    $ 2,688.0    $ 2,722.8    $ 1,789.3    $ 1,865.4    $ 11,605.5    $ 11,767.0   
(1) Included in Residential Mortgage-Backed securities.

84
As of December 31, 2019
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 $ 5,182.1    $ 5,080.1    $ 3.1    $ 3.1    $ 1,680.7    $ 1,650.3    $ 649.3    $ 636.6    $ 7,515.2    $ 7,370.1   
AA 1.5    1.5    0.1    0.1    578.1    570.0    250.0    240.5    829.7    812.1   
A 869.5    851.8    9.9    9.9    503.5    490.7    854.1    860.5    2,237.0    2,212.9   
BBB 3.8    3.9    1.3    1.3    78.6    78.9    140.3    138.3    224.0    222.4   
Below 32.6    33.0    37.0    37.0    —    —    30.9    31.5    100.5    101.5   
$ 6,089.5    $ 5,970.3    $ 51.4    $ 51.4    $ 2,840.9    $ 2,789.9    $ 1,924.6    $ 1,907.4    $ 10,906.4    $ 10,719.0   
Rating %
AAA 85.1  % 85.0  % 6.0  % 6.0  % 59.1  % 59.2  % 33.7  % 33.4  % 68.9  % 68.8  %
AA —    —    0.2    0.2    20.4    20.4    13.0    12.6    7.6    7.6   
A 14.3    14.3    19.2    19.2    17.7    17.6    44.4    45.1    20.5    20.6   
BBB 0.1    0.1    2.6    2.6    2.8    2.8    7.3    7.2    2.1    2.1   
Below 0.5    0.6    72.0    72.0    —    —    1.6    1.7    0.9    0.9   
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
2015 and prior $ 1,788.0    $ 1,752.3    $ 48.3    $ 48.3    $ 1,885.6    $ 1,855.1    $ 1,032.0    $ 1,008.3    $ 4,753.9    $ 4,664.0   
2016 371.6    360.1    —    —    492.9    486.3    128.6    130.2    993.1    976.6   
2017 843.6    822.8    3.1    3.1    256.9    251.6    481.9    485.6    1,585.5    1,563.1   
2018 1,374.2    1,332.3    —    —    147.1    139.1    198.0    199.1    1,719.3    1,670.5   
2019 1,712.1    1,702.8    —    —    58.4    57.8    84.1    84.2    1,854.6    1,844.8   
Total $ 6,089.5    $ 5,970.3    $ 51.4    $ 51.4    $ 2,840.9    $ 2,789.9    $ 1,924.6    $ 1,907.4    $ 10,906.4    $ 10,719.0   
(1) Included in Residential Mortgage-Backed securities
The majority of our RMBS holdings as of March 31, 2020, were super senior or senior bonds in the capital structure. Our total non-agency portfolio has a weighted-average life of 4.8 years. The following table categorizes the weighted-average life for our non-agency portfolio, by category of material holdings, as of March 31, 2020:
  Weighted-Average
Non-agency portfolio Life
   
Prime 4.80
Sub-prime 3.07

Mortgage Loans
We invest a portion of our investment portfolio in commercial mortgage loans. As of March 31, 2020 our mortgage loan holdings were approximately $9.3 billion, net of allowance for credit losses. We have specialized in making loans on either credit-oriented 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.

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Our commercial mortgage loans are stated at unpaid principal balance, adjusted for any unamortized premium or discount, and net of an allowance for credit losses. 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 10 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 March 31, 2020, assuming the loans are called at their next call dates, approximately $114.3 million of principal would become due for the remainder of 2020, $647.7 million in 2021 through 2025, and $57.6 million in 2026 through 2029.

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 March 31, 2020 and December 31, 2019, approximately $694.9 million and $717.0 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 nine months ended March 31, 2020 and 2019, we recognized $16.0 million and $2.2 million, respectively, of participating mortgage loan income.

The following table includes a breakdown of our commercial mortgage loan portfolio:

Commercial Mortgage Loan Portfolio Profile
As of March 31, 2020 As of December 31, 2019
(Dollars In Thousands)
Total number of loans 1,822    1,832   
Total amortized cost $ 9,332,867    $ 9,379,401   
Total unpaid principal balance $ 9,400,480    $ 9,271,041   
Allowance for credit losses - funded mortgage loans $ (171,216)   $ (4,884)  
Average loan size $ 5,159    $ 5,061   
Weighted-average amortization 20.7 years 20.6 years
Weighted-average coupon 4.46  % 4.48  %
Weighted-average LTV 53.77  % 53.8  %
Weighted-average debt coverage ratio 1.75    1.73   
Total number of unfunded commitments 135    100   
Total unfunded commitments balance $ 781,555    $ 754,418   
Allowance for credit losses - unfunded commitments $ (19,914)   —   
We record mortgage loans net of an allowance for credit losses. This allowance is calculated and recorded at a loan level, based on analysis and input data for loans with similar risk characteristics. As of March 31, 2020 and December 31, 2019, there were allowances for mortgage loan and unfunded commitment credit losses of $191.1 million and $4.9 million, respectively.

While our mortgage loans do not have quoted market values, as of March 31, 2020 we estimated the fair value of our mortgage loans to be $9.4 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 0.44% more 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.

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As of March 31, 2020, we had no invested assets that consisted of nonperforming mortgage loans, restructured mortgage loans, or mortgage loans that were foreclosed and were converted to real estate properties. During the three months ended March 31, 2020 we did not recognized any troubled debt restructurings as a result of granting concession to borrowers which included loan terms unavailable from other lenders. During the three months ended March 31, 2020, we did not recognize any mortgage loans that were foreclosed and were converted to real estate properties. We did not identify any loans whose principal was permanently impaired during the three months ended March 31, 2020. It is our policy to write off loan amounts that are deemed uncollectible. No amounts were written off during the three months ended March 31, 2020.

It is our policy to limit accrued interest income on loans to 90 days of interest. For loans in nonaccrual status, interest income is recognized on a cash basis. For the period ended March 31, 2020, an immaterial amount of accrued interest was excluded from the amortized cost basis pursuant to our nonaccrual policy.

We use the same methodology and assumptions to estimate the allowance for credit losses for unfunded loan commitments as for funded mortgage loan receivables. During the three months ended March 31, 2020, the allowance for credit losses for unfunded loan commitments was $19.9 million, as compared to $9.3 million for the three months ended March 31, 2019.  

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 March 31, 2020, 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 related to a credit loss, 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 whether a credit loss has occurred. On a quarterly basis, we perform an analysis on every security with an unrealized loss to determine whether a credit loss 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 $68.1 million, prior to tax and the related impact of certain insurance assets and liabilities offsets, as of March 31, 2020, and an overall net unrealized gain of $2.8 billion as of December 31, 2019.
For fixed maturity securities held that are in an unrealized loss position as of March 31, 2020, 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
  (Dollars In Thousands)
<= 90 days $ 24,685,703    92.5  % $ 26,313,785    91.2  % $ (1,628,082)   73.2  %
>90 days but <= 180 days 158,682    0.6    189,540    0.7    (30,858)   1.4   
>180 days but <= 270 days 213,227    0.8    243,600    0.8    (30,373)   1.4   
>270 days but <= 1 year 37,616    0.1    66,235    0.2    (28,619)   1.3   
>1 year but <= 2 years 364,682    1.4    447,485    1.5    (82,803)   3.7   
>2 years but <= 3 years 232,397    0.9    315,768    1.1    (83,371)   3.8   
>3 years but <= 4 years 302,434    1.1    330,787    1.1    (28,353)   1.3   
>4 years but <= 5 years 95,494    0.4    201,776    0.7    (106,282)   4.8   
>5 years 589,449    2.2    791,940    2.7    (202,491)   9.1   
Total $ 26,679,684    100.0  % $ 28,900,916    100.0  % $ (2,221,232)   100.0  %
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The range of maturity dates for securities in an unrealized loss position as of March 31, 2020, varies, with 23.8% maturing in less than 5 years, 20.2% maturing between 5 and 10 years, and 56.0% maturing after 10 years. The following table shows the credit rating of securities in an unrealized loss position as of March 31, 2020:
S&P or Equivalent Fair % Fair Amortized % Amortized Unrealized % Unrealized
Designation Value Value Cost Cost Loss Loss
  (Dollars In Thousands)
AAA/AA/A $ 13,908,877    52.1  % $ 14,476,068    50.1  % $ (567,191)   25.5  %
BBB 11,486,066    43.1    12,652,040    43.8    (1,165,974)   52.5   
Investment grade 25,394,943    95.2  % 27,128,108    93.9  % (1,733,165)   78.0  %
BB 1,100,614    4.1    1,451,868    5.0    (351,254)   15.8   
B 126,391    0.5    160,246    0.6    (33,855)   1.5   
CCC or lower 57,736    0.2    160,694    0.5    (102,958)   4.7   
Below investment grade 1,284,741    4.8  % 1,772,808    6.1  % (488,067)   22.0  %
Total $ 26,679,684    100.0  % $ 28,900,916    100.0  % $ (2,221,232)   100.0  %

As of March 31, 2020, the Barclays Investment Grade Index was priced at 258.0 bps versus a 10 year average of 134.0 bps. Similarly, the Barclays High Yield Index was priced at 899.0 bps versus a 10 year average of 512.0 bps. As of March 31, 2020, the five, ten, and thirty-year U.S. Treasury obligations were trading at levels of 0.4%, 0.7%, and 1.3%, as compared to 10 year averages of 1.6%, 2.3%, and 3.1%, respectively.

As of March 31, 2020, 78.0% 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 concluded than an allowance for credit losses was not necessary. 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 March 31, 2020, we held a total of 2,450 positions that were in an unrealized loss position. Included in that amount were 199 positions of below investment grade securities with a fair value of $1.3 billion that were in an unrealized loss position. Total unrealized losses related to below investment grade securities were $488.1 million, $257.0 million of which had been in an unrealized loss position for more than twelve months. Below investment grade securities in an unrealized loss position were 1.6% of invested assets.
As of March 31, 2020, securities in an unrealized loss position that were rated as below investment grade represented 4.8% of the total fair value and 22.0% 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 fair value to be temporary.
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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 March 31, 2020:
Fair
Value 		% Fair
Value 		Amortized
Cost 		% Amortized
Cost 		Unrealized
Loss 		% Unrealized
Loss
  (Dollars In Thousands)
<= 90 days $ 744,479    58.0  % $ 918,410    51.8  % $ (173,931)   35.7  %
>90 days but <= 180 days 11,347    0.9    22,800    1.3    (11,453)   2.3   
>180 days but <= 270 days 27,624    2.2    45,486    2.6    (17,862)   3.7   
>270 days but <= 1 year 32,419    2.5    60,230    3.4    (27,811)   5.7   
>1 year but <= 2 years 23,487    1.8    34,259    1.9    (10,772)   2.2   
>2 years but <= 3 years 154,108    12.0    191,446    10.8    (37,338)   7.7   
>3 years but <= 4 years 44,044    3.4    54,426    3.1    (10,382)   2.1   
>4 years but <= 5 years 39,184    3.0    115,942    6.5    (76,758)   15.7   
>5 years 208,049    16.2    329,809    18.6    (121,760)   24.9   
Total $ 1,284,741    100.0  % $ 1,772,808    100.0  % $ (488,067)   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 March 31, 2020, is presented in the following table:
Fair
Value 		% Fair
Value 		Amortized
Cost 		% Amortized
Cost 		Unrealized
Loss 		% Unrealized
Loss
  (Dollars In Thousands)
Banking $ 2,386,123    8.9  % $ 2,506,015    8.7  % $ (119,892)   5.4  %
Other finance 547,206    2.1    579,679    2.0    (32,473)   1.5   
Electric utility 2,507,052    9.4    2,666,330    9.2    (159,278)   7.2   
Energy 3,035,830    11.4    3,881,888    13.4    (846,058)   38.1   
Natural gas 629,160    2.4    669,514    2.3    (40,354)   1.8   
Insurance 2,071,329    7.8    2,205,326    7.6    (133,997)   6.0   
Communications 861,083    3.2    938,064    3.2    (76,981)   3.5   
Basic industrial 949,919    3.6    1,004,686    3.5    (54,767)   2.5   
Consumer noncyclical 1,736,744    6.5    1,859,623    6.4    (122,879)   5.5   
Consumer cyclical 1,019,034    3.8    1,129,320    3.9    (110,286)   5.0   
Finance companies 170,253    0.6    191,173    0.7    (20,920)   0.9   
Capital goods 1,064,115    4.0    1,119,518    3.9    (55,403)   2.5   
Transportation 915,891    3.4    973,898    3.4    (58,007)   2.6   
Other industrial 178,546    0.7    181,774    0.6    (3,228)   0.1   
Brokerage 604,152    2.3    634,333    2.2    (30,181)   1.4   
Technology 470,490    1.8    509,856    1.8    (39,366)   1.8   
Real estate 285,785    1.1    294,413    1.0    (8,628)   0.4   
Other utility 11,990    —    12,266    0.1    (276)   —   
Commercial mortgage-backed securities 1,560,473    5.8    1,627,366    5.6    (66,893)   2.9   
Other asset-backed securities 1,045,543    3.9    1,148,707    4.0    (103,164)   4.6   
Residential mortgage-backed non-agency securities 4,130,102    15.5    4,242,714    14.7    (112,612)   5.1   
Residential mortgage-backed agency securities 7,713    —    7,761    —    (48)   —   
U.S. government-related securities 1,707    —    1,745    —    (38)   —   
Other government-related securities 132,847    0.5    148,269    0.5    (15,422)   0.7   
States, municipals, and political divisions 356,597    1.3    366,678    1.3    (10,081)   0.5   
Total $ 26,679,684    100.0  % $ 28,900,916    100.0  % $ (2,221,232)   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, 2019, is presented in the following table:
  Fair
Value 		% Fair
Value 		Amortized
Cost 		% Amortized
Cost 		Unrealized
Loss 		% Unrealized
Loss
  (Dollars In Thousands)
Banking $ 343,955    3.8  % $ 349,861    3.7  % $ (5,906)   1.8  %
Other finance 134,604    1.5    142,979    1.5    (8,375)   2.6   
Electric utility 1,600,110    17.4    1,661,652    17.5    (61,542)   18.9   
Energy 747,114    8.1    824,578    8.7    (77,464)   23.8   
Natural gas 277,024    3.0    283,821    3.0    (6,797)   2.1   
Insurance 435,074    4.7    453,430    4.8    (18,356)   5.6   
Communications 265,373    2.9    281,086    3.0    (15,713)   4.8   
Basic industrial 292,054    3.2    299,647    3.2    (7,593)   2.3   
Consumer noncyclical 768,446    8.4    814,268    8.6    (45,822)   14.1   
Consumer cyclical 313,898    3.4    330,322    3.5    (16,424)   5.0   
Finance companies 23,371    0.3    24,132    0.3    (761)   0.2   
Capital goods 226,853    2.5    233,706    2.5    (6,853)   2.1   
Transportation 317,788    3.5    326,209    3.4    (8,421)   2.6   
Other industrial 112,940    1.2    115,200    1.2    (2,260)   0.7   
Brokerage 98,572    1.1    101,330    1.1    (2,758)   0.8   
Technology 116,155    1.3    123,424    1.3    (7,269)   2.2   
Real estate —    —    —    —    —    —   
Other utility 6,495    —    6,764    —    (269)   0.2   
Commercial mortgage-backed securities 487,511    5.3    490,803    5.1    (3,292)   1.0   
Other asset-backed securities 696,605    7.6    711,531    7.5    (14,926)   4.6   
Residential mortgage-backed non-agency securities 938,299    10.2    943,696    9.9    (5,397)   1.7   
Residential mortgage-backed agency securities 133,877    1.5    134,802    1.4    (925)   0.3   
U.S. government-related securities 736,968    8.0    742,284    7.8    (5,316)   1.6   
Other government-related securities 29,192    0.3    31,183    0.3    (1,991)   0.6   
States, municipals, and political divisions 69,377    0.8    70,607    0.7    (1,230)   0.4   
Total $ 9,171,655    100.0  % $ 9,497,315    100.0  % $ (325,660)   100.0  %

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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 March 31, 2020: 
    Percent of
Rating Fair Value Fair Value
  (Dollars In Thousands)  
AAA $ 9,787,591    15.9  %
AA 6,926,896    11.3   
A 21,705,136    35.3   
BBB 21,515,157    35.0   
Investment grade 59,934,780    97.5   
BB 1,298,770    2.1   
B 178,710    0.3   
CCC or lower 60,477    0.1   
Below investment grade 1,537,957    2.5   
Total $ 61,472,737    100.0  %
Not included in the table above are $2.3 billion of investment grade and $113.7 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 March 31, 2020. The following table summarizes our ten largest fixed maturity exposures to an individual creditor group as of March 31, 2020: 
  Fair Value of  
  Funded Unfunded Total
Creditor Securities Exposures Fair Value
  (Dollars In Millions)
Berkshire Hathaway Inc $ 280.2    $ —    $ 280.2   
JP Morgan Chase & Co 264.5    11.2    275.7   
Comcast Corp 271.5    —    271.5   
Apple Inc 271.2    —    271.2   
Citigroup Inc 228.2    42.5    270.7   
Microsoft Corp 270.6    —    270.6   
UnitedHealth Group Inc 270.4    —    270.4   
Duke Energy Corp 261.4    —    261.4   
Verizon Communications Inc 251.4    —    251.4   
Morgan Stanley 249.3    —    249.3   
Total $ 2,618.7    $ 53.7    $ 2,672.4   
Determining whether a decline in the current fair value of invested assets is a credit loss 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.
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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, a credit loss 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.

For securities which the Company has the intent and ability to hold the security until the recovery of the amortized cost basis, analysis of expected cash flows is used to measure the amount of the credit loss, if any, and the Company uses the effective interest rate implicit in the security at the date of acquisition to discount expected cash flows. For floating rate securities, the Company’s policy is to lock in the interest rate at the first instance of an impairment. Estimates of expected cash flows are not probability-weighted, but will reflect the Company’s best estimate based on past events, current conditions, and reasonable and supportable forecasts of future events. To the extent the amortized cost basis of the security exceeds the present value of future cash flows expected to be collected, this difference represents a credit loss. Credit losses are recorded in current earnings with a corresponding adjustment to the allowance for credit losses, except that the credit loss recognized cannot exceed the difference between the book value and fair value of the security as of the date of the analysis. In future periods, recoveries in the present value of expected cash flows are recorded in current earnings as a reversal of the previously recognized allowance for credit losses. Based on our analysis, for the three months ended March 31, 2020, we recognized approximately $51.8 million of credit losses in earnings.
There are certain risks and uncertainties associated with determining whether declines in fair values are the result of credit losses. 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.
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, which could have a detrimental impact on regional or global economic conditions and on sovereign and non-sovereign obligations. The chart shown below includes our non-sovereign fair value exposures in these countries as of March 31, 2020. As of March 31, 2020, we had no material unfunded exposure and had no material direct sovereign exposure. 
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      Total Gross
  Non-sovereign Debt Funded
Financial Instrument and Country Financial Non-financial Exposure
  (Dollars In Millions)
Securities:      
United Kingdom $ 1,011.8    $ 1,254.7    $ 2,266.5   
France 446.9    487.9    934.8   
Netherlands 327.4    310.3    637.7   
Germany 116.5    628.3    744.8   
Switzerland 336.3    203.1    539.4   
Spain 107.0    362.1    469.1   
Belgium —    166.6    166.6   
Norway 4.0    141.0    145.0   
Finland 131.9    —    131.9   
Ireland 50.7    120.7    171.4   
Italy 2.9    124.3    127.2   
Luxembourg —    27.9    27.9   
Sweden 2.0    47.2    49.2   
Denmark 38.0    —    38.0   
Portugal —    8.0    8.0   
Total securities 2,575.4    3,882.1    6,457.5   
Derivatives:      
Germany 86.9    —    86.9   
United Kingdom 77.0    —    77.0   
Switzerland 48.4    —    48.4   
France 2.3    —    2.3   
Total derivatives 214.6    —    214.6   
Total securities $ 2,790.0    $ 3,882.1    $ 6,672.1   

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Realized Gains and Losses
The following table sets forth realized gains (losses) - investments/derivatives for the periods shown:
For The
Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Fixed maturity gains - sales $ 39,968    $ 7,870   
Fixed maturity losses - sales (798)   (2,733)  
Equity gains and losses (43,013)   30,635   
Net credit losses recognized in operations (51,793)   —   
Net impairment losses recognized in operations —    (3,142)  
Mortgage loans (95,396)   (1,068)  
Modco trading portfolio (124,200)   94,902   
Other (1,019)   (78)  
Total realized gains (losses) - investments $ (276,251)   $ 126,386   
Derivatives related to VA contracts:    
Interest rate futures $ 858    $ (6,022)  
Equity futures 30,652    29,738   
Currency futures 12,162    2,244   
Equity options 280,479    (71,695)  
Interest rate swaps 409,515    74,861   
Total return swaps 139,767    (40,027)  
Embedded derivative - GLWB (410,580)   (33,387)  
Funds withheld derivative (261,414)   61,777   
Total derivatives related to VA contracts 201,439    17,489   
Derivatives related to FIA contracts:    
Embedded derivative 38,887    (38,814)  
Equity futures (8,152)   (429)  
Equity options (60,385)   —   
Other derivatives 200    42,050   
Total derivatives related to FIA contracts (29,450)   2,807   
Derivatives related to IUL contracts:    
Embedded derivative 38    (13,370)  
Equity futures (2,439)   171   
Equity options (14,449)   6,180   
Total derivatives related to IUL contracts (16,850)   (7,019)  
Embedded derivative - Modco reinsurance treaties 75,729    (84,998)  
Derivatives with PLC(1)
(1,948)   (1,653)  
Other derivatives 9,220    66   
Total realized gains (losses) - derivatives $ 238,140    $ (73,308)  
(1) These derivatives include the interest support agreement, two yearly renewable term (“YRT”) premium support agreements, and three portfolio maintenance agreements between certain of our subsidiaries and PLC.
Realized gains (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 gains (losses) - investments, excluding changes in the allowance for credit losses and Modco trading portfolio activity during the three months ended March 31, 2020, primarily reflects the normal operation of our asset/liability program within the context of the changing interest rate and spread environment.
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Realized losses are comprised of credit losses and actual sales of investments. These credit losses 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 credit losses impairments are presented in the chart below: 
For The
Three Months Ended
March 31,
2020
  (Dollars In Thousands)
Other MBS $ (658)  
Corporate securities (51,135)  
Total $ (51,793)  
As previously discussed, management considers several factors when determining whether a credit loss has occurred. 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 three months ended March 31, 2020, we sold securities in an unrealized loss position that was immaterial. 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:
  Proceeds % Proceeds Realized Loss % Realized Loss
  (Dollars In Thousands)
<= 90 days $ 15    100.0  % $ (798)   100.0  %
>90 days but <= 180 days —    —    —    —   
>180 days but <= 270 days —    —    —    —   
>270 days but <= 1 year —    —    —    —   
>1 year —    —    —    —   
Total $ 15    100.0  % $ (798)   100.0  %
For the three months ended March 31, 2020, we sold securities in an unrealized loss position with a fair value (proceeds) that was immaterial. The losses realized on the sale of these securities were $0.8 million. We made the decision to exit these holdings in conjunction with our overall asset/liability management process.
For the three months ended March 31, 2020, we sold securities in an unrealized gain position with a fair value of $504.3 million. The gains realized on the sale of these securities were $40.0 million.
For the three months ended March 31, 2020, net losses of $124.2 million related to changes in fair value on our Modco trading portfolios, were included in realized gains (losses) - investments/derivatives. Of this amount, approximately $0.1 million of gains 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, included those associated with the trading portfolios had realized pre-tax gains of $75.7 million during the three months ended March 31, 2020. The gains on the embedded derivative were due to lower treasury yields and credit spreads widening.
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 GLWB rider associated with the variable annuity, fixed indexed annuity products as well as indexed universal life products. During the three months ended March 31, 2020, we experienced net realized gains of $201.4 million on derivatives related to VA contracts. These net gains on derivatives related to VA contracts were affected by capital market impacts, changes in our non-performance risk, unlocking of assumptions, and variations in actual sub-account fund performance from the indices included in our hedging program during the three months ended March 31, 2020.
The Funds Withheld derivative associated with Shades Creek had pre-tax realized losses of $261.4 million for the three months ended March 31, 2020.
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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 a loss of $3.4 million related to the interest support agreement for the three months ended March 31, 2020. We recognized gains of $2.8 million related to the YRT premium support agreements for the three months ended March 31, 2020.
We entered into two separate portfolio maintenance agreements in October 2012 and one portfolio maintenance agreement in January 2016. We recognized losses of $1.3 million for the three months ended March 31, 2020.
We also use various swaps and other types of derivatives to mitigate risk related to other exposures. For the three months ended March 31, 2020, these contracts generated gains of $9.2 million.
LIQUIDITY AND CAPITAL RESOURCES
The Holding Company
Overview
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.
Debt and other 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 below.
On May 3, 2018, we amended the Credit Facility (as amended the “Credit Facility”). We have the ability to borrow under the Credit Facility 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 $1.5 billion. We are not aware of any non-compliance with the financial debt covenants of the Credit Facility as of March 31, 2020. PLC had a $200 million outstanding balance as of March 31, 2020 and no outstanding balance as of December 31, 2019.
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.
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.
We 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 March 31, 2020 to fund mortgage loans in the amount of $781.6 million.
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Our cash flows 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 March 31, 2020, we held cash and short-term investments of approximately $1.4 billion.
The following chart includes the cash flows provided by or used in operating, investing, and financing activities for the following periods:
For The Three Months Ended
March 31,
2020 2019
  (Dollars In Thousands)
Net cash provided by (used in) operating activities $ 186,143    $ (65,549)  
Net cash (used in) provided by investing activities (471,600)   42,156   
Net cash provided by financing activities 495,152    89,547   
Total $ 209,695    $ 66,154   
For The Three Months Ended March 31, 2020 as compared to the Three Months Ended March 31, 2019
Net cash used in operating activities - Cash flows from operating activities are affected by the timing of premiums received, investment income, and benefits and expenses paid. Principal sources of cash inflows from operating activities include sales of our products and services as well as income from investments. Due to the nature of our business and the fact that many of the products we sell produce financing and investing cash flows it is important to consider cash flows generated by investing and financing activities in conjunction with those generated by operating activities.
Net cash used in investing activities - Changes in cash from investing activities primarily related to our investment portfolio.
Net cash provided by financing activities - Changes in cash from financing activities included $267.9 million of outflows from secured financing liabilities for the three months ended March 31, 2020, as compared to the $311.3 million of outflows for the three months ended March 31, 2019 and $0.8 billion of inflows of investment product and universal life net activity as compared to $0.4 billion in the prior year.
Through our subsidiaries, we are members of the FHLB of Cincinnati and the 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. 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 March 31, 2020, we had $1.2 billion of funding agreement-related advances and accrued interest outstanding under the FHLB program.
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 fair 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 provide for net settlement in the event of default or on termination of the agreements. As of March 31, 2020, the Company did not have any outstanding repurchase agreements. During the three months ended March 31, 2020, the maximum balance outstanding at any one point in time related to these programs was $440.0 million. The average daily balance was $65.7 million (at an average borrowing rate of 163 basis points) during the three months ended March 31, 2020. As of December 31, 2019, the fair value of securities pledged under the repurchase program was $282.2 million and the repurchase obligation of $270.0 million was included in our consolidated condensed balance sheets (at an average borrowing rate of 163 basis points). During the year ended December 31, 2019, the maximum balance outstanding at any one point in time related to these programs was $900.0 million. The average daily balance was $212.2 million (at an average borrowing rate of 214 basis points) during the year ended December 31, 2019.

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We participate in securities lending, primarily as an investment yield enhancement, whereby securities that are held as investments are loaned out to third parties for short periods of time. We require collateral at least equal to 102% of the fair value of the loaned securities to be separately maintained. The loaned securities’ fair value is monitored on a daily basis and collateral is adjusted accordingly. We maintain ownership of the securities at all times and are entitled to receive from the borrower any payments for interest received on such securities during the loan term. Securities lending transactions are accounted for as secured borrowings. As of March 31, 2020, securities with a fair value of $66.1 million were loaned under this program. As collateral for the loaned securities, we receive cash, which is primarily reinvested in short-term agreements, which are collateralized by U.S. Government or U.S. Government Agency securities, and government money market funds. These investments are recorded in short-term investments with a corresponding liability recorded in secured financing liabilities to account for its obligation to return the collateral. As of March 31, 2020, the fair value of the collateral related to this program was $67.6 million and we have an obligation to return $67.6 million of collateral to the securities borrowers.

Statutory Capital
A life insurance company’s statutory capital is computed according to rules prescribed by the National Association of Insurance Commissioners (“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 without prior approval of the insurance commissioner of the state of domicile. 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 to us from our insurance subsidiaries in 2020 is approximately $138.4 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 market value adjusted (“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.
99
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 the three months ended March 31, 2020, we ceded premiums to third party reinsurers amounting to $53.3 million. In addition, we had receivables from reinsurers amounting to $4.4 billion as of March 31, 2020. We review reinsurance receivable amounts for collectability and establish bad debt reserves if deemed appropriate.
Scottish Re (U.S.), Inc. ("SRUS") was placed in rehabilitation on March 6, 2019 by the State of Delaware. Under the related order, the Insurance Commissioner of the State of Delaware has been appointed the receiver of SRUS and provided with authority to conduct and continue the business of SRUS in the interest of its cedents, creditors, and stockholder. The order was accompanied by an injunction requiring the continued payment of reinsurance premiums to SRUS and temporarily prohibiting cedents, including the Company, from offsetting premiums payable against receivables from SRUS. On June 20, 2019, the Delaware Court of Chancery entered an order approving a Revised Offset Plan, which allows cedents, including the Company, to offset premiums under certain circumstances.
The Company continues to monitor SRUS and the actions of the receiver through discussions with legal counsel and review of publicly available information. An allowance for credit losses related to SRUS is included in the overall reinsurance allowance for credit losses. See Note 2, Summary of Significant Accounting Policies. As of March 31, 2020, management does not believe that the ultimate outcome of the rehabilitation process will have a material impact on the Company’s financial position or results of operations.
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.
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 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 NAIC has adopted Actuarial Guideline XLVIII (“AG48”) and the substantially similar “Term and Universal Life Insurance Reserve Financing Model Regulation” (the “Reserve Model”) which establish national standards for new reserve financing arrangements for term life insurance and universal life insurance with secondary guarantees. AG48 and the Reserve Model govern collateral requirements for captive reinsurance arrangements. In order to obtain reserve credit, AG48 and the Reserve Model require a minimum level of funds, consisting of primary and other securities, to be held by or on behalf of ceding insurers as security under each captive life reinsurance treaty. As a result of AG48 and the Reserve Model, the implementation of new captive structures in the future may be less capital efficient, lead to lower product returns and/or increased product pricing or result in reduced sales of certain products. In some circumstances, AG48 and the Reserve 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 GLWB and guaranteed minimum death benefits (“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, we reinsure these risks to Shades Creek. The purpose of Shades Creek is to reduce the volatility in RBC due to non-economic variables included within the RBC calculation.
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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 March 31, 2020, 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.
Ratings
Various Nationally Recognized Statistical Rating Organizations (“rating organizations”) review the financial performance and condition of insurers, including us and 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- A1
West Coast Life Insurance Company   A+ A+ AA- A1
Protective Life and Annuity Insurance Company   A+ A+ AA- —
Protective Property & Casualty Insurance Company   A — — —
MONY Life Insurance Company   A+ A+ A+ A1
 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 rating organization with respect to the financial strength ratings of us and 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.
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 March 31, 2020, we had policy liabilities and accruals of approximately $54.0 billion. Our interest-sensitive life insurance policies have a weighted average minimum credited interest rate of approximately 3.46%.
Contractual Obligations
There have been no material additions or changes outside of the ordinary course of business to our contractual obligations as compared to the amounts disclosed within our 2019 Annual Report on Form 10-K filed on March 25, 2020. For additional details related to our commitments, see Note 11, Commitments and Contingencies in our unaudited condensed consolidated financial statements.
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 11, Commitments and Contingencies, of the consolidated condensed financial statements for more information.
The Company uses the same methodology and assumptions to estimate the allowance for credit losses for unfunded loan commitments as for funded mortgage loan receivables. As of March 31, 2020, the allowance for credit losses for unfunded loan commitments was $19.9 million. As of January 1, 2020, the Company established an allowance for credit losses of $10.6 million upon adoption of ASU No. 2016-13. During the three months ended March 31, 2020, the Company established an additional allowance for credit losses of $9.3 million. Refer to Note 9, Mortgage Loans, of the consolidated condensed financial statements for more information.
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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, 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. The primary focus of our asset/liability program is the management of interest rate risk within the insurance operations. 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 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 incorporates the use of derivative financial instruments to reduce exposure to certain risks, including but not limited to, interest rate risk, currency exchange risk, volatility risk, and equity market risk. These strategies are developed through our analysis of data from financial simulation models and other internal and industry sources, and are then incorporated into our risk management program. See Note 7, Derivative Financial Instruments, to the consolidated financial statements included in this report for additional information on our financial instruments.
Derivative instruments expose us to credit and market risk and could result in material changes from period to period. We attempt to minimize our credit risk by entering into transactions with highly rated counterparties. We manage the market risk 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 risk management strategies. 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 swaptions.
Derivative instruments that are used as part of the Company’s foreign currency exchange risk management strategy include foreign currency swaps, foreign currency futures, foreign equity futures, and foreign equity options.
We may use the following types of derivative contracts to mitigate our exposure to certain guaranteed benefits related to VA contracts, fixed indexed annuities, and indexed universal life:
•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
 
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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 GLWB 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 March 31, 2020, we had outstanding mortgage loan commitments of $781.6 million at an average rate of 4.87%.
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 tables below present 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 March 31, 2020 and December 31, 2019:
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Credited Rate Summary
As of March 31, 2020
    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% $ —    $ 79    $ 1,790    $ 1,869   
>2% - 3% 4,046    1,453    1,483    6,982   
>3% - 4% 9,533    552    43    10,128   
>4% - 5% 2,328    498    52    2,878   
>5% - 6% 324    —    —    324   
Subtotal 16,231    2,582    3,368    22,181   
Fixed Annuities        
1%    $ 225    $ 428    $ 1,968    $ 2,621   
>1% - 2% 512    228    2,181    2,921   
>2% - 3% 1,501    74    2    1,577   
>3% - 4% 279    2    —    281   
>4% - 5% 251    —    —    251   
>5% - 6% 1    —    —    1   
Subtotal 2,769    732    4,151    7,652   
Total $ 19,000    $ 3,314    $ 7,519    $ 29,833   
Percentage of Total 64  % 11  % 25  % 100  %
Credited Rate Summary
As of December 31, 2019
    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% $ —    $ 78    $ 1,735    $ 1,813   
>2% - 3% 4,119    1,401    1,608    7,128   
>3% - 4% 9,157    567    507    10,231   
>4% - 5% 2,439    443    1    2,883   
>5% - 6% 326    —    —    326   
Subtotal 16,041    2,489    3,851    22,381   
Fixed Annuities        
1%    $ 225    $ 493    $ 2,020    $ 2,738   
>1% - 2% 443    227    1,897    2,567   
>2% - 3% 1,518    83    2    1,603   
>3% - 4% 282    3    —    285   
>4% - 5% 251    —    —    251   
>5% - 6% 2    —    —    2   
Subtotal 2,721    806    3,919    7,446   
Total $ 18,762    $ 3,295    $ 7,770    $ 29,827   
Percentage of Total 63  % 11  % 26  % 100  %
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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 fair 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, “Market Risk Exposures”.
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 Rule 13a -15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), except as otherwise noted below. 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, Significant Transactions, we acquired substantially all of the individual life insurance and annuity business of Great-West Life & Annuity Insurance Company and certain of its affiliates (“GWL&A”) effective June 1, 2019. Pursuant to the SEC’s guidance that an assessment of recently acquired business may be omitted from the scope of an assessment of internal controls over financial reporting for one year from the date of acquisition, our evaluation of the effectiveness of the Company’s disclosure controls and procedures since the acquisition date has excluded those internal controls over financial reporting at Great-West Life & Annuity Insurance Company (“GWL&A”) that relate to systems and processes for assets and liabilities of the acquired business that were not integrated into our existing systems. The acquired GWL&A business not integrated into our existing systems and controls represents approximately $9.8 billion of consolidated assets, approximately $136.5 million of consolidated revenue, approximately $202.2 million of consolidated benefits and expenses, and approximately $21.2 billion of liabilities on the related consolidated financial statements as of and for the three months ended March 31, 2020.

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Due to the COVID-19 pandemic, a significant portion of our employees are now working from home, while also under shelter-in-place orders or other restrictions. Established business continuity plans were activated in order to mitigate the impact to our operating procedures, data, and internal controls. The design of our processes and controls allow for remote execution with accessibility to secure data.

(b) Changes in internal control over financial reporting
Other than as described in the preceding paragraph, there were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2020, 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 1. Legal Proceedings
To the knowledge and in the opinion of management, there are no other material pending legal proceedings to which the Company or any of its subsidiaries is a party or of which any of our properties is the subject, other than as set forth in Note 11, Commitments and Contingencies, of the notes to the consolidated condensed financial statements, included herein.

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 risk 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, 2019, which could materially affect the Company’s business, financial condition, or future results of operations which are discussed more fully below.

The novel coronavirus (COVID-19) global pandemic has adversely impacted our business, and the ultimate effect on our business, results of operations, and financial condition will depend on future developments that are highly uncertain, including the scope and duration of the pandemic and actions taken by governmental authorities in response to the pandemic.

Beginning in 2020, the global pandemic related to the novel coronavirus, COVID-19, began to impact the worldwide economy and our results of operations. Because of the size and breadth of this pandemic, all of the direct and indirect consequences of COVID-19 are not yet known and may not emerge for some time. The COVID-19 pandemic has created a higher risk of mortality, negatively impacted the U.S. and global economy, lowered equity market valuations, created significant volatility and disruption in capital markets, significantly increased unemployment levels, and fueled concerns that it will lead to a severe global recession. In addition, the pandemic resulted in temporary closures of many businesses and schools and the imposition of social distancing and sheltering in place requirements in many states and local communities. As a result, our ability to sell products through our regular channels and the demand for our products and services could be significantly impacted. The extent to which the COVID-19 pandemic impacts our business, results of operations, or financial condition will depend on future developments which are highly uncertain and cannot be predicted, including the scope and duration of the pandemic and actions taken by governmental authorities and other third parties in response to the pandemic.

Risks presented by the ongoing effects of the COVID-19 pandemic include the following:

•Premiums and Revenues. We expect that the impact of COVID-19 on general economic activity may negatively impact our premiums, policy fees, and other revenues. The degree of the impact will depend on the extent and duration of the economic contraction.

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•Claims and Claims Expense. As a result of the pandemic and ensuing conditions, we have experienced, and we may continue to experience, an elevated incidence and level of life insurance claims. We expect to incur higher claims expense in our life insurance and deferred annuity businesses, partially offset by lower life contingent payments in our payout annuity and structured settlement businesses, as a result of COVID-19 due to increases in mortality. In addition, the anticipated and unknown risks related to COVID-19 may cause additional uncertainty in the process of estimating claims expense reserves. For example, the behavior of claimants and policyholders may change in unexpected ways, and actions taken by governmental bodies, both legislative and regulatory, in reaction to COVID-19 and their related impacts are hard to predict. We are also subject to credit risk in our insurance operations (both with respect to policyholder receivables and reinsurance credit risk) which may be exacerbated in times of economic distress. A prolonged continuation of the pandemic or a significant and protracted increase in claims could have a material and adverse effect on our business, results of operations, or financial condition.

•Investments. The disruption in the financial markets related to COVID-19 may adversely affect our investment portfolio, specifically resulting in lower investment income and returns, and lead to further impairments, credit spread widening, credit quality deterioration, ratings downgrades, equity market declines, and the need to establish additional reserves for potential losses related to our commercial mortgage portfolio. Additionally, higher volatility in the equity and credit markets increases hedging costs. Interest rates have been, and may be, reduced, which may lower the Company’s future returns on certain classes of investments. There is uncertainty regarding future treasury rates and risk spreads, which may lead to lower investment returns and difficulty forecasting financial results. Disruption in financial markets may also influence overall market liquidity and availability of assets for sale and purchase.

•Legislative and/or Regulatory Action. Federal, state, and local government actions to address and contain the impact of COVID-19 may adversely affect us. Many state insurance departments are requiring insurers to extend the time allowed for premium payments to avoid the canceling of policies. If these extensions continue, premium waivers may significantly exceed our expectations, and our earnings may be negatively impacted. If policyholder lapse and surrender rates or premium waivers significantly exceed our expectations, we may need to change our assumptions, models, or reserves.

•Operational Disruptions and Heightened Cybersecurity Risks. Our operations could be disrupted if key members of our senior management or a significant percentage of our workforce or the workforce of our independent distributors, agents, brokers, or service providers are unable to continue to work because of illness, government directives, or otherwise. Currently, approximately 95% of our employees are working remotely with only a limited number of employees working at certain facilities for business continuity purposes. An extended period of companywide remote work arrangements could introduce additional operational risk, including but not limited to cybersecurity risks, and impair our ability to effectively manage our business.

In addition, any interruption of our or third-party system capabilities could result in a deterioration of our ability to write and process new business, provide customer service, pay claims in a timely manner, or perform other necessary administrative and business functions. Having shifted to remote working arrangements, we are more dependent on remote internet and telecommunications services, access and capabilities and potentially face a heightened risk of cybersecurity attacks and data security incidents.

•Financial Reporting and Controls. Currently, the Company does not expect COVID-19 to affect its ability to timely and accurately account for the assets and liabilities on its balance sheet; however, this could change in future periods. Market dislocations, decreases in observable market activity, or unavailability of information arising, in each case, from the spread of COVID-19, may restrict our access to key inputs used to derive certain estimates and assumptions made in connection with financial reporting or otherwise. Restricted access to such inputs may make our financial statement balances and estimates and assumptions used to run our business subject to greater variability and subjectivity. It is possible that the lingering effects of COVID-19 could cause the occurrence of what management would deem to be a triggering event that could, under certain circumstances, cause us to perform an intangible asset impairment test and result in an impairment charge being recorded for that period. Although the Company has not experienced a negative effect on its internal controls over financial reporting due to COVID-19, it may experience a negative effect in the future. Further, as the vast majority of our employees are expected to work from home, new processes, procedures, and controls could be required to respond to changes in our business environment. Should any key employees become ill from COVID-19 and unable to work, our ability to operate our internal controls may be adversely affected.

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•Reliance on the Performance of Third Parties. We rely on outside parties, including independent third-party distribution channels, data processing servicers, and investment fund managers, among others. While we closely monitor the business continuity activities of these third parties, successful implementation and execution of their business continuity strategies are largely outside of our control. If one or more of these third parties experience operational failures as a result of the impacts from the spread of COVID-19 and governmental reactions thereto, or claim that they cannot perform due to a force majeure, our business, results of operations, or financial condition could be adversely impacted.

Any of the above events could cause, contribute to, or exacerbate the risks and uncertainties enumerated in our Annual Report on Form 10-K or otherwise in this report, and could materially adversely affect our business, results of operations, or financial condition. We have implemented risk management and business continuity plans, performed stress testing, and taken other precautions with respect to the COVID-19 global pandemic. However, such measures may not adequately protect our business from the full impacts of the pandemic.

The Company’s risk management policies, practices, and procedures could leave it exposed to unidentified or unanticipated risks, which could negatively affect its business or result in losses.

The Company has developed risk management policies and procedures and expects to continue enhancing them in the future. Nonetheless, the Company’s policies and procedures to identify, monitor, and manage both internal and external risks may not predict future exposures, which could be different or significantly greater than expected.

These identified risks may not be the only risks facing the Company. Additional risks and uncertainties not currently known to the Company may adversely affect its business, financial condition and/or results of operations.

The Company may be subject to regulations of, or regulations influenced by, 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 systemic nature of recent financial crises. 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 an evolving method 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 insurance groups as G-SIIs in the past. The IAIS is developing the policy measures which include higher capital requirements and enhanced supervision. The FSB has not published a new list of G-SIIs since 2016 because the IAIS has developed a holistic framework for the assessment and mitigation of systemic risk in the insurance sector (the “Holistic Framework”). The Holistic Framework was approved by the IAIS in November 2019 and is expected to be introduced in countries for assessment beginning in 2020. The Holistic Framework proposes enhanced supervisory and corrective measures and disclosures for any build-up of systemic risk in liquidity risk, macroeconomic exposure, counterparty exposure and substitutability. Since the Holistic Framework is expected to produce an improved system for assessing and mitigating systemic risk in the insurance sector, the FSB has decided to suspend G-SII identification until November 2022, at which point it will review whether to resume or discontinue the G-SII designation system. Although none of PLC, the Company, or Dai-ichi Life has been designated as a G-SII, the list of designated insurers may be updated in the future by the FSB. It is possible that due to the size and reach of the combined Dai-ichi Life group, or a change in the method of identifying G-SIIs, the combined group, including PLC and the Company, could be designated as a G-SII.

The IAIS has also developed a common framework (“ComFrame”) for the supervision of internationally active insurance groups (“IAIGs”). ComFrame was adopted by the IAIS in November 2019 and is currently in an implementation phase. The IAIS plans to integrate into ComFrame in the future a new global capital measurement standard for insurance groups deemed to be IAIGs that could exceed the sum of state or other local capital requirements and contemplates “group wide supervision” across national boundaries and legal entities, which could require each IAIG to conduct its own risk and solvency assessment to monitor and manage its overall solvency. It is likely that the combined Dai-ichi Life group will be deemed an IAIG, in which case it, and PLC and the Company, may be subject to supervision requirements, capital measurement standards, and enhanced disclosures beyond those applicable to any competitors who are not designated as an IAIG.
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PLC’s sole shareowner, Dai-ichi Life, is also subject to regulation by the Japanese Financial Services Authority (“JFSA”). Under applicable laws and regulations, Dai-ichi Life is required to provide notice to or obtain the consent of the JFSA prior to taking certain actions or engaging in certain transactions, either directly or indirectly through its subsidiaries, including PLC, the Company, and its consolidated subsidiaries, which could limit the ability of PLC and the Company to engage in certain transactions or business initiatives.

While it is not yet known how or the extent to which the Company will be impacted by these regulations, the Company may experience increased costs of compliance, increased disclosure, less flexibility in capital management, and more burdensome regulation and capital requirements for specific lines of business. In addition, such regulations could impact the business of the Company and its reserve and capital requirements, financial condition, or results of operations.

The Company’s use of affiliate and captive reinsurance companies to finance statutory reserves related to its fixed annuity and 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 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 certain of the Company’s variable annuity products.

The NAIC has adopted Actuarial Guideline XLVIII (“AG48”) and the substantially similar “Term and Universal Life Insurance Reserve Financing Model Regulation” (the “Reserve Model”) which establish national standards for new reserve financing arrangements for term life insurance and universal life insurance with secondary guarantees. AG48 and the Reserve Model govern collateral requirements for captive reinsurance arrangements. In order to obtain reserve credit, AG48 and the Reserve Model require a minimum level of funds, consisting of primary and other securities, to be held by or on behalf of ceding insurers as security under each captive life reinsurance treaty. As a result of AG48 and the Reserve Model, the implementation of new captive structures in the future may be less capital efficient, lead to lower product returns and/or increased product pricing, or result in reduced sales of certain products. In some circumstances, AG48 and the Reserve Model could impact the Company’s ability to engage in certain reinsurance transactions with non-affiliates.

The NAIC’s 2020 Valuation Manual includes changes to current rules and regulations applicable to the determination of variable annuity reserves and risk-based capital. The changes are intended to decrease incentives for insurers to establish variable annuities captives and will apply to both in-force and new business. The new rules and regulations have a January 1, 2020 effective date and an optional 3- to 7-year transition period from current rules and regulations, which the Company may elect to utilize.

The NAIC adopted revisions to the Part A Laws and Regulations Preamble (the “Preamble”) of the NAIC Financial Regulation Standards and Accreditation Program that includes 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 subjects 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 PLC to recapture business from and unwind PLC’s existing variable annuity captive (“VA Captive”).

As of April 1, 2020, the Company uses an affiliated Bermuda domiciled reinsurance company, Protective Life Reinsurance Bermuda Ltd. (“PL Re”) to reinsure certain fixed annuity business. PL Re is licensed as a Class C entity for affiliate reinsurance and holds reserves based on Bermuda insurance regulations.

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Any regulatory action or change 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 or affiliate reinsurers for intercompany reinsurance transactions on a retroactive basis, adverse impacts would include early termination fees payable to third party finance providers 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 or affiliate reinsurers could impact the types, amounts and pricing of products offered by the Company and its subsidiaries.

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 (the “Dodd-Frank Act”) enacted in July 2010 made sweeping changes to the regulation of financial services entities, products and markets. We cannot predict with certainty how the Dodd-Frank Act will continue to affect the financial markets generally, or impact our business, ratings, results of operations, financial condition or liquidity.

Among other things, the Dodd-Frank Act imposed a comprehensive new regulatory regime on the over-the-counter (“OTC”) derivatives marketplace and granted new joint regulatory authority to the SEC and the U.S. Commodity Futures Trading Commission (“CFTC”) over OTC derivatives. While the SEC and CFTC continue to promulgate rules required by the Dodd-Frank Act, most rules have been finalized and, as a result, certain of the Company’s derivatives operations are subject to, among other things, new recordkeeping, reporting and documentation requirements and new clearing requirements for certain swap transactions (currently, certain interest rate swaps and index-based credit default swaps; cleared swaps require the posting of margin to a clearinghouse via a futures commission merchant and, in some case, to the futures commission merchant as well).

In 2015, U.S. federal banking regulators and the CFTC adopted regulations that require swap dealers, security-based swap dealers, major swap participants, and major security-based swap participants (“Swap Entities”) to post margin to, and collect margin from, their OTC swap counterparties (the “Margin Rules”). Under the Margin Rules, the Company is considered a “financial end-user” that, when facing a Swap Entity, is required to post and collect variation margin for its non-cleared swaps. In addition, depending on its derivatives exposure, the Company may be required to post and collect initial margin as well. The initial margin requirements of the Margin Rules have been phased-in over a period of five years based on the average aggregate notional amount of the Swap Entity’s (combined with all of its affiliates) and its counterparty’s (combined with all of its affiliates) swap positions. It is anticipated that the Company will not be subject to the initial margin requirements until the “Phase 5” deadline under the Margin Rules, which deadline is currently set for September 1, 2020. The Basel Committee on Banking Supervision (BCBS) and the International Organization of Securities Commissions (IOSCO) have recommended extending this deadline to September 1, 2021, which proposal is subject to pending approval by the CFTC and US Prudential Regulators. The variation margin requirement took effect on September 1, 2016, for swaps where both the Swap Entity (and its affiliates) and its counterparty (and its affiliates) have an average daily aggregate notional amount of swaps for March, April, and May of 2016 that exceeds $3 trillion. Otherwise, the variation margin requirement, to which we are subject, took effect on March 1, 2017.

Other regulatory requirements relating to derivatives may indirectly impact us. For example, non-U.S. counterparties of the Company may also be subject to non-U.S. regulation of their derivatives transactions with the Company. In addition, counterparties regulated by the Prudential Regulators (which consist of the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Farm Credit Administration, and the Federal Housing Finance Agency) are subject to liquidity, leverage, and capital requirements that impact their derivatives transactions with the Company. Collectively, these new requirements have increased the direct and indirect costs of our derivatives activities and may further increase them in the future.

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Pursuant to the Dodd-Frank Act, in December 2013, the Federal Insurance Office (“FIO”) issued a report on how to modernize and improve the system of insurance regulation in the United States and, in December 2014, the FIO published its report on the breadth and scope of the global reinsurance market. In this reinsurance report, the FIO indicates that reinsurance collateral continues to be at the forefront of its thinking with regard to potential direct federal involvement in insurance regulation. Specifically, the FIO’s reinsurance report argues that federal officials are well-positioned to make determinations regarding whether a foreign jurisdiction has sufficiently effective regulation and, in doing so, consider other prudential issues pending in the U.S. and between the U.S. and affected foreign jurisdictions. The reinsurance report notes that work continues towards initiating negotiations for covered agreements with leading reinsurance jurisdictions that may have the effect of preempting inconsistent state laws. The U.S. entered into such covered agreements with the E.U. in 2017 and with the United Kingdom in 2018. It remains to be seen whether the U.S. will negotiate covered agreements with other major U.S. trading partners. More generally, it remains to be seen whether either of the FIO’s reports will affect the manner in which insurance and reinsurance are regulated in the U.S. and therefore affect the Company’s business.

The Dodd-Frank Act also established the Financial Stability Oversight Council (the “FSOC”), which is authorized to determine whether an insurance company is systematically significant and to recommend that it should be subject to enhanced prudential standards and to supervision by the Board of Governors of the Federal Reserve System. In April 2012, the Financial Stability Oversight Council (the “FSOC”) approved its final rule for designating non-bank financial companies as systemically important financial institutions (“SIFI”). Under the final rule, the Company’s assets, liabilities, and operations do not currently satisfy the financial thresholds that serve as the first step of the three-stage process to designate a non-bank financial company as a SIFI. In December 2019, the FSOC released final interpretive guidance for designating non-bank SIFIs that incorporates an activities-based approach (“ABA”) and that provides that the FSOC will pursue entity-specific determinations only if a potential risk or threat cannot be addressed through an ABA. While recent developments suggest that it is unlikely that FSOC will be designating additional non-bank financial companies as systematically significant, there can be no assurance of that unless and until FSOC’s authority to do so has been rescinded.

The Consumer Financial Protection Bureau (“CFPB”) has supervisory authority over certain non-banks whose activities or products it determines pose risks to consumers, and has issued regulations under the Home Mortgage Disclosure Act (“HMDA”). Those regulations relate to reporting data relative to Company loans made on multi-family apartments, seniors living housing, manufactured housing communities, and any mixed-use properties which contain a residential component, and could require the Company to, among other things, collect and disclose extensive data related to its lending practices. The CFPB has amended Regulation C of the HMDA, to raise the reporting threshold based on the number of originated loans effective July 1, 2020. At its current volume, the Company expects that it will no longer be subject to the HMDA reporting requirements under the revised threshold. However, the Company may become subject to reporting requirements in the future, and it is unclear how burdensome compliance with the rules under the HMDA may become.

The Company and certain of its subsidiaries sell products that may be regulated by the CFPB. The 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. The Company is unable at this time to predict the impact of these activities on the Company.

Pursuant to Section 171 of the Dodd-Frank Act, the Board of Governors of the Federal Reserve System (“the Board”) has released a notice of proposed rulemaking that proposes a method, termed the Building Block Approach (the “BBA”), for measuring and prescribing minimum capital for U.S. insurance depository institution holding companies. The Board retains the right to apply the BBA to insurance firms designated by the FSOC as systemically important. The BBA prescribes generally higher minimum levels of group capital than current state-based standards. While it is not currently subject to the BBA, the Company is unable to predict the impact that the BBA may have on competing NAIC and international group capital standards.
Although the full impact of the Dodd-Frank Act cannot be determined until all of the various studies mandated by the law are conducted and all implementing regulations are adopted, many of the legislation’s requirements could have an adverse impact on the financial services and insurance industries. In addition, the Dodd-Frank Act could make it more expensive for us to conduct business, require us to make changes to our business model or satisfy increased capital requirements.

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New and amended regulations regarding the standard of care or standard of conduct applicable to investment professionals, insurance agencies, and financial institutions that recommend or sell annuities or life insurance products may have a material adverse impact on our ability to sell annuities and other products and to retain in-force business and on our financial condition or results of operations.

Sales of life insurance policies and annuity contracts offered by the Company are subject to regulations relating to sales practices adopted by a variety of federal and state regulatory authorities. Certain annuities and life insurance policies such as variable annuities and variable universal life insurance are regulated under the federal securities laws administered by the SEC. On June 5, 2019, the SEC adopted a comprehensive package of rulemakings and interpretations relating to the standard of conduct applicable to broker-dealers, investment advisers, and their representatives when making certain recommendations to retail customers. Regulation Best Interest (“Regulation BI”), a new rule establishing a “best interest” standard of conduct for broker-dealers and their natural associated persons when making recommendations to retail customers of any securities transaction or investment strategy involving securities or regarding the opening of an account. Specifically, Regulation BI requires a broker-dealer (or associated person) to act in the retail customer’s best interest and not place its (or his or her) own interests ahead of the retail customer’s interests. In addition to Regulation BI, the SEC also adopted a new rule and amended existing rules to require broker-dealers and registered investment advisers to provide a brief relationship summary to retail investors (“Form CRS Rules”). The Form CRS Rules are intended to assist retail investors with their initial selection of, and ongoing decision to maintain an existing relationship with, a financial professional or firm by summarizing in one place certain specified information about the broker-dealer or investment adviser. The obligations under Regulation BI and Form CRS generally become effective on June 30, 2020. The rulemaking package also includes two interpretations: (i) the investment adviser interpretation, which clarifies certain aspects of the standard of conduct applicable to registered investment advisers under section 206 of the Investment Advisers Act of 1940 (“Advisers Act”), and (ii) the “solely incidental” interpretation, which clarifies the broker-dealer exclusion from the definition of “investment adviser” under section 202 of the Advisers Act.

In addition, 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. Also, the DOL is working to promulgate new rules around its own fiduciary standard. The DOL has indicated that they are working closely with the SEC to ensure the DOL’s new fiduciary standard tracks as closely as possible with the SEC’s Regulation Best Interest.

The NAIC has finalized revisions to the Suitability in Annuity Transactions Model Regulation which is intended to impose a higher standard of care on insurers who sell annuities. NAIC’s work largely mirrors the SEC’s Regulation Best Interest, which also introduces a higher standard of care for broker-dealers. Likewise, several states are considering or have adopted legislation or regulatory measures that would implement new requirements and standards applicable to the sale of annuities and, in some cases, life insurance products. These standards vary widely in scope, applicability, and timing of implementation. The adoption and enactment of these or any revised standards as law or regulation could have a material adverse effect upon the manner in which the Company’s products are sold and impact the overall market for such products.

There remains significant uncertainty surrounding the final form that these regulations may take. Our current distributors may continue to move forward with their plans to 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, supervises, and supports sales of its annuities and, where applicable, life insurance products. In addition, the Company continues to incur expenses in connection with initial and ongoing compliance obligations with respect to such rules, and in the aggregate these expenses may be significant. Any of the foregoing regulatory, legislative, or judicial measures or the reaction to such activity by consumers or other members of the insurance industry 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.
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Item 6. Exhibits
Exhibit    
Number   Document
  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).
  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).
Amended and Restated Protective Life Corporation Annual Incentive Plan, effective January 1, 2020, filed as Exhibit 10.2 to the Company’s Current Report on Form 8-K filed February 24, 2020 (No. 001-31901).
Amended and Restated Protective Life Corporation Long-Term Incentive Plan, effective January 1, 2020, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed February 24, 2020.
2020 Parent-Based Award Letter of the Company, filed herewith.
2020 Parent-Based Award Provisions of the Company, filed herewith.
2020 Performance Units Award Letter (for key officers) of the Company, filed herewith.
2020 Performance Units Provision (for key officers) of the Company, filed herewith.
2020 Restricted Units Award Letter (for key officers) of the Company, filed herewith.
2020 Restricted Units Provisions of the Company, filed herewith.
2020 Long-Term Incentive Plan Awards Acceptance Form, filed herewith.
Consulting Agreement with Carl S. Thigpen, dated May 1, 2020, filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 7, 2020 (No. 001-31901).
  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
  Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  Certification Pursuant to 18 U.S.C Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS    XBRL Instance Document - the instance document does not appear in the Interactive Data file because its XBRL tags are embedded within the Inline XBRL document
101.SCH    Inline XBRL Taxonomy Extension Schema Document
101.CAL    Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE    Inline XBRL Taxonomy Extension Presentation Linkbase Document
104      Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
*    Incorporated by Reference.
†    Management contract or compensatory plan or arrangement.
±    Pursuant to Item 601(b)(2) of Regulation S-K, the schedules have been omitted and will be furnished to the SEC supplementally upon request.

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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
  PROTECTIVE LIFE INSURANCE COMPANY
   
   
Date: May 14, 2020   By: /s/ PAUL R. WELLS
    Paul R. Wells
    Chief Accounting Officer
   

114


[NAME]
MARCH 15, 2020
PARENT-BASEDAWARD LETTER
The Compensation and Management Succession Committee of the Company's Board of Directors has awarded you:
Parent-Based Award Valued at _______Date of Grant: March 15, 2020
This Parent-Based Award was awarded pursuant to the Protective Life Corporation Long-Term Incentive Plan (the “Plan”), and is subject to the terms and conditions contained in the 2020 Parent-Based Award Provisions (“Provisions”), as set forth in Appendix A to this Award Letter, and the Plan. The Plan and the Provisions contain terms and conditions regarding the vesting of this Parent-Based Award, termination of employment, tax withholding, non-solicitation of Company employees and customers, regulatory compliance, and other matters, and I encourage you to read the Provisions carefully.
Please retain these documents in your personal records.
             
Richard J. Bielen
President and Chief Executive Officer of Protective Life Corporation
        

2020 PARENT-BASED AWARD PROVISIONS
As of March 15, 2020, the Board of Directors of Protective Life Corporation (the “Company”) granted you a cash denominated award (“Parent-Based Award”) under the Protective Life Corporation Long-Term Incentive Plan (the “Plan”) that, subject to the satisfaction of the applicable terms and conditions related to such Parent-Based Award, including, but not limited to, the satisfaction of the applicable service vesting conditions specified below, will entitle you to receive a cash amount determined in the manner described below. You have also received a Parent-Based Award Letter (“Award Letter”), which together with these 2020 Parent-Based Award Provisions (“Provisions”) and the Plan, constitutes your full award.
1. Award.
(a)General Provisions. The Initial Value and the Date of Grant of the Parent-Based Award are set forth in your Award Letter.
(b)Definitions. Capitalized terms that are used but not defined herein shall have the meaning ascribed to them in the Plan.
2. Vesting and Payment of Parent-Based Award.
(a)General Vesting Rule. Unless vested on an earlier date as provided in these Provisions or the Plan, your Parent-Based Award will vest on December 31, 2022 (collectively, the “Regular Vesting Schedule”), subject to your continued employment through such date.
(b)Payment of Parent-Based Award.
(i)Regular Vesting. If your Parent-Based Award becomes vested in accordance with Section 2(a), it will be settled in cash following (but not later than the March 15 immediately following) the date as of which such Parent-Based Award becomes vested. Such amount payable will be calculated in accordance with Section 2(b)(iii) below.
(ii)Early Vesting. Any Parent-Based Award that becomes vested under Section 4 by reason of your termination of employment prior to the date such Parent-Based Award would otherwise have become vested pursuant to Section 2(a) (“Early Vesting”) shall nonetheless be settled in cash following (but not later than the March 15 immediately following) the date as of which such Parent-Based Award would have become vested (but for such Early Vesting) if you had remained in the Company's employment through the applicable date specified in Section 2(a). Such amount payable will be calculated in accordance with Section 2(b)(iii) below.
(iii)The aggregate amount payable in respect of any vested Parent-Based Award under Section 2(b)(i) or (ii) shall be equal to the percentage of such Parent-Based Award that has become vested multiplied by the product of the Initial Value and Parent Stock Percentage.
3.Change in Control.
1.In the event of a Company Change in Control, all of your Parent-Based Award will immediately vest and shall be settled in cash, based on the Parent Stock Percentage, but the Final Parent Stock Value shall be determined based on the average of the closing prices of the Parent common stock on all trading days during the 30-calendar day period ended on the date on which the Company
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Change in Control occurs. Payment of the amount so determined will be paid within 60 days following the date on which the Company Change in Control occurs.
2.In the event of a Parent Change in Control that results in the common stock of Parent no longer being actively traded on a public securities exchange, all of your Parent-Based Awards shall be converted to Restricted Units as of the date of the Parent Change in Control. Such conversion to Restricted Units shall be effected in the manner described below. First, the dollar value of your Parent-Based Awards shall be determined as of the Parent Change in Control, with the Final Parent Stock Value used to determine the Parent Stock Percentage determined using the average of the closing prices of the Parent common stock on all trading days during the 30-calendar day period ended on the date on which the Parent Change in Control occurs. The resulting dollar value of the Parent-Based Awards shall then be converted into Restricted Units by dividing such dollar value by the PL Tangible Book Value Per Unit determined as of the most recently reported quarterly balance sheet preceding the Parent Change in Control. Notwithstanding the foregoing, all terms and provisions of the Parent-Based Award Agreement shall otherwise be maintained, including, but not limited to, the vesting schedule and payment timing provisions of such agreement.
3.Termination of Employment.
(a)Death, Disability or Normal Retirement. If your employment is terminated by death, Disability or Normal Retirement, your Parent-Based Award will immediately vest in full.
(b)Early Retirement. Unless the Committee determines to provide for treatment that is more favorable to you on such terms and conditions as the Committee may determine, if your employment with the Company and its Subsidiaries terminates due to Early Retirement, a pro-rated portion of your Parent-Based Award will immediately vest based on a fraction, the numerator of which is the number of complete and partial calendar months between January 1, 2020 and your Early Retirement date, and the denominator of which is 36. Any portion of your Parent-Based Award that does not vest upon your Early Retirement pursuant to the preceding sentence will be forfeited.
(c)Special Termination. If your employment is terminated by reason of (1) the divestiture of a business segment or a significant portion of the assets of the Company, or (2) a significant reduction by the Company in its salaried work force, the determination of whether, to what extent, and on what conditions any payment shall be made with respect to any unvested portion of your Parent-Based Award shall be at the discretion of the Committee. Any portion of your Parent-Based Award that the Committee determines is not eligible for payment under this Section 4(c) shall be forfeited as of the date your employment terminates.
(d)Other Termination. Unless the Committee determines to provide for treatment that is more favorable to you on such terms and conditions as the Committee may determine, if your employment is terminated for any reason not set forth in Sections 4(a), (b) or (c) prior to the applicable vesting dates specified in Section 2(a), the unvested portion of your Parent-Based Award will be forfeited.
(e)Termination for Cause. Unless the Committee determines to provide for treatment that is more favorable to you on such terms and conditions as the Committee may determine, if your employment is terminated for Cause prior to the date your Parent-Based Award is paid pursuant to Section 2(b), all of the vested and unvested portions of your Parent-Based Award will be forfeited.
5. Federal Income Tax Consequences.
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(a)General. The following description of the federal income tax consequences of the Parent-Based Award is based on currently applicable provisions of the Code, and is only a general summary. The summary does not discuss state and local tax laws, which may differ from the federal tax law, or federal estate, gift and employment tax laws. You are urged to consult with your own tax advisor regarding the application of the tax laws to your particular situation.
(b)Grant of Parent-Based Award. This Parent-Based Award grant will not subject you to federal income tax.
(c)Payment of Parent-Based Award. You will recognize ordinary income for federal income tax purposes on the payment date. The amount of income recognized will be equal to the aggregate amount of cash paid. Notwithstanding the foregoing, if you have made an effective election under the Company's Deferred Compensation Plan for Officers (“Deferred Compensation Plan”), the taxation of such deferred amount will be handled as discussed in Section 5(d).
(d)Deferred Compensation Plan. To the extent eligible, you may elect to defer payment in respect of your vested Parent-Based Award, and the recognition of taxable income with respect to such payment, by making deferral elections under the Deferred Compensation Plan. If you make effective deferral elections, you will recognize ordinary income when the amount derived from the deferred portion of your Parent-Based Award payment is paid from the Deferred Compensation Plan, in an amount equal to the amount of cash paid. If eligible, you will be provided with more information about this deferral opportunity and the Deferred Compensation Plan.
(e)ERISA. Neither the Plan nor this Parent-Based Award is qualified under Section 401(a) of the Code and neither is subject to any of the provisions of the Employee Retirement Income Security Act of 1974, as amended.
6. Tax Withholding. The Company will withhold an amount in cash sufficient to satisfy any applicable federal, state and/or local tax withholding obligations attributable to your Parent-Based Award, whether under this Plan or under the Deferred Compensation Plan, if you have made deferral elections under that plan in respect to your Parent-Based Award.
7.Non-transferability of Parent-Based Award. Your Parent-Based Award may not be assigned, pledged, or otherwise transferred, except upon your death by the laws of intestacy or descent and distribution.
8.Beneficiary Designations. You may name a beneficiary or beneficiaries (who must be members of your family and who may be named contingently or successively) with respect to your rights under the Plan and this Parent-Based Award (including the right to receive any payment in respect of your Parent-Based Award after your death) by submitting a written beneficiary designation in a form acceptable to the Company. Any such designation will be effective only when filed with the Company's Chief Financial Officer and Controller (or such other person as the Company may designate) before your date of death, and will (unless specifically set forth therein) revoke all prior designations. If there is no beneficiary designation in effect on the date of your death, your beneficiary will be your surviving spouse or, if you have no surviving spouse, your estate.
9.Administration of the Plan. The Committee has full power to administer and interpret the Plan and these Provisions and to adopt such rules and regulations consistent with the terms of the Plan as the Committee deems necessary or advisable in order to carry out the provisions of the Plan. Except as otherwise provided in the Plan, the Committee’s interpretation and construction of the Plan and these
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Provisions and its determination of any conditions applicable to Awards or the granting of Awards to specific Participants is conclusive and binding on all Participants.
10.Amendment. By action of the Board or the Committee, the Company may from time to time amend, terminate or discontinue the Plan and/or these Provisions in accordance with the terms of the Plan in effect at the time of the amendment, but no amendment, termination or discontinuance of these Provisions or the Plan will unfavorably affect any Parent-Based Award previously granted.
11.Effect on Employment and Other Benefits. Receipt of a Parent-Based Award under the Plan does not give any Participant any right to receive awards in the future or to continue in the employ of the Company and its subsidiaries, and Parent-Based Award recipients are subject to discipline and discharge in the same manner as any other employee. Subject to the terms of the applicable plans, income recognized as a result of any payment in respect of Parent-Based Awards will not be included in the formula for calculating benefits under the Company's Pension Plan, 401(k), and disability plans.
12.Cooperation in Litigation. By accepting a Parent-Based Award subject to the Plan, you agree that after your employment terminates (regardless of the reason), you will cooperate fully with the Company in connection with any current or future claims, lawsuits, arbitrations, proceedings, examinations, inquiries or investigations involving the Company that relate to your service with the Company. This includes being available on reasonable notice for interviews and other communications with the Company's counsel in connection with any such matter and appearing at the Company's request (and without a subpoena) to be deposed or to give testimony.
13.Non-Solicitation of Company Employees. The Company has expended and continues to expend significant time and expense in recruiting and training its employees and the loss of employees would cause significant and irreparable harm to the Company. Accordingly, by accepting a Parent-Based Award subject to the Plan and these Provisions, you agree that for one year beginning on the date your employment terminates (regardless of the reason) (the “Restricted Period”), you will not (directly or indirectly) hire, solicit for hire, or assist others in hiring or soliciting for hire, any employee of the Company or its subsidiaries (“Company Employees”). This provision shall not prohibit you or a future employer of yours from hiring, soliciting for hire, or assisting others in hiring or soliciting for hire, any Company Employee who: (1) responds to a general solicitation or advertisement that is not directed to Company Employees or (2) is referred to your future employer by a search firm, employment agency, or similar organization without any assistance, input, or involvement by you.
14.Non-Solicitation of Company Customers, Distributors, or Agents. The Company has expended and continues to expend significant time and expense in developing relationships and related goodwill with its customers, distributors, and agents; and the loss of these relationships (or any associated business) would cause significant and irreparable harm to the Company. Accordingly, by accepting a Parent-Based Award subject to the Plan and these provisions, you agree that, during the Restricted Period, you will not — whether on your own behalf or on behalf of or in conjunction with any person or entity — directly or indirectly solicit or accept any business of the type conducted by the Company as of your termination date from any person or entity that was either (1) a customer, distributor, or agent of the Company as of that date or (2) a prospective customer, distributor, or agent contacted, called upon, or serviced by the Company during the twelve months before your termination date, or induce, promote, facilitate, or otherwise contribute to the solicitation of such customers, distributors, or agents or
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prospective customers, distributors, or agents. You further agree that, during the Restricted Period, you will not communicate for business purposes with any person or entity that was either (1) a customer, distributor, or agent of the Company as of your termination date or (2) a prospective customer, distributor, or agent contacted, called upon, or serviced by the Company during the twelve months before your termination date. This Section 14 shall not apply if you worked in, or were a resident of, the state of California when your employment terminated.
15.Confidential Information. The Company has expended and continues to expend considerable time and resources developing its Confidential Information; and this information is of great competitive importance and commercial value to the Company. The improper use or disclosure of the Company’s Confidential Information would cause significant and irreparable harm to the Company. Accordingly, by accepting a Parent-Based Award subject to the Plan and these provisions, you agree to permanently maintain the confidentiality of the Company’s “Confidential Information.” Confidential Information includes, but is not limited to, all information not generally known to the public (in spoken, printed, electronic, or any other form or medium) relating to the Company’s: business (including without limitation, business plans and strategies, financial information, customer or prospective customer information, agent or prospective agent information, distributor or prospective distributor information, marketing plans, terms of agreements, etc.), technologies (including without limitation, computer software, databases, web design, technical drawings, designs, schematics, algorithms, technical data, research plans, systems, etc.), products (including without limitation, product design, pricing, and development information), transactions or potential transactions, services, trade secrets, know-how, formulas, processes, ideas, inventions (whether or not patentable), training materials, personnel information, attorney-client communications, and third-party relationships. The above list is not exhaustive and Confidential Information includes any other information that should be reasonably understood as the confidential or proprietary information of the Company. Confidential Information includes not only information disclosed by the Company to you, but also information developed or learned by you during the course of your employment with the Company. Information is not confidential, however, if it is available in the public domain through no fault of your own.
16.Recovery of Damages by the Company. You agree that if you were to violate any of Sections 12, 13, 14, and 15 the amount of damages suffered by the Company would be difficult to determine. Therefore, you agree that the Company will be entitled to recover liquidated damages from you equal to the amount of income that you realize under this Parent-Based Award (including all legally required withholdings) (or, if less, the portion thereof determined by the Committee) if the Committee reasonably determines in good faith that you violated any of Sections 12, 13, 14, or 15. All determinations under this Section shall be made by the Committee, acting reasonably and in good faith, and its determinations shall be final, binding and conclusive on you, the Company, and any other person or entity affected thereby. This liquidated damages provision does not relinquish any equitable remedies and other claims for damages that the Company may have. The Company will be entitled to recover costs and expenses, including attorneys’ fees, incurred in enforcing or bringing any action to protect its rights under Sections 12, 13, 14, or 15.
17.Parent-Based Award Subject to the Plan. These Provisions are subject to the Plan as approved by the Board. The terms and provisions of the Plan as it may be amended from time to time are hereby incorporated herein by reference. In the event of a conflict between any term or provision
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contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.
18.Acceptance of Award. If you wish to accept your Parent-Based Award, you must execute a 2020 Long-Term Incentive Plan Awards Acceptance Form, in the manner specified by the Company, which may be in the form of an electronic signature, no later than March 25, 2020.
19.Communications with Government Agencies. Nothing in these Provisions, including, without limitation, Section 12, 15 or 16 hereof, (i) is intended to or will be used in any way to limit your rights to communicate with a government agency, as provided for, protected under or warranted by applicable law or (ii) limits your right to receive an award from the government for information provided to any government agency. You may not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that: (a) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document that is filed under seal in a lawsuit or other proceeding.
Questions regarding a Parent-Based Award subject to the Plan and requests for additional information about these Provisions, the Plan or the Committee should be directed to Rachel Goodson, Protective Life Corporation, P.O. Box 2606, Birmingham, Alabama 35202 (e-mail: Rachel.Goodson@Protective.com). The Plan, these Provisions and your Award Letter contain the formal terms and conditions of your Award, and you should retain them for future reference. You may obtain a copy of the Plan by written or email request to Rachel Goodson.
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[NAME]
MARCH 15, 2020
PERFORMANCE UNITS AWARD LETTER
The Compensation and Management Succession Committee of the Company's Board of Directors has awarded you:
_______ Performance UnitsAward Period: January 1, 2020 – December 31, 2022Grant Date: March 15, 2020
These Performance Units were awarded pursuant to the Protective Life Corporation Long-Term Incentive Plan (the “Plan”), and are subject to the terms and conditions contained in the 2020 Performance Units Award Provisions (“Provisions”), as set forth in Appendix A to this Award Letter, and the Plan. The Plan and the Provisions contain terms and conditions regarding the payment of these Performance Units, termination of employment, tax withholding, non-solicitation of Company employees and customers, regulatory compliance, and other matters, and I encourage you to read the Provisions carefully.
Please retain these documents in your personal records.
             
Richard J. Bielen
President and Chief Executive Officer of Protective Life Corporation
        

2020 PERFORMANCE UNITS PROVISIONS
As of March 15, 2020, the Board of Directors of Protective Life Corporation (the “Company”) granted you performance units (“Performance Units”) under the Protective Life Corporation Long-Term Incentive Plan (the “Plan”) that, subject to the satisfaction of the applicable terms and conditions related to such Performance Units, including, but not limited to, the satisfaction of the applicable performance vesting conditions specified below, will entitle you to receive a cash amount based on the PL Tangible Book Value of the Company. You have also received a Performance Unit Award Letter (“Award Letter”), which together with these 2020 Performance Units Provisions (“Provisions”) and the Plan, constitutes your “Performance Unit Award.”
1.General Provisions. The number of Performance Units that you have been awarded, the Award Period of the Performance Units, and the Date of Grant of the Performance Units are set forth in your Award Letter.
2.Earn-Out of Performance Units.
(a)General. Whether you will receive any cash payment in respect of your Performance Unit Award will be determined based upon the extent to which the applicable performance objectives have been satisfied and, except as otherwise provided in Section 5 below, your continued employment until the date the Performance Units are paid. Your right to vest in, and the amount payable in respect of, one-half (1/2) of your Performance Units is dependent on the Company's Cumulative After-tax Adjusted Operating Income during the Award Period, and on Average Return on Equity over the Award Period with regard to the remaining one-half (1/2) of the Performance Units, in each case as specified below.
(b)Cumulative After-tax Adjusted Operating Income. Payment with respect to one-half of your Performance Units will be based on the Company's Cumulative After-tax Adjusted Operating Income during the Award Period, as determined in accordance with the following schedule:
Cumulative After-tax
Adjusted Operating Income
(dollars in millions)
Percentage of Performance
Units Earned

Less than $1,246 0%
$1,385 100%
$1,524 or more 200%
There will be straight-line interpolation between Cumulative After-tax Adjusted Operating Income between $1,246 and $1,385 to determine the exact percentage to be paid between 0% and 100%; and between $1,385 and $1,524 to determine the exact percentage to be paid between 100% and 200%.
(c) Average Return on Equity. Payment with respect to one-half of your Performance Units will be based on the Company's Average Return on Equity during the Award Period, as determined in accordance with the following schedule:
Average Return on Equity
Percentage of Performance
Units Earned
Less than 4.92% 0%
5.40% 100%
5.88% 200%
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There will be straight-line interpolation between Average Return on Equity between 4.92% and 5.40% to determine the exact percentage to be paid between 0% and 100%; and between 5.40% and 5.88% to determine the exact percentage to be paid between 100% and 200%.
3. Definitions. Capitalized terms that are used but not defined herein shall have the meaning ascribed to them in the Plan. For purposes of these Provisions, the following terms shall have the following meanings:
“Average Return on Equity” shall mean annualized Cumulative After-tax Adjusted Operating Income during the Award Period divided by the Average Total Shareowner’s Equity and excluding the cumulative after-tax adjustments that are excluded from Cumulative After-tax Adjusted Operating Income during the Award Period.
“Average Total Shareowner’s Equity” shall mean the average of the Total Shareowner’s Equity as reported in the Company’s GAAP financial statements, excluding accumulated other comprehensive income, using the Total Shareowner’s Equity as of the beginning of the Award Period and as of the end of each fiscal quarter during the Award Period (or, if applicable, the number of calendar quarters completed through the date of a Change in Control).
“Cumulative After-tax Adjusted Operating Income” is defined as the Company's total income earned after taxes during the Award Period, excluding the impact of realized gains or losses on investments and derivatives, any impairment losses recorded on goodwill and other intangible assets created by the Merger, any expense borne by the Company that was the result of actions or requirements of the Company's Parent and were not included in the business plan, and unplanned changes to income resulting from new accounting pronouncements. Any lost income due to dividends paid in excess of planned amounts will be added back to determine after tax operating income.
4.Time and Form of Payment. As soon as practicable, but not later than 60 days, after the end of the Award Period, the Committee will determine the extent to which any Performance Unit Award has been earned. Except as otherwise set forth herein, the value of each earned Performance Unit shall equal the PL Tangible Book Value Per Unit determined as of the most recently reported quarterly balance sheet date last preceding the date of payment and shall be paid not later than the March 15 following the end of the Award Period.
5.Termination of Employment.
(a)Death, Disability or Retirement. Unless the Committee determines to provide for treatment that is more favorable to you on such terms and conditions as the Committee may determine, if your employment is terminated by death, Disability or by Early Retirement or Normal Retirement, you (or, as applicable, your legal representative or beneficiary) will receive a payment with respect to a pro-rata portion of your Performance Units, determined based on a fraction, the numerator of which is your period of employment during the Award Period and the denominator of which is the total number of days in the Award Period. The amount in respect of your pro-rated Performance Units will be determined by applying the performance achieved through the end of the Award Period (or the date of a Change in Control, if applicable) against the schedules set forth in Sections 2(b) and 2(c) above. The remaining portion of your Performance Units (i.e., the excess over the pro-rated portion) shall be forfeited as of the date your employment terminates.
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(b)Special Termination. If your employment is terminated by reason of (1) the divestiture of a business segment or a significant portion of the assets of the Company, or (2) a significant reduction by the Company in its salaried work force, the determination of whether, to what extent, and on what conditions any payment shall be made with respect to any unvested portion of your Performance Unit Award shall be at the discretion of the Committee. Any portion of your Performance Units which the Committee determines is not eligible for payment under this Section 5(b) shall be forfeited as of the date your employment terminates.
(c)Other Termination. Unless the Committee determines to provide for treatment that is more favorable to you on such terms and conditions as the Committee may determine, if your employment is terminated for any reason not set forth in Sections 5(a) or (b), any unvested portion of your Performance Unit Award will be forfeited.
(d)Termination for Cause. Unless the Committee determines to provide for treatment that is more favorable to you on such terms and conditions as the Committee may determine, if your employment is terminated for Cause prior to the date your Performance Units are paid pursuant to Section 4, all of your vested and unvested Performance Units will be forfeited.
6. Company Change in Control. In the event of a Company Change in Control, the Award Period shall be deemed to have ended on the date of the Company Change in Control and you shall be deemed to have earned the greater of (i) 100% of the Performance Units, or (ii) the percentage of such Performance Units that would derive from applying the schedule in Section 2(b) to Cumulative After-tax Adjusted Operating Income through the date of the Company Change in Control (instead of over the Award Period). Any earned Performance Units shall be paid shall be paid within 45 days following the date on which the Company Change in Control occurs, based on the Company Change in Control Book Value Per Unit, if available within 10 days before such payment date; or, if the Company Change in Control Book Value Per Unit is not then available, then 90% of the value of each Performance Unit, based on the PL Tangible Book Value Per Unit determined as of the most recently reported quarterly balance sheet preceding such Company Change in Control, shall be paid within 45 days of the Company Change in Control, followed by an additional payment in respect of each such Performance Unit within 75 days of such Company Change in Control equal to the excess, if any, of (i) the Change in Control Book Value Per Unit over (ii) 90% of the PL Tangible Book Value Per Unit determined as of the most recently reported quarterly balance sheet preceding such Company Change in Control.
7. Federal Income Tax Consequences.
(a)General. The following description of the federal income tax consequences of the Performance Units is based on currently applicable provisions of the Code and regulations, and is only a general summary. The summary does not discuss state and local tax laws, which may differ from the federal tax law, or federal estate, gift and employment tax laws. You are urged to consult with your own tax advisor regarding the application of the tax laws to your particular situation.
(b)Grant of Performance Units. This grant of Performance Units will not cause you to be subject to federal income tax.
(c)Payment of Performance Units. You will recognize ordinary income for federal income tax purposes on the payment date. The amount of income recognized will be equal to the aggregate amount of cash paid. Notwithstanding the foregoing, if you have made an effective election under the
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Company's Deferred Compensation Plan for Officers (“Deferred Compensation Plan”), the taxation of such deferred amount will be handled as discussed in Section 7(d).
(d)Deferred Compensation Plan. To the extent eligible, you may elect to defer payment in respect of your earned Performance Units, and the recognition of taxable income with respect to such payment, by making deferral elections under the Deferred Compensation Plan. If you make effective deferral elections, you will recognize ordinary income when the deferred portion of the amount payable on your Performance Units is paid from the Deferred Compensation Plan, in an amount equal to the amount of cash paid. If eligible, you will be provided with more information about this deferral opportunity and the Deferred Compensation Plan before your Performance Units become payable.
(e)ERISA. Neither the Plan nor this Performance Unit Award is qualified under Section 401(a) of the Code and neither is subject to any of the provisions of the Employee Retirement Income Security Act of 1974, as amended.
8. Tax Withholding. The Company will withhold an amount in cash sufficient to satisfy any applicable federal, state and/or local tax withholding obligations attributable to your Performance Units, whether under this Plan or under the Deferred Compensation Plan, if you have made deferral elections under that plan in respect to your Performance Units.
9.Non-transferability of Performance Units. Your Performance Units may not be assigned, pledged, or otherwise transferred, except upon your death by the laws of intestacy or descent and distribution.
10.Beneficiary Designations. You may name a beneficiary or beneficiaries (who must be members of your family and who may be named contingently or successively) with respect to your rights under the Plan and this Performance Unit Award (including the right to receive payment in respect of your Performance Units after your death) by submitting a written beneficiary designation in a form acceptable to the Company. Any such designation will be effective only when filed with the Company's Chief Financial Officer or Controller (or such other person as the Company may designate) before your date of death, and will (unless specifically set forth therein) revoke all prior designations. If there is no beneficiary designation in effect on the date of your death, your beneficiary will be your surviving spouse or, if you have no surviving spouse, your estate.
11.Administration of the Plan. The Committee has full power to administer and interpret the Plan and these Provisions and to adopt such rules and regulations consistent with the terms of the Plan as the Committee deems necessary or advisable in order to carry out the provisions of the Plan. Except as otherwise provided in the Plan, the Committee’s interpretation and construction of the Plan and these Provisions and its determination of any conditions applicable to Awards or the granting of Awards to specific Participants is conclusive and binding on all Participants.
12.Amendment. By action of the Board or the Committee, the Company may from time to time amend, terminate or discontinue the Plan and/or these Provisions in accordance with the terms of the Plan in effect at the time of the amendment, but no amendment, termination or discontinuance of these Provisions or the Plan will unfavorably affect any Performance Unit Award previously granted.
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13.Effect on Employment and Other Benefits. Receipt of a Performance Unit Award under the Plan does not give any Participant any right to receive awards in the future or to continue in the employ of the Company and its subsidiaries, and Performance Unit Award recipients are subject to discipline and discharge in the same manner as any other employee. Subject to the terms of the applicable plan, income recognized as a result of any payment in respect of Performance Units will not be included in the formula for calculating benefits under the Company's Pension Plan, 401(k), and disability plans.
14.Cooperation in Litigation. By accepting a Performance Unit Award subject to the Plan, you agree that after your employment terminates (regardless of the reason), you will cooperate fully with the Company in connection with any current or future claims, lawsuits, arbitrations, proceedings, examinations, inquiries or investigations involving the Company that relate to your service with the Company. This includes being available on reasonable notice for interviews and other communications with the Company's counsel in connection with any such matter and appearing at the Company's request (and without a subpoena) to be deposed or to give testimony.
15.Non-Solicitation of Company Employees. The Company has expended and continues to expend significant time and expense in recruiting and training its employees and the loss of employees would cause significant and irreparable harm to the Company. Accordingly, by accepting a Performance Unit Award subject to the Plan and these Provisions, you agree that for one year beginning on the date your employment terminates (regardless of the reason) (the “Restricted Period”), you will not (directly or indirectly) hire, solicit for hire, or assist others in hiring or soliciting for hire, any employee of the Company or its subsidiaries (“Company Employees”). This provision shall not prohibit you or a future employer of yours from hiring, soliciting for hire, or assisting others in hiring or soliciting for hire, any Company Employee who: (1) responds to a general solicitation or advertisement that is not directed to Company Employees or (2) is referred to your future employer by a search firm, employment agency, or similar organization without any assistance, input, or involvement by you.
16.Non-Solicitation of Company Customers, Distributors, or Agents. The Company has expended and continues to expend significant time and expense in developing relationships and related goodwill with its customers, distributors, and agents; and the loss of these relationships (or any associated business) would cause significant and irreparable harm to the Company. Accordingly, by accepting a Performance Unit Award subject to the Plan and these provisions, you agree that, during the Restricted Period, you will not — whether on your own behalf or on behalf of or in conjunction with any person or entity — directly or indirectly solicit or accept any business of the type conducted by the Company as of your termination date from any person or entity that was either (1) a customer, distributor, or agent of the Company as of that date or (2) a prospective customer, distributor, or agent contacted, called upon, or serviced by the Company during the twelve months before your termination date, or induce, promote, facilitate, or otherwise contribute to the solicitation of such customers, distributors, or agents or prospective customers, distributors, or agents. You further agree that, during the Restricted Period, you will not communicate for business purposes with any person or entity that was either (1) a customer, distributor, or agent of the Company as of your termination date or (2) a prospective customer, distributor, or agent contacted, called upon, or serviced by the Company during the twelve months before your termination date. This Section 16 shall not apply if you worked in, or were a resident of, the state of California when your employment terminated.
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17.Confidential Information. The Company has expended and continues to expend considerable time and resources developing its Confidential Information; and this information is of great competitive importance and commercial value to the Company. The improper use or disclosure of the Company’s Confidential Information would cause significant and irreparable harm to the Company. Accordingly, by accepting a Performance Unit Award subject to the Plan and these provisions, you agree to permanently maintain the confidentiality of the Company’s “Confidential Information.” Confidential Information includes, but is not limited to, all information not generally known to the public (in spoken, printed, electronic, or any other form or medium) relating to the Company’s: business (including without limitation, business plans and strategies, financial information, customer or prospective customer information, agent or prospective agent information, distributor or prospective distributor information, marketing plans, terms of agreements, etc.), technologies (including without limitation, computer software, databases, web design, technical drawings, designs, schematics, algorithms, technical data, research plans, systems, etc.), products (including without limitation, product design, pricing, and development information), transactions or potential transactions, services, trade secrets, know-how, formulas, processes, ideas, inventions (whether or not patentable), training materials, personnel information, attorney-client communications, and third-party relationships. The above list is not exhaustive and Confidential Information includes any other information that should be reasonably understood as the confidential or proprietary information of the Company. Confidential Information includes not only information disclosed by the Company to you, but also information developed or learned by you during the course of your employment with the Company. Information is not confidential, however, if it is available in the public domain through no fault of your own.
18.Recovery of Damages by the Company. You agree that if you were to violate any of Sections 14, 15, 16 and 17 the amount of damages suffered by the Company would be difficult to determine. Therefore, you agree that the Company will be entitled to recover liquidated damages from you equal to the amount of income that you realize under this Performance Unit Award (including all legally required withholdings) (or, if less, the portion thereof determined by the Committee) if the Committee reasonably determines in good faith that you violated any of Sections 14, 15, 16, or 17. All determinations under this Section shall be made by the Committee, acting reasonably and in good faith, and its determinations shall be final, binding and conclusive on you, the Company, and any other person or entity affected thereby. This liquidated damages provision does not relinquish any equitable remedies and other claims for damages that the Company may have. The Company will be entitled to recover costs and expenses, including attorneys’ fees, incurred in enforcing or bringing any action to protect its rights under Sections 14, 15, 16, or 17.
19.Performance Units Subject to the Plan. These Provisions are subject to the Plan as approved by the Board. The terms and provisions of the Plan as it may be amended from time to time are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.
20.Acceptance of Award. If you wish to accept your Performance Unit Award, you must execute a 2020 Long-Term Incentive Plan Awards Acceptance Form, in the manner specified by the Company, which may be in the form of an electronic signature, no later than March 25, 2020.
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21.Communications with Government Agencies. Nothing in these Provisions, including, without limitation, Section 14, 17 or 18 hereof, (i) is intended to or will be used in any way to limit your rights to communicate with a government agency, as provided for, protected under or warranted by applicable law or (ii) limits your right to receive an award from the government for information provided to any government agency. You may not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that: (a) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document that is filed under seal in a lawsuit or other proceeding.
Questions regarding a Performance Unit Award subject to the Plan and requests for additional information about these Provisions, the Plan or the Committee should be directed to Rachel Goodson, Protective Life Corporation, P.O. Box 2606, Birmingham, Alabama 35202 (e-mail: Rachel.Goodson@Protective.com). The Plan, these Provisions and your Award Letter contain the formal terms and conditions of your Award, and you should retain them for future reference. You may obtain a copy of the Plan by written or email request to Rachel Goodson.

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[NAME]
MARCH 15, 2020
RESTRICTED UNITS AWARD LETTER
The Compensation and Management Succession Committee of the Company's Board of Directors has awarded you:
______ Restricted UnitsDate of Grant: March 15, 2020
These Restricted Units were awarded pursuant to the Protective Life Corporation Long-Term Incentive Plan (the “Plan”), and are subject to the terms and conditions contained in the 2020 Restricted Units Award Provisions (“Provisions”), as set forth in Appendix A to this Award Letter, and the Plan. The Plan and the Provisions contain terms and conditions regarding the vesting of these Restricted Units, termination of employment, tax withholding, non-solicitation of Company employees and customers, regulatory compliance, and other matters, and I encourage you to read the Provisions carefully.
Please retain these documents in your personal records.
             
Richard J. Bielen
President and Chief Executive Officer of Protective Life Corporation
        



2020 RESTRICTED UNITS PROVISIONS
As of March 15, 2020, you were granted restricted units (“Restricted Units”) under the Protective Life Corporation Long-Term Incentive Plan (the “Plan”) that, subject to the satisfaction of the applicable terms and conditions related to such Restricted Units, including, but not limited to, the satisfaction of the applicable service vesting conditions specified below, will entitle you to receive a cash amount based on the Tangible Book Value of Protective Life Corporation (the “Company”). You have also received a Restricted Unit Award Letter (“Award Letter”), which together with these 2020 Restricted Units Provisions (“Provisions”) and the Plan, constitutes your “Restricted Unit Award.”
1. Award.
(a)General Provisions. The number of Restricted Units that you have been awarded (subject to adjustment as provided in these Provisions and the Plan), and the Date of Grant of the Restricted Units, are set forth in your Award Letter.
(b)Definitions. Capitalized terms that are used but not defined herein shall have the meaning ascribed to them in the Plan.
2. Vesting and Payment of Restricted Units.
(a)General Vesting Rule. Unless vested on an earlier date as provided in these Provisions or the Plan, 50% of your Restricted Units will vest on December 31, 2022, and the remaining 50% of your Restricted Units will vest on December 31, 2023 (collectively, the “Regular Vesting Schedule”), subject in each case to your continued employment through such date (except as otherwise provided in Section 4 below).
(b)Payment of Restricted Units.
(i)Regular Vesting. Restricted Units that become vested in accordance with Section 2(a) shall be settled in cash following (but not later than the March 15 immediately following) the date as of which such Restricted Units become vested based on the PL Tangible Book Value Per Unit determined as of the most recently reported quarterly balance sheet date last preceding the date of payment.
(ii)Early Vesting. Any Restricted Units that become vested under Section 4 by reason of your termination of employment prior to the date such Restricted Units would otherwise have become vested pursuant to Section 2(a) (“Early Vesting”) shall nonetheless be settled in cash following (but not later than the March 15 immediately following) the date as of which such Restricted Units would have become vested (but for such Early Vesting) if you had remained in the Company's employment through each of the applicable dates specified in Section 2(a), based on the PL Tangible Book Value Per Unit determined as of the most recently reported quarterly balance sheet date last preceding the date of payment.
3.Company Change in Control. In the event of a Company Change in Control, all of your Restricted Units will immediately vest and shall be settled in cash within 45 days following the date on which the Company Change in Control occurs, based on the Company Change in Control Book Value Per Unit, if available within 10 days before such payment date; or, if the Company Change in Control Book Value Per Unit is not then available, then 90% of the value of each Restricted Unit based on the PL Tangible Book Value Per Unit determined as of the most recently reported quarterly balance sheet preceding such Company Change in Control, shall be paid within 45 days of the Company Change in
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Control, followed by an additional payment within 75 days of such Company Change in Control equal to the excess, if any, of (i) the Change in Control Book Value Per Unit over (ii) 90% of the PL Tangible Book Value Per Unit determined as of the most recently reported quarterly balance sheet preceding such Company Change in Control.
4.Termination of Employment.
(a)Death, Disability or Normal Retirement. If your employment is terminated by death, Disability or Normal Retirement, your Restricted Units will immediately vest in full.
(b)Early Retirement. Unless the Committee determines to provide for treatment that is more favorable to you on such terms and conditions as the Committee may determine, if your employment with the Company and its Subsidiaries terminates due to Early Retirement, a pro-rated portion of your Restricted Units will immediately vest. The portion of your Restricted Units that would otherwise have become vested based on employment through each of December 31, 2022 and December 31, 2023 will be separately calculated by multiplying (1) the number of unvested Restricted Units that would become vested at the applicable date by (2) a fraction, the numerator of which is the number of complete and partial calendar months between January 1, 2020 and your Early Retirement date, and the denominator of which is (x) 36, in the case of the portion of the Restricted Units that would become vested at December 31, 2022, and (y) 48, in the case of the portion of the Restricted Units that would become vested at December 31, 2023. Any Restricted Units that do not vest upon your Early Retirement pursuant to the preceding sentence will be forfeited.
(c)Special Termination. If your employment is terminated by reason of (1) the divestiture of a business segment or a significant portion of the assets of the Company, or (2) a significant reduction by the Company in its salaried work force, the determination of whether, to what extent, and on what conditions any payment shall be made with respect to any unvested portion of your Restricted Unit Award shall be at the discretion of the Committee. Any portion of your Restricted Units that the Committee determines is not eligible for payment under this Section 4(c) shall be forfeited as of the date your employment terminates.
(d)Other Termination. Unless the Committee determines to provide for treatment that is more favorable to you on such terms and conditions as the Committee may determine, if your employment is terminated for any reason not set forth in Sections 4(a), (b) or (c) prior to the applicable vesting dates specified in Section 2(a), your unvested Restricted Units will be forfeited.
(e)Termination for Cause. Unless the Committee determines to provide for treatment that is more favorable to you on such terms and conditions as the Committee may determine, if your employment is terminated for Cause prior to the date your Restricted Units are paid pursuant to Section 2(b), all of your vested and unvested Restricted Units will be forfeited.
5. Federal Income Tax Consequences.
(a)General. The following description of the federal income tax consequences of the Restricted Units is based on currently applicable provisions of the Code, and is only a general summary. The summary does not discuss state and local tax laws, which may differ from the federal tax law, or federal estate, gift and employment tax laws. You are urged to consult with your own tax advisor regarding the application of the tax laws to your particular situation.
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(b)Grant of Restricted Units. This grant of Restricted Units will not subject you to federal income tax.
(c)Payment of Restricted Units. You will recognize ordinary income for federal income tax purposes on the payment date. The amount of income recognized will be equal to the aggregate amount of cash paid. Notwithstanding the foregoing, if you have made an effective election under the Company's Deferred Compensation Plan for Officers (“Deferred Compensation Plan”), the taxation of such deferred amount will be handled as discussed in Section 5(d).
(d)Deferred Compensation Plan. To the extent eligible, you may elect to defer payment in respect of your vested Restricted Units, and the recognition of taxable income with respect to such payment, by making deferral elections under the Deferred Compensation Plan. If you make effective deferral elections, you will recognize ordinary income when the amount derived from the deferred portion of your Restricted Units payment is paid from the Deferred Compensation Plan, in an amount equal to the amount of cash paid. If eligible, you will be provided with more information about this deferral opportunity and the Deferred Compensation Plan.
(e)ERISA. Neither the Plan nor this Restricted Unit Award is qualified under Section 401(a) of the Code and neither is subject to any of the provisions of the Employee Retirement Income Security Act of 1974, as amended.
6. Tax Withholding. The Company will withhold an amount in cash sufficient to satisfy any applicable federal, state and/or local tax withholding obligations attributable to your Restricted Units, whether under this Plan or under the Deferred Compensation Plan, if you have made deferral elections under that plan in respect to your Restricted Units.
7. Non-transferability of Restricted Units. Your Restricted Units may not be assigned, pledged, or otherwise transferred, except upon your death by the laws of intestacy or descent and distribution.
8. Beneficiary Designations. You may name a beneficiary or beneficiaries (who must be members of your family and who may be named contingently or successively) with respect to your rights under the Plan and this Restricted Unit Award (including the right to receive any payment in respect of your Restricted Units after your death) by submitting a written beneficiary designation in a form acceptable to the Company. Any such designation will be effective only when filed with the Company's Chief Financial Officer and Controller (or such other person as the Company may designate) before your date of death, and will (unless specifically set forth therein) revoke all prior designations. If there is no beneficiary designation in effect on the date of your death, your beneficiary will be your surviving spouse or, if you have no surviving spouse, your estate.
9.Administration of the Plan. The Committee has full power to administer and interpret the Plan and these Provisions and to adopt such rules and regulations consistent with the terms of the Plan as the Committee deems necessary or advisable in order to carry out the provisions of the Plan. Except as otherwise provided in the Plan, the Committee’s interpretation and construction of the Plan and these Provisions and its determination of any conditions applicable to Awards or the granting of Awards to specific Participants is conclusive and binding on all Participants.
10.Amendment. By action of the Board or the Committee, the Company may from time to time amend, terminate or discontinue the Plan and/or these Provisions in accordance with the terms of the
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Plan in effect at the time of the amendment, but no amendment, termination or discontinuance of these Provisions or the Plan will unfavorably affect any Restricted Unit Award previously granted.
11.Effect on Employment and Other Benefits. Receipt of a Restricted Unit Award under the Plan does not give any Participant any right to receive awards in the future or to continue in the employ of the Company and its subsidiaries, and Restricted Unit Award recipients are subject to discipline and discharge in the same manner as any other employee. Subject to the terms of the applicable plans, income recognized as a result of any payment in respect of Restricted Units will not be included in the formula for calculating benefits under the Company's Pension Plan, 401(k), and disability plans.
12.Cooperation in Litigation. By accepting a Restricted Unit Award subject to the Plan, you agree that after your employment terminates (regardless of the reason), you will cooperate fully with the Company in connection with any current or future claims, lawsuits, arbitrations, proceedings, examinations, inquiries or investigations involving the Company that relate to your service with the Company. This includes being available on reasonable notice for interviews and other communications with the Company's counsel in connection with any such matter and appearing at the Company's request (and without a subpoena) to be deposed or to give testimony.
13.Non-Solicitation of Company Employees. The Company has expended and continues to expend significant time and expense in recruiting and training its employees and the loss of employees would cause significant and irreparable harm to the Company. Accordingly, by accepting a Restricted Unit Award subject to the Plan and these Provisions, you agree that for one year beginning on the date your employment terminates (regardless of the reason) (the “Restricted Period”), you will not (directly or indirectly) hire, solicit for hire, or assist others in hiring or soliciting for hire, any employee of the Company or its subsidiaries (“Company Employees”). This provision shall not prohibit you or a future employer of yours from hiring, soliciting for hire, or assisting others in hiring or soliciting for hire, any Company Employee who: (1) responds to a general solicitation or advertisement that is not directed to Company Employees or (2) is referred to your future employer by a search firm, employment agency, or similar organization without any assistance, input, or involvement by you.
14.Non-Solicitation of Company Customers, Distributors, or Agents. The Company has expended and continues to expend significant time and expense in developing relationships and related goodwill with its customers, distributors, and agents; and the loss of these relationships (or any associated business) would cause significant and irreparable harm to the Company. Accordingly, by accepting a Restricted Unit Award subject to the Plan and these provisions, you agree that, during the Restricted Period, you will not — whether on your own behalf or on behalf of or in conjunction with any person or entity — directly or indirectly solicit or accept any business of the type conducted by the Company as of your termination date from any person or entity that was either (1) a customer, distributor, or agent of the Company as of that date or (2) a prospective customer, distributor, or agent contacted, called upon, or serviced by the Company during the twelve months before your termination date, or induce, promote, facilitate, or otherwise contribute to the solicitation of such customers, distributors, or agents or prospective customers, distributors, or agents. You further agree that, during the Restricted Period, you will not communicate for business purposes with any person or entity that was either (1) a customer, distributor, or agent of the Company as of your termination date or (2) a prospective customer, distributor, or agent contacted, called upon, or serviced by the Company during the twelve months before your termination date. This Section 14 shall not apply if you worked in, or were a resident of, the state of California when your employment terminated.
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15.Confidential Information. The Company has expended and continues to expend considerable time and resources developing its Confidential Information; and this information is of great competitive importance and commercial value to the Company. The improper use or disclosure of the Company’s Confidential Information would cause significant and irreparable harm to the Company. Accordingly, by accepting a Restricted Unit Award subject to the Plan and these provisions, you agree to permanently maintain the confidentiality of the Company’s “Confidential Information.” Confidential Information includes, but is not limited to, all information not generally known to the public (in spoken, printed, electronic, or any other form or medium) relating to the Company’s: business (including without limitation, business plans and strategies, financial information, customer or prospective customer information, agent or prospective agent information, distributor or prospective distributor information, marketing plans, terms of agreements, etc.), technologies (including without limitation, computer software, databases, web design, technical drawings, designs, schematics, algorithms, technical data, research plans, systems, etc.), products (including without limitation, product design, pricing, and development information), transactions or potential transactions, services, trade secrets, know-how, formulas, processes, ideas, inventions (whether or not patentable), training materials, personnel information, attorney-client communications, and third-party relationships. The above list is not exhaustive and Confidential Information includes any other information that should be reasonably understood as the confidential or proprietary information of the Company. Confidential Information includes not only information disclosed by the Company to you, but also information developed or learned by you during the course of your employment with the Company. Information is not confidential, however, if it is available in the public domain through no fault of your own.  
16.Recovery of Damages by the Company. You agree that if you were to violate any of Sections 12, 13, 14, and 15 the amount of damages suffered by the Company would be difficult to determine. Therefore, you agree that the Company will be entitled to recover liquidated damages from you equal to the amount of income that you realize under this Restricted Unit Award (including all legally required withholdings) (or, if less, the portion thereof determined by the Committee) if the Committee reasonably determines in good faith that you violated any of Sections 12, 13, 14, or 15. All determinations under this Section shall be made by the Committee, acting reasonably and in good faith, and its determinations shall be final, binding and conclusive on you, the Company, and any other person or entity affected thereby. This liquidated damages provision does not relinquish any equitable remedies and other claims for damages that the Company may have. The Company will be entitled to recover costs and expenses, including attorneys’ fees, incurred in enforcing or bringing any action to protect its rights under Sections 12, 13, 14, or 15.
17.Restricted Units Subject to Plan. These Provisions are subject to the Plan as approved by the Board. The terms and provisions of the Plan as it may be amended from time to time are hereby incorporated herein by reference. In the event of a conflict between any term or provision contained herein and a term or provision of the Plan, the applicable terms and provisions of the Plan will govern and prevail.
18.Acceptance of Award. If you wish to accept your Restricted Unit Award, you must execute a 2020 Long-Term Incentive Plan Awards Acceptance Form, in the manner specified by the Company, which may be in the form of an electronic signature, no later than March 25, 2020.
19.Communications with Government Agencies. Nothing in these Provisions, including, without limitation, Section 12, 15 or 16 hereof, (i) is intended to or will be used in any way to limit your rights to communicate with a government agency, as provided for, protected under or warranted by applicable law or (ii) limits your right to receive an award from the government for information provided
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to any government agency. You may not be held criminally or civilly liable under any federal or state trade secret law for the disclosure of a trade secret that: (a) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney; and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document that is filed under seal in a lawsuit or other proceeding.
Questions regarding a Restricted Unit Award subject to the Plan and requests for additional information about these Provisions, the Plan or the Committee should be directed to Rachel Goodson, Protective Life Corporation, P.O. Box 2606, Birmingham, Alabama 35202 (e-mail: Rachel.Goodson@Protective.com). The Plan, these Provisions and your Award Letter contain the formal terms and conditions of your Award, and you should retain them for future reference. You may obtain a copy of the Plan by written or email request to Rachel Goodson.
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2020 Long-Term Incentive Plan Awards
Acceptance Form
        As of March 15, 2020, you were granted long-term incentive awards under the Protective Life Corporation Long-Term Incentive Plan (the “Plan”). In conjunction with these awards, you have been provided with Award Letters and the applicable provision documents (“Provisions”). The Award Letters, Provisions, and the Plan govern your respective 2020 Awards. The 2020 Awards contain terms and conditions regarding the vesting and payment of the Awards, termination of employment, tax withholding, confidentiality, non-solicitation of Company employees and customers, regulatory compliance, and other important matters. If you agree to and accept the terms of the 2020 Awards, please sign where indicated below by March 25, 2020.

[Employee’s electronic signature]

[Rich’s electronic signature]
Rich Bielen
President and Chief Executive Officer
of Protective Life Corporation

        

Exhibit 31.1
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Richard J. Bielen, certify that:
1. I have reviewed the Quarterly Report on Form 10-Q for the period ended March 31, 2020, of Protective Life Insurance Company;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 14, 2020
/s/ Richard J. Bielen
Chairman of the Board, President
and Chief Executive Officer



Exhibit 31.2
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Steven G. Walker, certify that:
1. I have reviewed the Quarterly Report on Form 10-Q for the period ended March 31, 2020, of Protective Life Insurance Company;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: May 14, 2020
/s/ Steven G. Walker
Executive Vice President and
Chief Financial Officer



Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Protective Life Insurance Company (the “Company”) on Form 10-Q for the period ended March 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Richard J. Bielen, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Richard J. Bielen
Chairman of the Board, President
and Chief Executive Officer
May 14, 2020
This certification accompanies the Report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.



Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Protective Life Insurance Company (the “Company”) on Form 10-Q for the period ended March 31, 2020, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven G. Walker, Executive Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Steven G. Walker
Executive Vice President and
Chief Financial Officer
May 14, 2020
This certification accompanies the Report pursuant to §906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of §18 of the Securities Exchange Act of 1934, as amended.