Table of Contents

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

FORM 10-Q

 

x       Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended June 30, 2014

 

or

 

o          Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                          to                         

 

Commission File Number 00 1-11339

 

PROTECTIVE LIFE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

2801 HIGHWAY 280 SOUTH

BIRMINGHAM, ALABAMA 35223

(Address of principal executive offices and zip code)

 

Registrant’s telephone number, including area code   (205) 268-1000

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x   No  o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

 

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

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes  o   No  x

 

Number of shares of Common Stock, $0.50 Par Value, outstanding as of July 23, 2014:  78,861,427

 

 

Table of Contents

 

PROTECTIVE LIFE CORPORATION

QUARTERLY REPORT ON FORM 10-Q

FOR QUARTERLY PERIOD ENDED JUNE 30, 2014

 

TABLE OF CONTENTS

 

		Page
	PART I
Item 1.	Financial Statements (unaudited):
	Consolidated Condensed Statements of Income For The Three and Six Months Ended June 30, 2014 and 2013	3
	Consolidated Condensed Statements of Comprehensive Income (Loss) For The Three and Six Months Ended June 30, 2014 and 2013	4
	Consolidated Condensed Balance Sheets as of June 30, 2014 and December 31, 2013	5
	Consolidated Condensed Statement of Shareowners’ Equity For The Six Months Ended June 30, 2014	7
	Consolidated Condensed Statements of Cash Flows For The Six Months Ended June 30, 2014 and 2013	8
	Notes to Consolidated Condensed Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	62
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	126
Item 4.	Controls and Procedures	126
	PART II
Item 1.	Legal Proceedings	127
Item 1A.	Risk Factors and Cautionary Factors that may Affect Future Results	127
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	137
Item 6.	Exhibits	138
	Signature	139

 

2

Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF INCOME

(Unaudited)

 

		For The						For The
		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2014			2013			2014			2013
		(Dollars In Thousands, Except Per Share Amounts)
Revenues
Premiums and policy fees		$	851,802		$	756,331		$	1,667,698		$	1,483,178
Reinsurance ceded		(342,968		)	(390,490		)	(670,681		)	(725,840		)
Net of reinsurance ceded		508,834			365,841			997,017			757,338
Net investment income		550,816			466,220			1,088,979			923,854
Realized investment gains (losses):
Derivative financial instruments		(89,926		)	143,881			(195,276		)	151,266
All other investments		80,148			(109,978		)	152,262			(114,123		)
Other-than-temporary impairment losses		(461		)	(1,789		)	(884		)	(3,129		)
Portion recognized in other comprehensive income (before taxes)		(999		)	(2,211		)	(2,167		)	(5,455		)
Net impairment losses recognized in earnings		(1,460		)	(4,000		)	(3,051		)	(8,584		)
Other income		106,931			94,392			205,970			179,419
Total revenues		1,155,343			956,356			2,245,901			1,889,170
Benefits and expenses
Benefits and settlement expenses, net of reinsurance ceded: (three months: 2014 - $328,555; 2013 - $370,752; six months: 2014 - $633,387; 2013 - $678,058)		747,816			557,866			1,476,335			1,139,746
Amortization of deferred policy acquisition costs and value of business acquired		51,531			74,946			107,113			127,185
Other operating expenses, net of reinsurance ceded: (three months: 2014 - $46,545; 2013 - $50,406; six months: 2014 - $90,311; 2013 - $91,395)		193,786			166,531			375,038			347,599
Total benefits and expenses		993,133			799,343			1,958,486			1,614,530
Income before income tax		162,210			157,013			287,415			274,640
Income tax expense		54,233			53,814			95,799			93,150
Net income		$	107,977		$	103,199		$	191,616		$	181,490
Net income - basic		$	1.35		$	1.30		$	2.40		$	2.29
Net income - diluted		$	1.33		$	1.27		$	2.36		$	2.24
Cash dividends paid per share		$	0.24		$	0.20		$	0.44		$	0.38
Average shares outstanding - basic		79,979,153			79,404,770			79,794,831			79,272,814
Average shares outstanding - diluted		81,446,277			81,087,238			81,160,800			80,898,042

 

See Notes to Consolidated Condensed Financial Statements

 

3

---

Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Unaudited)

 

		For The						For The
		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2014			2013			2014			2013
		(Dollars In Thousands)
Net income		$	107,977		$	103,199		$	191,616		$	181,490
Other comprehensive income (loss):
Change in net unrealized gains (losses) on investments, net of income tax: (three months: 2014 - $216,476; 2013 - $(420,013); six months: 2014 - $476,065; 2013 - $(496,308))		402,027			(780,022		)	884,120			(921,713		)
Reclassification adjustment for investment amounts included in net income, net of income tax: (three months: 2014 - $(6,558); 2013 - $(6,131); six months: 2014 - $(8,581); 2013 - $(8,835))		(12,180		)	(11,387		)	(15,936		)	(16,409		)
Change in net unrealized gains (losses) relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (three months: 2014 - $(571); 2013 - $(1,293); six months: 2014 - $1,858; 2013 - $2,926)		(1,061		)	(2,402		)	3,450			5,435
Change in accumulated (loss) gain - derivatives, net of income tax: (three months: 2014 - $(325); 2013 - $(1,606); six months: 2014 - $(9); 2013 - $(63))		(604		)	(2,983		)	(17		)	(117		)
Reclassification adjustment for derivative amounts included in net income, net of income tax: (three months: 2014 - $214; 2013 - $203; six months: 2014 - $449; 2013 - $377)		399			377			835			700
Change in postretirement benefits liability adjustment, net of income tax: (three months: 2014 - $1,896; 2013 - $(922); six months: 2014 - $1,264; 2013 - $(1,844))		3,520			(1,712		)	2,347			(3,424		)
Total other comprehensive income (loss)		392,101			(798,129		)	874,799			(935,528		)
Total comprehensive income (loss)		$	500,078		$	(694,930	)	$	1,066,415		$	(754,038	)

 

See Notes to Consolidated Condensed Financial Statements

 

4

Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(Unaudited)

 

		As of
		June 30, 2014			December 31, 2013
		(Dollars In Thousands)
Assets
Fixed maturities, at fair value (amortized cost: 2014 - $34,244,088; 2013 - $33,662,295)		$	37,164,427		$	34,815,931
Fixed maturities, at amortized cost (fair value: 2014 - $451,382; 2013 - $335,676)		400,000			365,000
Equity securities, at fair value (cost: 2014 - $771,004; 2013 - $675,758)		792,047			646,027
Mortgage loans (2014 and 2013 includes: $531,141 and $627,731 related to securitizations)		5,294,729			5,493,492
Investment real estate, net of accumulated depreciation (2014 - $1,123; 2013 - $1,066)		18,856			20,413
Policy loans		1,778,379			1,815,744
Other long-term investments		475,719			521,811
Short-term investments		208,624			134,146
Total investments		46,132,781			43,812,564
Cash		361,088			466,542
Accrued investment income		485,620			465,333
Accounts and premiums receivable, net of allowance for uncollectible amounts (2014 - $4,322; 2013 - $4,283)		101,891			101,039
Reinsurance receivables		6,132,712			6,175,115
Deferred policy acquisition costs and value of business acquired		3,273,275			3,570,215
Goodwill		103,914			105,463
Property and equipment, net of accumulated depreciation (2014 - $115,056; 2013 - $111,579)		53,421			52,403
Other assets		385,060			432,151
Assets related to separate accounts
Variable annuity		13,304,455			12,791,438
Variable universal life		823,747			783,618
Total assets		$	71,157,964		$	68,755,881

 

See Notes to Consolidated Condensed Financial Statements

 

5

Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED BALANCE SHEETS

(continued)

(Unaudited)

 

		As of
		June 30, 2014			December 31, 2013
		(Dollars In Thousands)
Liabilities
Future policy benefits and claims		$	29,823,111		$	29,772,325
Unearned premiums		1,586,785			1,549,815
Total policy liabilities and accruals		31,409,896			31,322,140
Stable value product account balances		2,435,995			2,559,552
Annuity account balances		11,071,468			11,125,253
Other policyholders’ funds		1,400,817			1,214,380
Other liabilities		1,381,570			1,143,371
Income tax payable		99,869			12,761
Deferred income taxes		1,489,331			1,050,533
Non-recourse funding obligations		579,078			562,448
Repurchase program borrowings		420,490			350,000
Debt		1,445,000			1,585,000
Subordinated debt securities		540,593			540,593
Liabilities related to separate accounts
Variable annuity		13,304,455			12,791,438
Variable universal life		823,747			783,618
Total liabilities		66,402,309			65,041,087
Commitments and contingencies - Note 10
Shareowners’ equity
Preferred Stock; $1 par value, shares authorized: 4,000,000; Issued: None
Common Stock, $.50 par value, shares authorized: 2014 and 2013 - 160,000,000 shares issued: 2014 and 2013 - 88,776,960		$	44,388		$	44,388
Additional paid-in-capital		610,451			606,934
Treasury stock, at cost (2014 - 9,915,533; 2013 - 10,199,514)		(194,838		)	(200,416		)
Retained earnings		2,926,789			2,769,822
Accumulated other comprehensive income (loss):
Net unrealized gains (losses) on investments, net of income tax: (2014 - $757,392; 2013 - $289,908)		1,406,584			538,400
Net unrealized (losses) gains relating to other-than-temporary impaired investments for which a portion has been recognized in earnings, net of income tax: (2014 - $2,183; 2013 - $325)		4,053			603
Accumulated loss - derivatives, net of income tax: (2014 - $(226); 2013 - $(666))		(417		)	(1,235		)
Postretirement benefits liability adjustment, net of income tax: (2014 - $(22,268); 2013 - $(23,532))		(41,355		)	(43,702		)
Total shareowners’ equity		4,755,655			3,714,794
Total liabilities and shareowners’ equity		$	71,157,964		$	68,755,881

 

See Notes to Consolidated Condensed Financial Statements

 

6

Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF SHAREOWNERS’ EQUITY

(Unaudited)

 

														Accumulated
					Additional									Other			Total
		Common			Paid-In-			Treasury			Retained			Comprehensive			Shareowners’
		Stock			Capital			Stock			Earnings			Income			equity
		(Dollars In Thousands)
Balance, December 31, 2013		$	44,388		$	606,934		$	(200,416	)	$	2,769,822		$	494,066		$	3,714,794
Net income for the six months ended June 30, 2014											191,616						191,616
Other comprehensive income														874,799			874,799
Comprehensive income for the six months ended June 30, 2014																	1,066,415
Cash dividends ($0.440 per share)											(34,649		)				(34,649		)
Stock-based compensation					3,517			5,578									9,095
Balance, June 30, 2014		$	44,388		$	610,451		$	(194,838	)	$	2,926,789		$	1,368,865		$	4,755,655

 

See Notes to Consolidated Condensed Financial Statements

 

7

Table of Contents

 

PROTECTIVE LIFE CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

		For The Six Months Ended June 30,
		2014			2013
		(Dollars In Thousands)
Cash flows from operating activities
Net income		$	191,616		$	181,490
Adjustments to reconcile net income to net cash provided by operating activities:
Realized investment losses (gains)		46,065			(28,559		)
Amortization of deferred policy acquisition costs and value of business acquired		107,113			127,185
Capitalization of deferred policy acquisition costs		(136,561		)	(163,676		)
Depreciation expense		3,757			4,404
Deferred income tax		(30,728		)	87,166
Accrued income tax		91,410			30,840
Interest credited to universal life and investment products		422,306			448,223
Policy fees assessed on universal life and investment products		(481,402		)	(442,576		)
Change in reinsurance receivables		42,403			(26,793		)
Change in accrued investment income and other receivables		(16,821		)	10,675
Change in policy liabilities and other policyholders’ funds of traditional life and health products		83,825			63,368
Trading securities:
Maturities and principal reductions of investments		47,888			101,838
Sale of investments		112,473			167,872
Cost of investments acquired		(75,742		)	(245,520		)
Other net change in trading securities		(52,325		)	13,544
Change in other liabilities		104,961			(91,691		)
Other income - gains on repurchase of non-recourse funding obligations		(4,587		)	(3,359		)
Other, net		(32,161		)	(43,064		)
Net cash provided by operating activities		423,490			191,367
Cash flows from investing activities
Maturities and principal reductions of investments, available-for-sale		656,492			489,364
Sale of investments, available-for-sale		768,785			1,336,778
Cost of investments acquired, available-for-sale		(2,071,692		)	(2,684,864		)
Change in investments, held-to-maturity		(35,000		)	(35,000		)
Mortgage loans:
New lendings		(351,505		)	(171,997		)
Repayments		547,698			345,704
Change in investment real estate, net		1,256			4,148
Change in policy loans, net		37,365			9,611
Change in other long-term investments, net		(73,387		)	(122,295		)
Change in short-term investments, net		(35,799		)	18,431
Net unsettled security transactions		47,933			51,883
Purchase of property and equipment		(4,776		)	(10,865		)
Sales of property and equipment		—			57
Payments for business acquisitions		(906		)	—
Net cash used in investing activities		(513,536		)	(769,045		)
Cash flows from financing activities
Borrowings under line of credit arrangements and debt		90,000			380,000
Principal payments on line of credit arrangement and debt		(230,000		)	(320,000		)
Issuance (repayment) of non-recourse funding obligations		16,630			18,900
Repurchase program borrowings		70,490			190,000
Dividends to shareowners		(34,649		)	(29,763		)
Investment product deposits and change in universal life deposits		1,304,549			1,718,353
Investment product withdrawals		(1,232,428		)	(1,492,901		)
Net cash (used in) provided by financing activities		(15,408		)	464,589
Change in cash		(105,454		)	(113,089		)
Cash at beginning of period		466,542			368,801
Cash at end of period		$	361,088		$	255,712

 

See Notes to Consolidated Condensed Financial Statements

 

8

Table of Contents

 

PROTECTIVE LIFE CORPORATION

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(Unaudited)

 

1.                                       BASIS OF PRESENTATION

 

Basis of Presentation

 

The accompanying unaudited consolidated condensed financial statements of Protective Life Corporation and subsidiaries (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. In the opinion of management, the accompanying financial statements reflect all adjustments (consisting only of normal recurring items) necessary for a fair statement of the results for the interim periods presented. Operating results for the three and six month periods ended June 30, 2014, are not necessarily indicative of the results that may be expected for the year ending December 31, 2014. The year-end consolidated condensed financial data was derived from audited financial statements but 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, 2013 .

 

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.

 

Reclassifications

 

Certain reclassifications have been made in the previously reported financial statements and accompanying notes to make the prior year amounts comparable to those of the current year. Such reclassifications had no effect on previously reported net income or shareowners’ equity.

 

Entities Included

 

The consolidated condensed financial statements include the accounts of Protective Life Corporation and subsidiaries and its affiliate companies in which the Company holds a majority voting or economic interest. Intercompany balances and transactions have been eliminated.

 

2.                                       SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Significant Accounting Policies

 

For a full description of significant accounting policies, see Note 2 to consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013. There were no significant changes to the Company’s accounting policies during the six months ended June 30, 2014.

 

Accounting Pronouncements Not Yet Adopted

 

Accounting Standards Update (“ASU”) No. 2014-08 — Reporting Discontinued Operations and Disclosure of Disposals of Components of an Entity. This Update changes the requirements for reporting discontinued operations and related disclosures. The Update limits the definition of a discontinued operation to disposals that represent “strategic shifts” that will have a major effect on an entity’s operation and financial results. Additionally, the Update requires enhanced disclosures about the components of discontinued operations and the financial effects of the disposal. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2014. The Company is reviewing the additional disclosures required by the Update, and will apply the revised guidance to any disposals occurring after the effective date.

 

9

---

Table of Contents

 

ASU No. 2014-09 — Revenue from Contracts with Customers (Topic 606). This Update provides for significant revisions to the recognition of revenue from contracts with customers across various industries. Under the new guidance, entities are required to apply a prescribed 5-step process to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The accounting for revenues associated with insurance products is not within the scope of this Update. The Update is effective for annual and interim periods beginning after December 15, 2016. The Company is reviewing is reviewing its policies and processes to ensure compliance with the requirements in this Update.

 

ASU No. 2014-11 — Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. This Update changes the requirements for classification of certain repurchase agreements, and will expand the use of secured borrowing accounting for repurchase-to-maturity transactions. In addition, the Update requires additional disclosures for repurchase agreements accounted for both as sales and as secured borrowings. The amendments in this Update are effective for annual and interim periods beginning after December 15, 2014. The Update will not impact the Company’s financial position or results of operations. The Company is reviewing its policies and processes to ensure compliance with the additional disclosure requirements in this Update.

 

3.                                       SIGNIFICANT ACQUISITIONS

 

On October 1, 2013 Protective Life Insurance Company (“PLICO”) completed the acquisition contemplated by the master agreement (the “Master Agreement”) dated April 10, 2013. Pursuant to that Master Agreement with AXA Financial, Inc. (“AXA”) and AXA Equitable Financial Services, LLC (“AEFS”), PLICO acquired the stock of MONY Life Insurance Company (“MONY”) from AEFS and entered into a reinsurance agreement (the “Reinsurance Agreement”) pursuant to which it reinsured on a 100% indemnity reinsurance basis certain business (the “MLOA Business”) of MONY Life Insurance Company of America (“MLOA”). The final aggregate purchase price of MONY was $689 million. The ceding commission for the reinsurance of the MLOA Business was $370 million. Together, the purchase of MONY and reinsurance of the MLOA Business are hereto referred to as (the “MONY acquisition”). The MONY acquisition allowed the Company to invest its capital and increase the scale of its Acquisitions segment. The MONY acquisition business is comprised of traditional and universal life insurance policies and fixed and variable annuities, most of which were written prior to 2004.

 

The MONY acquisition was accounted for under the acquisition method of accounting under ASC Topic 805. In accordance with ASC 805-20-30, all identifiable assets acquired and liabilities assumed were measured at fair value as of the acquisition date. During the current quarter as a result of new information obtained about facts and circumstances that existed as of the acquisition date, the Company recorded certain measurement period adjustments to fixed maturities, mortgage loans, cash, accounts and premiums receivable, VOBA, other assets, deferred income taxes, future policy benefits and claims, other policyholders’ funds, and other liabilities. These were customary adjustments that occurred during the normal course of reviewing and integrating the MONY acquisition. The net result on the amount of VOBA recorded by the Company in relation to the MONY acquisition was to decrease VOBA by approximately $14.0 million. This impact has been revised in the comparative consolidated balance sheet presented as of December 31, 2013. The Company has determined that the impact on amortization and other related amounts within the comparative interim and annual periods from that previously presented in the annual or interim consolidated condensed statements of income is immaterial. The amounts presented in the following table related to the MONY acquisition (presented as of the acquisition date of October 1, 2013) have been retrospectively revised for the aforementioned measurement period adjustments.

 

10

Table of Contents

 

The following table summarizes the consideration paid for the acquisition and the determination of the fair value of assets acquired and liabilities assumed at the acquisition date:

 

		Fair Value
		As of
		October 1, 2013
		(Dollars In Thousands)
Assets
Fixed maturities, at fair value		$	6,557,853
Equity securities, at fair value		108,413
Mortgage loans		830,415
Policy loans		967,534
Short-term investments		130,963
Total investments		8,595,178
Cash		216,164
Accrued investment income		114,695
Accounts and premiums receivable, net of allowance for uncollectible amounts		26,055
Reinsurance receivables		422,692
Value of business acquired		205,767
Other assets		5,104
Income tax receivables		21,197
Deferred income taxes		188,142
Separate account assets		195,452
Total assets		$	9,990,446
Liabilities
Future policy benefits and claims		$	7,645,969
Unearned premiums		3,066
Total policy liabilities and accruals		7,649,035
Annuity account balances		752,163
Other policyholders’ funds		636,448
Other liabilities		66,124
Non-recourse funding obligation		2,548
Separate account liabilities		195,344
Total liabilities		9,301,662
Net assets acquired		$	688,784

 

The following (unaudited) pro forma condensed consolidated results of operations assumes that the aforementioned acquisition was completed as of January 1, 2012:

 

		Unaudited
		For The			For The
		Three Months Ended			Six Months Ended
		June 30, 2013			June 30, 2013
		(Dollars In Thousands)
Revenue		$	1,162,748		$	2,316,066
Net income		$	120,589		$	205,516
EPS - basic		$	1.52		$	2.59
EPS - diluted		$	1.49		$	2.54

 

11

Table of Contents

 

4.                                       MONY CLOSED BLOCK OF BUSINESS

 

In 1998, 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 MONY acquisition as discussed in Note 3, Significant Acquisitions .

 

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 Insurance Department (the “Superintendent”). Closed Block assets and liabilities are carried on the same basis as similar assets and liabilities held in the general account.

 

The excess of Closed Block liabilities over Closed Block assets (adjusted to exclude the impact of related amounts in accumulated other comprehensive income (loss) (“AOCI”)) at the acquisition date represented the estimated maximum future post-tax earnings from the Closed Block that would be recognized in income from continuing operations over the period the policies and contracts in the Closed Block remain in force. In connection with the acquisition of MONY, the Company has developed an actuarial calculation of the expected timing of MONY’s Closed Block’s earnings as of October 1, 2013.

 

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

 

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

 

12

Table of Contents

 

Summarized financial information for the Closed Block from December 31, 2013 through June 30, 2014 is as follows:

 

		As of
		June 30, 2014			December 31, 2013
		(Dollars In Thousands)
Closed block liabilities
Future policy benefits, policyholders’ account balances and other		$	6,195,402		$	6,261,819
Policyholder dividend obligation		328,872			190,494
Other liabilities		59,751			1,259
Total closed block liabilities		6,584,025			6,453,572
Closed block assets
Fixed maturities, available-for-sale, at fair value		$	4,402,851		$	4,109,142
Equity securities, available-for-sale, at fair value		5,369			5,223
Mortgage loans on real estate		512,800			601,959
Policy loans		787,348			802,013
Cash and other invested assets		70,954			140,577
Other assets		237,931			207,265
Total closed block assets		6,017,253			5,866,179
Excess of reported closed block liabilities over closed block assets		566,772			587,393
Portion of above representing accumulated other comprehensive income:
Net unrealized investment gains (losses) net of deferred tax benefit of $0 and $1,074 net of policyholder dividend obligation of $86,196 and $12,720		—			(1,994		)
Future earnings to be recognized from closed block assets and closed block liabilities		$	566,772		$	585,399

 

Reconciliation of the policyholder dividend obligation from December 31, 2013 through June 30, 2014 is as follows:

 

		For The
		Six Months Ended
		June 30, 2014
		(Dollars In Thousands)
Policyholder dividend obligation, at December 31, 2013		$	190,494
Applicable to net revenue (losses)		(6,951		)
Change in net unrealized investment gains (losses) allocated to the policyholder dividend obligation		145,329
Policyholder dividend obligation, end of period		$	328,872

 

13

Table of Contents

 

Closed Block revenues and expenses were as follows:

 

		For The			For The
		Three Months Ended			Six Months Ended
		June 30, 2014			June 30, 2014
		(Dollars In Thousands)
Revenues
Premiums and other income		$	53,073		$	102,846
Net investment income		60,416			112,623
Net investment gains		1,086			6,105
Total revenues		114,575			221,574
Benefits and other deduction
Benefits and settlement expenses		103,209			199,535
Other operating expenses		383			90
Total benefits and other deductions		103,592			199,625
Net revenues before income taxes		10,983			21,949
Income tax expense		3,844			7,682
Net revenues		$	7,139		$	14,267

 

5.                                       PROPOSED DAI-ICHI MERGER

 

On June 3, 2014, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with The Dai-ichi Life Insurance Company, Limited, a kabushiki kaisha organized under the laws of Japan (“Dai-ichi”) and DL Investment (Delaware), Inc., a Delaware corporation and wholly owned subsidiary of Dai-ichi which provides for the merger of DL Investment (Delaware), Inc. with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly owned subsidiary of Dai-ichi.

 

The Company’s Board of Directors unanimously (1) determined that the Merger and the other transactions contemplated by the Merger Agreement are fair to, advisable and in the best interests of, the Company and its shareowners, (2) approved the execution, delivery and performance of the Merger Agreement by the Company and the consummation of the Merger and the other transactions contemplated by the Merger Agreement, and (3) resolved to recommend the approval and adoption of the Merger Agreement and the transactions contemplated by the Merger Agreement by the shareowners of the Company. The Board of Directors received an opinion as to the fairness of the Merger consideration to be received by the shareowners of the Company from its financial advisor, Morgan Stanley & Co. LLC related to the terms of the Merger Agreement.

 

If the proposed Merger is completed, at the effective time of the Merger (the “Effective Time”), each share of the Company’s common stock, par value $0.50 per share, issued and outstanding immediately prior to the Effective Time, other than certain excluded shares, will be converted into the right to receive $70 in cash, without interest (the “Per Share Merger Consideration”). Shares of common stock held by Dai-ichi or the Company or their respective direct or indirect wholly-owned subsidiaries will not be entitled to receive the Merger Consideration. Stock appreciation rights, restricted stock units and performance shares issued under various benefit plans will be paid out as described below under “Treatment of Benefit Plans”.

 

Shareowners of the Company will be asked to vote on the adoption of the Merger Agreement and the Merger at a special shareowners meeting that will be held on a date to be announced. Completion of the Merger is subject to various closing conditions, including, but not limited to, (1) adoption of the Merger Agreement by the affirmative vote of the holders of at least a majority of all outstanding shares of the Company’s common stock (the “Shareowner Approval”), (2) requisite approval of the Japan Financial Services Agency of an application and notification filing by Dai-ichi and its affiliates, (3) the receipt of certain insurance regulatory approvals, (4) the absence of any laws that have been adopted or promulgated, or any order, injunction, decision or decree issued or remaining in effect, that would prohibit the Merger or make the Merger illegal, and (5) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, which waiting period terminated on July 25, 2014, pursuant to a grant of early termination by the Federal Trade Commission. Each party’s obligation to consummate the Merger also is subject to certain additional conditions that include the accuracy of the other party’s representations and warranties contained in the Merger Agreement (subject to certain materiality qualifiers) and the other party’s compliance with its covenants and agreements contained in the Merger Agreement in all material respects. The Merger Agreement does not contain a financing condition.

 

14

Table of Contents

 

The Merger Agreement contains representations and warranties customary for transactions of this type. The Company has agreed to various customary covenants and agreements, including, among others, agreements to conduct its business in the ordinary course during the period between the execution of the Merger Agreement and the Effective Time, not to engage in certain kinds of transactions during this period, and to convene and hold a meeting of its shareowners for the purpose of obtaining the Shareowners Approval.

 

In addition, and subject to certain limitations, either party may terminate the Merger Agreement if the Merger is not consummated by February 28, 2015, which date is extended until April 30, 2015 in the event of delays in obtaining regulatory approval.

 

Treatment of Benefit Plans

 

Pursuant to the Merger Agreement, at or immediately prior to the Effective Time, each stock appreciation right with respect to shares of Common Stock granted under any Stock Plan (each, a “SAR”) that is outstanding and unexercised immediately prior to the Effective Time and that has a base price per share of Common Stock underlying such SAR (the “Base Price”) that is less than the Per Share Merger Consideration (each such SAR, an “In-the-Money SAR”), whether or not exercisable or vested, will be cancelled and converted into the right to receive an amount in cash, without interest, determined by multiplying (i) the excess of the Per Share Merger Consideration over the Base Price of such In-the-Money SAR by (ii) the number of shares of Common Stock subject to such In-the-Money SAR (such amount, the “SAR Consideration”). At the Effective Time, each SAR that has a Base Price that is equal to or greater than the Per Share Merger Consideration, whether or not exercisable or vested, will be cancelled and the holder of such SAR will not be entitled to receive any payment in exchange for such cancellation.

 

Pursuant to the Merger Agreement, at or immediately prior to the Effective Time, each restricted share unit with respect to a share of Common Stock granted under any Stock Plan (each, a “RSU”) that is outstanding immediately prior to the Effective Time, whether or not vested, will be cancelled and converted into the right to receive an amount in cash, without interest, determined by multiplying (i) the Per Share Merger Consideration by (ii) the number of RSUs.

 

Pursuant to the Merger Agreement, at or immediately prior to the Effective Time, the number of performance shares earned for each award of performance shares granted under any Stock Plan will be calculated by determining the number of performance shares that would have been paid if the subject award period had ended on the December 31 immediately preceding the Effective Time (based on the conditions set for payment of performance share awards for the subject award period), provided that the number of performance shares earned for each award will not be less than the aggregate number of performance shares at the target performance level, and provided further that with respect to awards granted in the year in which the Effective Time occurs, performance shares will be earned at the same percentage as awards granted in the year preceding the year in which the Effective Time occurs. At or immediately prior to the Effective Time, each performance share so earned (each, a “Performance Share”) that is outstanding immediately prior to the Effective Time, whether or not vested, will be cancelled and converted into the right to receive an amount in cash, without interest, determined by multiplying (i) the Per Share Merger Consideration by (ii) the number of Performance Shares.

 

15

Table of Contents

 

6.                                       INVESTMENT OPERATIONS

 

Net realized gains (losses) for all other investments are summarized as follows:

 

		For The						For The
		Three Months Ended						Six Months Ended
		June 30,						June 30,
		2014			2013			2014			2013
		(Dollars In Thousands)
Fixed maturities		$	20,198		$	19,152		$	27,568		$	31,461
Equity securities		—			2,366			—			2,367
Impairments on fixed maturity securities		(1,460		)	(2,910		)	(3,051		)	(6,497		)
Impairments on equity securities		—			(1,090		)	—			(2,087		)
Modco trading portfolio		60,989			(126,694		)	127,292			(142,022		)
Other investments		(1,039		)	(4,802		)	(2,598		)	(5,929		)
Total realized gains (losses) - investments		$	78,688		$	(113,978	)	$	149,211		$	(122,707	)

 

For the three and six months ended June 30, 2014, gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $20.4 million and $28.1 million and gross realized losses were $1.6 million and $3.4 million, including $1.4 million and $2.9 million of impairment losses, respectively.

 

For the three and six months ended June 30, 2013, gross realized gains on investments available-for-sale (fixed maturities, equity securities, and short-term investments) were $23.9 million and $36.8 million and gross realized losses were $6.2 million and $11.1 million, including $3.8 million and $8.2 million of impairment losses, respectively.

 

For the three and six months ended June 30, 2014, the Company sold securities in an unrealized gain position with a fair value (proceeds) of $306.3 million and $571.0 million, respectively. The gain realized on the sale of these securities was $20.4 million and $28.1 million, respectively.

 

For the three and six months ended June 30, 2013, the Company sold securities in an unrealized gain position with a fair value (proceeds) of $409.9 million and $798.5 million, respectively. The gain realized on the sale of these securities was $23.9 million and $36.8 million, respectively.

 

For the three and six months ended June 30, 2014, the Company sold or otherwise disposed of securities in an unrealized loss position with a fair value (proceeds) of $1.6 million and $4.4 million, respectively. The losses realized on the sale of these securities were $0.2 million and $0.5 million, respectively. The Company made the decision to exit these holdings in conjunction with our overall asset liability management process.

 

For the three and six months ended June 30, 2013, the Company sold securities in an unrealized loss position with a fair value (proceeds) of $53.2 million and $57.2 million, respectively. The losses realized on the sale of these securities were $2.4 million and $3.0 million, respectively. The Company made the decision to exit these holdings in conjunction with our overall asset liability management process.

 

16

Table of Contents

 

The amortized cost and fair value of the Company’s investments classified as available-for-sale as of June 30, 2014 and December 31, 2013, are as follows:

 

					Gross			Gross						Total OTTI
		Amortized			Unrealized			Unrealized			Fair			Recognized
		Cost			Gains			Losses			Value			in OCI (1)
		(Dollars In Thousands)
2014
Fixed maturities:
Bonds
Residential mortgage-backed securities		$	1,398,009		$	50,699		$	(13,971	)	$	1,434,737		$	6,318
Commercial mortgage-backed securities		1,039,299			52,339			(4,023		)	1,087,615			—
Other asset-backed securities		878,416			20,116			(32,847		)	865,685			(82		)
U.S. government-related securities		1,544,310			46,206			(21,785		)	1,568,731			—
Other government-related securities		19,179			3,035			—			22,214			—
States, municipals, and political subdivisions		1,372,418			234,104			(3,673		)	1,602,849			—
Corporate bonds		25,137,768			2,669,336			(79,197		)	27,727,907			—
		31,389,399			3,075,835			(155,496		)	34,309,738			6,236
Equity securities		747,284			35,119			(14,075		)	768,328			—
Short-term investments		117,511			—			—			117,511			—
		$	32,254,194		$	3,110,954		$	(169,571	)	$	35,195,577		$	6,236
2013
Fixed maturities:
Bonds
Residential mortgage-backed securities		$	1,435,477		$	34,155		$	(24,564	)	$	1,445,068		$	979
Commercial mortgage-backed securities		963,461			26,900			(19,705		)	970,656			—
Other asset-backed securities		926,396			15,135			(69,548		)	871,983			(51		)
U.S. government-related securities		1,529,818			32,150			(54,078		)	1,507,890			—
Other government-related securities		49,171			2,257			(1		)	51,427			—
States, municipals, and political subdivisions		1,315,457			103,663			(8,291		)	1,410,829			—
Corporate bonds		24,644,025			1,507,630			(392,067		)	25,759,588			—
		30,863,805			1,721,890			(568,254		)	32,017,441			928
Equity securities		654,579			6,631			(36,362		)	624,848			—
Short-term investments		81,703			—			—			81,703			—
		$	31,600,087		$	1,728,521		$	(604,616	)	$	32,723,992		$	928

 

---

(1) These amounts are included in the gross unrealized gains and gross unrealized losses columns above.

 

The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of June 30, 2014 and December 31, 2013, are as follows:

 

					Gross			Gross						Total OTTI
		Amortized			Unrealized			Unrealized			Fair			Recognized
		Cost			Gains			Losses			Value			in OCI
		(Dollars In Thousands)
2014
Fixed maturities:
Other		$	400,000		$	51,382		$	—		$	451,382		$	—
		$	400,000		$	51,382		$	—		$	451,382		$	—
2013
Fixed maturities:
Other		$	365,000		$	—		$	(29,324	)	$	335,676		$	—
		$	365,000		$	—		$	(29,324	)	$	335,676		$	—

 

17