2013-06-30-AEL-10Q


FORM 10-Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2013
OR
o 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number : 001-31911
American Equity Investment Life Holding Company
(Exact name of registrant as specified in its charter)
Iowa
 
42-1447959
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
6000 Westown Parkway
West Des Moines, Iowa
 
50266
(Address of principal executive offices)
 
(Zip Code)
 
 
 
Registrant's telephone number, including area code
 
(515) 221-0002
 
 
(Telephone)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock, par value $1
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1
Indicate by check mark whether the registrant (1) has filed all documents and reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
 
Accelerated filer x
Non-accelerated filer o
 
Smaller reporting company o
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes o No x
APPLICABLE TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Shares of common stock outstanding at July 31, 2013: 64,710,572




TABLE OF CONTENTS
 
Page
 
 
 
 
 
 






PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share data)
 
June 30, 2013
 
December 31, 2012
 
(Unaudited)
 
 
Assets
 
 
 
Investments:
 
 
 
Fixed maturity securities:
 
 
 
Available for sale, at fair value (amortized cost: 2013 - $24,789,087; 2012 - $21,957,027)
$
25,545,642

 
$
24,172,136

Held for investment, at amortized cost (fair value: 2013 - $61,250; 2012 - $61,521)
76,170

 
76,088

Equity securities, available for sale, at fair value (cost: 2013 - $8,915; 2012 - $44,598)
9,790

 
53,422

Mortgage loans on real estate
2,583,703

 
2,623,940

Derivative instruments
629,135

 
415,258

Other investments
208,635

 
196,366

Total investments
29,053,075

 
27,537,210

 
 
 
 
Cash and cash equivalents
746,889

 
1,268,545

Coinsurance deposits
2,944,726

 
2,910,701

Accrued investment income
287,692

 
261,833

Deferred policy acquisition costs
2,147,252

 
1,709,799

Deferred sales inducements
1,646,164

 
1,292,341

Deferred income taxes
153,701

 

Income taxes recoverable
1,645

 

Other assets
307,406

 
153,049

Total assets
$
37,288,550

 
$
35,133,478

 
 
 
 
Liabilities and Stockholders' Equity
 
 
 
Liabilities:
 
 
 
Policy benefit reserves
$
33,635,600

 
$
31,773,988

Other policy funds and contract claims
440,217

 
455,752

Notes payable
303,126

 
309,869

Subordinated debentures
245,958

 
245,869

Amounts due under repurchase agreements
160,436

 

Deferred income taxes

 
49,303

Income taxes payable

 
4,756

Other liabilities
1,061,137

 
573,704

Total liabilities
35,846,474

 
33,413,241

 
 
 
 
Stockholders' equity:
 
 
 
Preferred stock, par value $1 per share, 2,000,000 shares authorized,
  2013 and 2012 - no shares issued and outstanding

 

Common stock, par value $1 per share, 200,000,000 shares authorized; issued and outstanding:
   2013 - 63,500,933 shares (excluding 4,877,735 treasury shares);
   2012 - 61,750,601 shares (excluding 5,127,379 treasury shares)
63,501

 
61,751

Additional paid-in capital
512,613

 
496,715

Unallocated common stock held by ESOP; 2013 - 186,485 shares; 2012 - 239,799 shares
(2,009
)
 
(2,583
)
Accumulated other comprehensive income
244,280

 
686,807

Retained earnings
623,691

 
477,547

Total stockholders' equity
1,442,076

 
1,720,237

Total liabilities and stockholders' equity
$
37,288,550

 
$
35,133,478

See accompanying notes to unaudited consolidated financial statements.

2



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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
Revenues:
 
 
 
 
 
 
 
Traditional life insurance premiums
$
2,913

 
$
3,248

 
$
5,611

 
$
6,470

Annuity product charges
23,511

 
21,908

 
44,992

 
41,301

Net investment income
336,143

 
320,259

 
665,833

 
647,169

Change in fair value of derivatives
64,040

 
(150,847
)
 
438,002

 
108,314

Net realized gains (losses) on investments, excluding other than temporary impairment ("OTTI") losses
15,689

 
(611
)
 
26,274

 
(6,687
)
OTTI losses on investments:
 
 
 
 
 
 
 
Total OTTI losses
(2,775
)
 
(375
)
 
(4,964
)
 
(2,156
)
Portion of OTTI losses recognized from other comprehensive income

 
(603
)
 
(1,048
)
 
(1,703
)
Net OTTI losses recognized in operations
(2,775
)
 
(978
)
 
(6,012
)
 
(3,859
)
Loss on extinguishment of debt
(589
)
 

 
(589
)
 

Total revenues
438,932

 
192,979

 
1,174,111

 
792,708

 
 
 
 
 
 
 
 
Benefits and expenses:
 
 
 
 
 
 
 
Insurance policy benefits and change in future policy benefits
2,106

 
2,250

 
3,841

 
4,367

Interest sensitive and index product benefits
336,025

 
142,733

 
561,834

 
281,856

Amortization of deferred sales inducements
120,536

 
25,940

 
149,367

 
42,650

Change in fair value of embedded derivatives
(408,409
)
 
(80,989
)
 
(45,137
)
 
278,077

Interest expense on notes payable
6,780

 
7,072

 
14,028

 
14,067

Interest expense on subordinated debentures
3,018

 
3,563

 
6,027

 
7,149

Amortization of deferred policy acquisition costs
169,270

 
44,848

 
215,500

 
79,132

Other operating costs and expenses
24,851

 
18,902

 
44,371

 
40,615

Total benefits and expenses
254,177

 
164,319

 
949,831

 
747,913

Income before income taxes
184,755

 
28,660

 
224,280

 
44,795

Income tax expense
64,642

 
9,901

 
78,136

 
15,565

Net income
$
120,113

 
$
18,759

 
$
146,144

 
$
29,230

 
 
 
 
 
 
 
 
Earnings per common share
$
1.87

 
$
0.31

 
$
2.29

 
$
0.49

Earnings per common share - assuming dilution
$
1.71

 
$
0.30

 
$
2.09

 
$
0.46

Weighted average common shares outstanding (in thousands):
 
 
 
 
 
 
 
Earnings per common share
64,254

 
59,943

 
63,787

 
59,822

Earnings per common share - assuming dilution
70,382

 
64,254

 
69,882

 
64,230

See accompanying notes to unaudited consolidated financial statements.

3



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

 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
Net income
$
120,113

 
$
18,759

 
$
146,144

 
$
29,230

Other comprehensive income (loss):
 
 
 
 
 
 
 
Change in net unrealized investment gains/losses (1)
(634,688
)
 
263,366

 
(669,871
)
 
188,391

Noncredit component of OTTI losses (1)

 
(99
)
 
347

 
290

Reclassification of unrealized investment gains/losses to net income (1)
(7,439
)
 

 
(11,286
)
 

Other comprehensive income (loss) before income tax
(642,127
)
 
263,267

 
(680,810
)
 
188,681

Income tax effect related to other comprehensive income
224,744

 
(92,142
)
 
238,283

 
(66,038
)
Other comprehensive income (loss)
(417,383
)
 
171,125

 
(442,527
)
 
122,643

Comprehensive income (loss)
$
(297,270
)
 
$
189,884

 
$
(296,383
)
 
$
151,873

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

4



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

 
Common
Stock
 
Additional
Paid-in
Capital
 
Unallocated
Common
Stock Held
by ESOP
 
Accumulated
Other
Comprehensive
Income
 
Retained
Earnings
 
Total
Stockholders'
Equity
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2012
$
61,751

 
$
496,715

 
$
(2,583
)
 
$
686,807

 
$
477,547

 
$
1,720,237

Net income for period

 

 

 

 
146,144

 
146,144

Other comprehensive loss

 

 

 
(442,527
)
 

 
(442,527
)
Allocation of 53,314 shares of common stock by ESOP, including excess income tax benefits

 
134

 
574

 

 

 
708

Share-based compensation, including excess income tax benefits

 
3,193

 

 

 

 
3,193

Issuance of 1,533,603 shares of common stock under compensation plans, including excess income tax benefits
1,533

 
11,024

 

 

 

 
12,557

Extinguishment of convertible senior notes, net of tax, including 216,729 shares of common stock issued upon conversion
217

 
1,547

 
 
 
 
 
 
 
1,764

Balance at June 30, 2013
$
63,501

 
$
512,613

 
$
(2,009
)
 
$
244,280

 
$
623,691

 
$
1,442,076

 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2011
$
57,837

 
$
468,281

 
$
(3,620
)
 
$
457,229

 
$
428,952

 
$
1,408,679

Net income for period

 

 

 

 
29,230

 
29,230

Other comprehensive income

 

 

 
122,643

 

 
122,643

Conversion of $12,554 of subordinated debentures
1,550

 
10,291

 

 

 

 
11,841

Allocation of 41,323 shares of common stock by ESOP, including excess income tax benefits

 
22

 
445

 

 

 
467

Share-based compensation, including excess income tax benefits

 
3,719

 

 

 

 
3,719

Issuance of 822,390 shares of common stock under compensation plans, including excess income tax benefits
822

 
250

 

 

 

 
1,072

Balance at June 30, 2012
$
60,209

 
$
482,563

 
$
(3,175
)
 
$
579,872

 
$
458,182

 
$
1,577,651

See accompanying notes to unaudited consolidated financial statements.

5



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

 
Six Months Ended
June 30,
 
2013
 
2012
Operating activities
 
 
 
Net income
$
146,144

 
$
29,230

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Interest sensitive and index product benefits
561,834

 
281,856

Amortization of deferred sales inducements
149,367

 
42,650

Annuity product charges
(44,992
)
 
(41,301
)
Change in fair value of embedded derivatives
(45,137
)
 
278,077

Change in traditional life and accident and health insurance reserves
(1,066
)
 
12,652

Policy acquisition costs deferred
(205,519
)
 
(186,573
)
Amortization of deferred policy acquisition costs
215,500

 
79,132

Provision for depreciation and other amortization
9,356

 
9,150

Amortization of discounts and premiums on investments
9,546

 
(64,020
)
Realized gains/losses on investments and net OTTI losses recognized in operations
(20,262
)
 
10,546

Change in fair value of derivatives
(438,002
)
 
(108,314
)
Deferred income taxes
38,781

 
(14,249
)
Share-based compensation
3,011

 
3,024

Change in accrued investment income
(25,859
)
 
(15,707
)
Change in income taxes payable
(8,483
)
 
(3,493
)
Change in other assets
(296
)
 
(10,077
)
Change in other policy funds and contract claims
(15,535
)
 
33,548

Change in collateral held for derivatives
164,269

 
175,549

Change in other liabilities
475

 
(11,421
)
Other
(1,868
)
 
164

Net cash provided by operating activities
491,264

 
500,423

 
 
 
 
Investing activities
 
 
 
Sales, maturities, or repayments of investments:
 
 
 
Fixed maturity securities - available for sale
2,292,959

 
1,423,179

Fixed maturity securities - held for investment

 
1,688,329

Equity securities - available for sale
44,829

 
5,605

Mortgage loans on real estate
266,539

 
219,423

Derivative instruments
409,050

 
110,201

Other investments
11,737

 
10,362

Acquisition of investments:
 
 
 
Fixed maturity securities - available for sale
(4,962,314
)
 
(3,542,142
)
Mortgage loans on real estate
(228,735
)
 
(152,648
)
Derivative instruments
(190,997
)
 
(184,709
)
Other investments
(19,594
)
 
(83,811
)
Purchases of property, furniture and equipment
(288
)
 
(273
)
Net cash used in investing activities
(2,376,814
)
 
(506,484
)

6



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

 
Six Months Ended
June 30,
 
2013
 
2012
Financing activities
 
 
 
Receipts credited to annuity policyholder account balances
$
2,033,484

 
$
1,808,845

Coinsurance deposits
15,960

 
(28,630
)
Return of annuity policyholder account balances
(829,047
)
 
(760,423
)
Financing fees incurred and deferred
(1,153
)
 

Proceeds from notes payable
15,000

 

Repayment of notes payable
(28,243
)
 

Proceeds from amounts due under repurchase agreements
160,436

 

Excess tax benefits realized from share-based compensation plans
380

 
693

Proceeds from issuance of common stock
12,284

 
1,062

Change in checks in excess of cash balance
(15,207
)
 
(12,608
)
Net cash provided by financing activities
1,363,894

 
1,008,939

Increase (decrease) in cash and cash equivalents
(521,656
)
 
1,002,878

Cash and cash equivalents at beginning of period
1,268,545

 
404,952

Cash and cash equivalents at end of period
$
746,889

 
$
1,407,830

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Cash paid during period for:
 
 
 
Interest expense
$
12,595

 
$
14,308

Income taxes
47,700

 
32,650

Non-cash operating activity:
 
 
 
Deferral of sales inducements
164,931

 
143,248

Non-cash investing activity:
 
 
 
Real estate acquired in satisfaction of mortgage loans
844

 
11,985

Non-cash financing activities:
 
 
 
Conversion of subordinated debentures

 
12,554

Common stock issued in extinguishment of debt
3,367

 

See accompanying notes to unaudited consolidated financial statements.
 

7



AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2013
(Unaudited)

1. Significant Accounting Policies
Consolidation and Basis of Presentation
The accompanying consolidated financial statements of American Equity Investment Life Holding Company (“we”, “us” or “our”) have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and notes required by GAAP for complete financial statements. The consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly our financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for the three and six month periods ended June 30, 2013 are not necessarily indicative of the results that may be expected for the year ended December 31, 2013. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements requires the use of management estimates. For further information related to a description of areas of judgment and estimates and other information necessary to understand our financial position and results of operations, refer to the audited consolidated financial statements and notes included in our Annual Report on Form 10-K for the year ended December 31, 2012.
As previously reported in the notes to consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2012, we identified certain classification errors related to amounts reported in the financing activities section of our consolidated statements of cash flows. Consistent with that presentation, we have revised the consolidated statement of cash flows for the six months ended June 30, 2012 resulting in decreases of $87.9 million to receipts credited to annuity and single premium universal life policyholder account balances and return of annuity policyholder account balances. These revisions had no net impact on net cash provided by financing activities, and no impact on our consolidated balance sheets, statements of operations, statements of comprehensive income or statements of changes in stockholders' equity.
Adopted Accounting Pronouncements
In February 2013, the Financial Accounting Standards Board ("FASB") issued an accounting standards update ("ASU") that expands the disclosure requirements related to other comprehensive income (loss). A reporting entity is now required to provide information about the amounts reclassified out of accumulated other comprehensive income (loss) by component. In addition, a reporting entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required to be reclassified to net income in its entirety in the same reporting period. This ASU became effective for interim and annual periods beginning after December 15, 2012. We adopted this ASU on January 1, 2013.
New Accounting Pronouncements
There are currently no accounting standards updates with effective dates after June 30, 2013 that will significantly affect our consolidated financial statements.

8



2. Fair Values of Financial Instruments
The following sets forth a comparison of the fair values and carrying amounts of our financial instruments:
 
June 30, 2013
 
December 31, 2012
 
Carrying
Amount
 
Fair Value
 
Carrying
Amount
 
Fair Value
 
(Dollars in thousands)
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale
$
25,545,642

 
$
25,545,642

 
$
24,172,136

 
$
24,172,136

Held for investment
76,170

 
61,250

 
76,088

 
61,521

Equity securities, available for sale
9,790

 
9,790

 
53,422

 
53,422

Mortgage loans on real estate
2,583,703

 
2,808,973

 
2,623,940

 
2,848,235

Derivative instruments
629,135

 
629,135

 
415,258

 
415,258

Other investments
182,026

 
182,219

 
163,193

 
163,517

Cash and cash equivalents
746,889

 
746,889

 
1,268,545

 
1,268,545

Coinsurance deposits
2,944,726

 
2,724,853

 
2,910,701

 
2,678,232

Interest rate caps
5,565

 
5,565

 
3,247

 
3,247

Interest rate swap
274

 
274

 

 

2015 notes hedges
71,400

 
71,400

 
43,105

 
43,105

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Policy benefit reserves
33,304,622

 
27,895,416

 
31,452,496

 
26,264,831

Single premium immediate annuity (SPIA) benefit reserves
439,591

 
453,496

 
455,167

 
469,768

Notes payable
303,126

 
481,406

 
309,869

 
422,175

Subordinated debentures
245,958

 
229,623

 
245,869

 
218,283

2015 notes embedded derivatives
71,400

 
71,400

 
43,105

 
43,105

Interest rate swap

 

 
4,261

 
4,261

Fair value is the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The objective of a fair value measurement is to determine that price for each financial instrument at each measurement date. We meet this objective using various methods of valuation that include market, income and cost approaches.
We categorize our financial instruments into three levels of fair value hierarchy based on the priority of inputs used in determining fair value. The hierarchy defines the highest priority inputs (Level 1) as quoted prices in active markets for identical assets or liabilities. The lowest priority inputs (Level 3) are our own assumptions about what a market participant would use in determining fair value such as estimated future cash flows. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument's level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. We categorize financial assets and liabilities recorded at fair value in the consolidated balance sheets as follows:
Level 1—
Quoted prices are available in active markets for identical financial instruments as of the reporting date. We do not adjust the quoted price for these financial instruments, even in situations where we hold a large position and a sale could reasonably impact the quoted price.
Level 2—
Quoted prices in active markets for similar financial instruments, quoted prices for identical or similar financial instruments in markets that are not active; and models and other valuation methodologies using inputs other than quoted prices that are observable.
Level 3—
Models and other valuation methodologies using significant inputs that are unobservable for financial instruments and include situations where there is little, if any, market activity for the financial instrument. The inputs into the determination of fair value require significant management judgment or estimation. Financial instruments that are included in Level 3 are securities for which no market activity or data exists and for which we used discounted expected future cash flows with our own assumptions about what a market participant would use in determining fair value.
Transfers of securities among the levels occur at times and depend on the type of inputs used to determine fair value of each security. There were no transfers between levels during the six months ended June 30, 2013.

9



Our assets and liabilities which are measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012 are presented below based on the fair value hierarchy levels:
 
Total
Fair Value
 
Quoted
Prices in
Active
Markets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
(Dollars in thousands)
June 30, 2013
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
4,938

 
$
4,938

 
$

 
$

United States Government sponsored agencies
1,199,847

 

 
1,199,847

 

United States municipalities, states and territories
3,543,158

 

 
3,543,158

 

Foreign government obligations
92,811

 

 
92,811

 

Corporate securities
15,999,327

 
8,924

 
15,990,403

 

Residential mortgage backed securities
2,488,057

 

 
2,486,516

 
1,541

Commercial mortgage backed securities
1,222,689

 

 
1,222,689

 

Other asset backed securities
994,815

 
378

 
994,437

 

Equity securities, available for sale: finance, insurance and real estate
9,790

 
2,020

 
7,770

 

Derivative instruments
629,135

 

 
629,135

 

Cash and cash equivalents
746,889

 
746,889

 

 

Interest rate caps
5,565

 

 
5,565

 

Interest rate swap
274

 

 
274

 

2015 notes hedges
71,400

 

 
71,400

 

 
$
27,008,695

 
$
763,149

 
$
26,244,005

 
$
1,541

Liabilities
 
 
 
 
 
 
 
2015 notes embedded derivatives
$
71,400

 
$

 
$
71,400

 
$

Fixed index annuities - embedded derivatives
3,747,052

 

 

 
3,747,052

 
$
3,818,452

 
$

 
$
71,400

 
$
3,747,052

 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
5,154

 
$
5,154

 
$

 
$

United States Government sponsored agencies
1,772,025

 

 
1,772,025

 

United States municipalities, states and territories
3,578,323

 

 
3,578,323

 

Foreign government obligations
105,259

 

 
105,259

 

Corporate securities
14,466,772

 
33,131

 
14,433,641

 

Residential mortgage backed securities
2,888,113

 

 
2,886,301

 
1,812

Commercial mortgage backed securities
357,982

 

 
357,982

 

Other asset backed securities
998,508

 
378

 
998,130

 

Equity securities, available for sale: finance, insurance and real estate
53,422

 
36,928

 
16,494

 

Derivative instruments
415,258

 

 
415,258

 

Cash and cash equivalents
1,268,545

 
1,268,545

 

 

Interest rate caps
3,247

 

 
3,247

 

2015 notes hedges
43,105

 

 
43,105

 

 
$
25,955,713

 
$
1,344,136

 
$
24,609,765

 
$
1,812

Liabilities
 
 
 
 
 
 
 
2015 notes embedded derivatives
$
43,105

 
$

 
$
43,105

 
$

Interest rate swap
4,261

 

 
4,261

 

Fixed index annuities - embedded derivatives
3,337,556

 

 

 
3,337,556

 
$
3,384,922

 
$

 
$
47,366

 
$
3,337,556


10



The following methods and assumptions were used in estimating the fair values of financial instruments during the periods presented in these consolidated financial statements.
Fixed maturity securities and equity securities
The fair values of fixed maturity securities and equity securities in an active and orderly market are determined by utilizing independent pricing services. The independent pricing services incorporate a variety of observable market data in their valuation techniques, including:
reported trading prices,
benchmark yields,
broker-dealer quotes,
benchmark securities,
bids and offers,
credit ratings,
relative credit information, and
other reference data.
The independent pricing services also take into account perceived market movements and sector news, as well as a security's terms and conditions, including any features specific to that issue that may influence risk and marketability. Depending on the security, the priority of the use of observable market inputs may change as some observable market inputs may not be relevant or additional inputs may be necessary.
The independent pricing services provide quoted market prices when available. Quoted prices are not always available due to market inactivity. When quoted market prices are not available, the third parties use yield data and other factors relating to instruments or securities with similar characteristics to determine fair value for securities that are not actively traded. We generally obtain one value from our primary external pricing service. In situations where a price is not available from this service, we may obtain further quotes or prices from additional parties as needed. In addition, for our callable United States Government sponsored agencies, we obtain two broker quotes and take the average of the two broker prices received. Market indices of similar rated asset class spreads are considered for valuations and broker indications of similar securities are compared. Inputs used by the broker include market information, such as yield data and other factors relating to instruments or securities with similar characteristics. Valuations and quotes obtained from third party commercial pricing services are non-binding and do not represent quotes on which one may execute the disposition of the assets.
We validate external valuations at least quarterly through a combination of procedures that include the evaluation of methodologies used by the pricing services, analytical reviews and performance analysis of the prices against trends, and maintenance of a securities watch list. Additionally, as needed we utilize discounted cash flow models or perform independent valuations on a case-by-case basis using inputs and assumptions similar to those used by the pricing services. Although we do identify differences from time to time as a result of these validation procedures, we did not make any significant adjustments as of June 30, 2013 and December 31, 2012.
Mortgage loans on real estate
Mortgage loans on real estate are not measured at fair value on a recurring basis. The fair values of mortgage loans on real estate are calculated using discounted expected cash flows using current competitive market interest rates currently being offered for similar loans. The fair values of impaired mortgage loans on real estate that we have considered to be collateral dependent are based on the fair value of the real estate collateral (based on appraised values) less estimated costs to sell. The inputs utilized to determine fair value of all mortgage loans are unobservable market data (competitive market interest rates and appraised property values); therefore, fair value of mortgage loans falls into Level 3 in the fair value hierarchy.
Derivative instruments
The fair values of derivative instruments, primarily call options, are based upon the amount of cash that we will receive to settle each derivative instrument on the reporting date. These amounts are determined by our investment team using industry accepted valuation models and are adjusted for the nonperformance risk of each counterparty net of any collateral held. Inputs include market volatility and risk free interest rates and are used in income valuation techniques in arriving at a fair value for each option contract. The nonperformance risk for each counterparty is based upon its credit default swap rate. We have no performance obligations related to the call options purchased to fund our fixed index annuity policy liabilities.
Other investments
None of the financial instruments included in other investments are measured at fair value on a recurring basis. Financial instruments included in other investments are policy loans, equity method investments and company owned life insurance (COLI). We have not attempted to determine the fair values associated with our policy loans, as we believe any differences between carrying value and the fair values afforded these instruments are immaterial to our consolidated financial position and, accordingly, the cost to provide such disclosure does not justify the benefit to be derived. The fair values of our equity method investments qualify as Level 3 fair values and were determined by calculating the present value of future cash flows discounted by a risk free rate, a risk spread and a liquidity discount. The risk spread and liquidity discount are rates determined by our investment professionals and are unobservable market inputs. The fair value of our COLI approximates the cash surrender value of the policies and falls within Level 2 of the fair value hierarchy.

11



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

12



The following tables provide a reconciliation of the beginning and ending balances for our Level 3 assets and liabilities, which are measured at fair value on a recurring basis using significant unobservable inputs for the three and six months ended June 30, 2013 and 2012:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in thousands)
Available for sale securities
 
 
 
 
 
 
 
Beginning balance
$
1,724

 
$
2,027

 
$
1,812

 
$
2,098

Principal returned
(193
)
 
(52
)
 
(561
)
 
(93
)
Accretion of discount
5

 
21

 
134

 
47

Total gains (losses) (realized/unrealized):
 
 
 
 
 
 
 
Included in other comprehensive income (loss)
5

 
81

 
156

 
183

Included in operations

 
(72
)
 

 
(230
)
Ending balance
$
1,541

 
$
2,005

 
$
1,541

 
$
2,005

The Level 3 assets included in the table above are not material to our financial position, results of operations or cash flows, and it is management's opinion that the sensitivity of the inputs used in determining the fair value of these assets is not material as well.
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
 
(Dollars in thousands)
Fixed index annuities - embedded derivatives
 
 
 
 
 
 
 
Beginning balance
$
3,848,902

 
$
2,921,037

 
$
3,337,556

 
$
2,530,496

Premiums less benefits
425,671

 
105,279

 
672,393

 
189,505

Change in unrealized gains, net
(527,521
)
 
(111,368
)
 
(262,897
)
 
194,947

Ending balance
$
3,747,052

 
$
2,914,948

 
$
3,747,052

 
$
2,914,948

Change in unrealized gains, net for each period in our embedded derivatives are included in change in fair value of embedded derivatives in the unaudited consolidated statements of operations.
Certain derivatives embedded in our fixed index annuity contracts are our most significant financial instrument measured at fair value that are categorized as Level 3 in the fair value hierarchy. The contractual obligations for future annual index credits within our fixed index annuity contracts are treated as a "series of embedded derivatives" over the expected life of the applicable contracts. We estimate the fair value of these embedded derivatives at each valuation date by the method described above under fixed index annuities - embedded derivatives. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as were used to project policy contract values.
The most sensitive assumption in determining policy liabilities for fixed index annuities is the rates used to discount the excess projected contract values. As indicated above, the discount rate reflects our nonperformance risk. If the discount rates used to discount the excess projected contract values at June 30, 2013, were to increase by 100 basis points, the fair value of the embedded derivatives would decrease by $240.7 million recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be a corresponding decrease of $147.2 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as an increase in amortization of deferred policy acquisition costs and deferred sales inducements. A decrease by 100 basis points in the discount rate used to discount the excess projected contract values would increase the fair value of the embedded derivatives by $267.5 million recorded through operations as an increase in the change in fair value of embedded derivatives and increase our combined balance for deferred policy acquisition costs and deferred sales inducements by $161.1 million recorded through operations as a decrease in amortization of deferred policy acquisition costs and deferred sales inducements.


13



3. Investments
At June 30, 2013 and December 31, 2012, the amortized cost and fair value of fixed maturity securities and equity securities were as follows:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(Dollars in thousands)
June 30, 2013
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
4,607

 
$
367

 
$
(36
)
 
$
4,938

United States Government sponsored agencies
1,241,898

 
4,796

 
(46,847
)
 
1,199,847

United States municipalities, states and territories
3,299,732

 
268,127

 
(24,701
)
 
3,543,158

Foreign government obligations
86,106

 
9,230

 
(2,525
)
 
92,811

Corporate securities
15,527,755

 
808,241

 
(336,669
)
 
15,999,327

Residential mortgage backed securities
2,337,399

 
167,051

 
(16,393
)
 
2,488,057

Commercial mortgage backed securities
1,304,028

 
1,714

 
(83,053
)
 
1,222,689

Other asset backed securities
987,562

 
27,416

 
(20,163
)
 
994,815

 
$
24,789,087

 
$
1,286,942

 
$
(530,387
)
 
$
25,545,642

Held for investment:
 
 
 
 
 
 
 
Corporate security
$
76,170

 
$

 
$
(14,920
)
 
$
61,250

 
 
 
 
 
 
 
 
Equity securities, available for sale:
 
 
 
 
 
 
 
Finance, insurance, and real estate
$
8,915

 
$
875

 
$

 
$
9,790

 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
4,590

 
$
564

 
$

 
$
5,154

United States Government sponsored agencies
1,763,789

 
11,704

 
(3,468
)
 
1,772,025

United States municipalities, states and territories
3,116,678

 
461,770

 
(125
)
 
3,578,323

Foreign government obligations
86,099

 
19,160

 

 
105,259

Corporate securities
12,930,173

 
1,568,223

 
(31,624
)
 
14,466,772

Residential mortgage backed securities
2,743,537

 
172,304

 
(27,728
)
 
2,888,113

Commercial mortgage backed securities
354,870

 
5,095

 
(1,983
)
 
357,982

Other asset backed securities
957,291

 
44,190

 
(2,973
)
 
998,508

 
$
21,957,027

 
$
2,283,010

 
$
(67,901
)
 
$
24,172,136

Held for investment:
 
 
 
 
 
 
 
Corporate security
$
76,088

 
$

 
$
(14,567
)
 
$
61,521

 
 
 
 
 
 
 
 
Equity securities, available for sale:
 
 
 
 
 
 
 
Finance, insurance, and real estate
$
44,598

 
$
10,227

 
$
(1,403
)
 
$
53,422

During the six months ended June 30, 2013 and 2012, we received $1.0 billion and $2.8 billion, respectively, in redemption proceeds related to calls of our callable United States Government sponsored agency securities and public and private corporate bonds, of which $1.7 billion for the six months ended June 30, 2012, were classified as held for investment. The proceeds from these redemptions that have been reinvested have primarily been in United States government sponsored agencies, corporate securities, commercial mortgage backed securities and other asset backed securities. At June 30, 2013, 30% of our fixed income securities have call features of which 5% ($1.3 billion) will become subject to call redemption during the next twelve months and $500.6 million of which are U.S. Government agency securities with a book yield of 0.75%. The $500.6 million of U.S. Government securities were expected to be called in July. However, with the increase in interest rates during June, these securities were not called and are currently yielding 3.75%. These securities are callable quarterly and a modest decline in interest rates from current levels could result in the calls being exercised on the next call date in October of 2013.

14



The amortized cost and fair value of fixed maturity securities at June 30, 2013, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of our mortgage and other asset backed securities provide for periodic payments throughout their lives and are shown below as separate lines.
 
Available for sale
 
Held for investment
 
Amortized
Cost
 
Fair Value
 
Amortized
Cost
 
Fair Value
 
(Dollars in thousands)
Due in one year or less
$
113,074

 
$
116,889

 
$

 
$

Due after one year through five years
840,609

 
941,104

 

 

Due after five years through ten years
6,802,325

 
6,819,438

 

 

Due after ten years through twenty years
5,829,419

 
6,033,288

 

 

Due after twenty years
6,574,671

 
6,929,362

 
76,170

 
61,250

 
20,160,098

 
20,840,081

 
76,170

 
61,250

Residential mortgage backed securities
2,337,399

 
2,488,057

 

 

Commercial mortgage backed securities
1,304,028

 
1,222,689

 

 

Other asset backed securities
987,562

 
994,815

 

 

 
$
24,789,087

 
$
25,545,642

 
$
76,170

 
$
61,250

Net unrealized gains on available for sale fixed maturity securities and equity securities reported as a separate component of stockholders' equity were comprised of the following:
 
June 30,
2013
 
December 31,
2012
 
(Dollars in thousands)
Net unrealized gains on available for sale fixed maturity securities and equity securities
$
757,430

 
$
2,223,933

Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements
(416,281
)
 
(1,201,974
)
Deferred income tax valuation allowance reversal
22,534

 
22,534

Deferred income tax benefit
(119,403
)
 
(357,686
)
Net unrealized gains reported as accumulated other comprehensive income
$
244,280

 
$
686,807

The National Association of Insurance Commissioners (“NAIC”) assigns designations to fixed maturity securities. These designations range from Class 1 (highest quality) to Class 6 (lowest quality). In general, securities are assigned a designation based upon the ratings they are given by the Nationally Recognized Statistical Rating Organizations (“NRSRO’s”). The NAIC designations are utilized by insurers in preparing their annual statutory statements. NAIC Class 1 and 2 designations are considered “investment grade” while NAIC Class 3 through 6 designations are considered “non-investment grade.” Based on the NAIC designations, we had 98% of our fixed maturity portfolio rated investment grade at June 30, 2013 and December 31, 2012.
The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:
 
 
June 30, 2013
 
December 31, 2012
NAIC
Designation
 
Amortized Cost

 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
(Dollars in thousands)
1
 
$
15,440,564

 
$
16,049,276

 
$
13,737,381

 
$
15,250,560

2
 
8,878,184

 
9,028,631

 
7,838,186

 
8,533,121

3
 
475,652

 
457,918

 
398,294

 
387,222

4
 
68,807

 
69,502

 
53,879

 
56,151

5
 

 

 

 

6
 
2,050

 
1,565

 
5,375

 
6,603

 
 
$
24,865,257

 
$
25,606,892

 
$
22,033,115

 
$
24,233,657


15



The following tables show our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 803 and 198 securities, respectively) have been in a continuous unrealized loss position, at June 30, 2013 and December 31, 2012:
 
Less than 12 months
 
12 months or more
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
(Dollars in thousands)
June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
United States Government full faith and credit
$
984

 
$
(36
)
 
$

 
$

 
$
984

 
$
(36
)
United States Government sponsored agencies
1,126,107

 
(46,847
)
 

 

 
1,126,107

 
(46,847
)
United States municipalities, states and territories
407,748

 
(24,701
)
 

 

 
407,748

 
(24,701
)
Foreign government obligations
27,269

 
(2,525
)
 

 

 
27,269

 
(2,525
)
Corporate securities:
 
 
 
 
 
 
 
 
 
 
 
Finance, insurance and real estate
1,295,619

 
(67,115
)
 
84,262

 
(7,814
)
 
1,379,881

 
(74,929
)
Manufacturing, construction and mining
2,631,633

 
(135,270
)
 
12,079

 
(1,797
)
 
2,643,712

 
(137,067
)
Utilities and related sectors
1,334,828

 
(64,359
)
 
29,728

 
(3,728
)
 
1,364,556

 
(68,087
)
Wholesale/retail trade
301,898

 
(17,027
)
 

 

 
301,898

 
(17,027
)
Services, media and other
747,156

 
(39,559
)
 

 

 
747,156

 
(39,559
)
Residential mortgage backed securities
293,301

 
(13,905
)
 
58,100

 
(2,488
)
 
351,401

 
(16,393
)
Commercial mortgage backed securities
1,064,758

 
(83,053
)
 

 

 
1,064,758

 
(83,053
)
Other asset backed securities
426,195

 
(16,816
)
 
22,823

 
(3,347
)
 
449,018

 
(20,163
)
 
$
9,657,496

 
$
(511,213
)
 
$
206,992

 
$
(19,174
)
 
$
9,864,488

 
$
(530,387
)
Held for investment:
 
 
 
 
 
 
 
 
 
 
 
Corporate security:
 
 
 
 
 
 
 
 
 
 
 
Insurance
$

 
$

 
$
61,250

 
$
(14,920
)
 
$
61,250

 
$
(14,920
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
United States Government sponsored agencies
$
973,728

 
$
(3,468
)
 
$

 
$

 
$
973,728

 
$
(3,468
)
United States municipalities, states and territories
24,393

 
(125
)
 

 

 
24,393

 
(125
)
Corporate securities:
 
 
 
 
 
 
 
 
 
 
 
Finance, insurance and real estate
177,962

 
(4,126
)
 
85,709

 
(8,438
)
 
263,671

 
(12,564
)
Manufacturing, construction and mining
426,120

 
(4,303
)
 
21,975

 
(1,281
)
 
448,095

 
(5,584
)
Utilities and related sectors
221,044

 
(5,187
)
 
39,224

 
(4,212
)
 
260,268

 
(9,399
)
Wholesale/retail trade
101,790

 
(784
)
 
10,250

 
(208
)
 
112,040

 
(992
)
Services, media and other
264,421

 
(3,085
)
 

 

 
264,421

 
(3,085
)
Residential mortgage backed securities
220,622

 
(8,679
)
 
260,226

 
(19,049
)
 
480,848

 
(27,728
)
Commercial mortgage backed securities
161,582

 
(1,983
)
 

 

 
161,582

 
(1,983
)
Other asset backed securities
145,238

 
(2,242
)
 
26,131

 
(731
)
 
171,369

 
(2,973
)
 
$
2,716,900

 
$
(33,982
)
 
$
443,515

 
$
(33,919
)
 
$
3,160,415

 
$
(67,901
)
Held for investment:
 
 
 
 
 
 
 
 
 
 
 
Corporate security:
 
 
 
 
 
 
 
 
 
 
 
Insurance
$

 
$

 
$
61,521

 
$
(14,567
)
 
$
61,521

 
$
(14,567
)
 
 
 
 
 
 
 
 
 
 
 
 
Equity security, available for sale:
 
 
 
 
 
 
 
 
 
 
 
Services
$

 
$

 
$
8,722

 
$
(1,403
)
 
$
8,722

 
$
(1,403
)
The following is a description of the factors causing the temporary unrealized losses by investment category as of June 30, 2013:
United States Government sponsored agencies: These securities are relatively long in duration; however, they are callable in less than 12 months making the value of such securities sensitive to changes in market interest rates. The timing of when some of these securities were purchased gave rise to unrealized losses at June 30, 2013.
United States municipalities, states and territories: These securities are relatively long in duration and their fair values are sensitive to changes in market interest rates. The timing of the purchase of these securities have resulted in unrealized losses at this point in time.

16



Foreign government obligations: The unrealized losses on these securities are due to wider spreads on the announcement of increased capital expenditures with resulting higher leverage and greater supply.
Corporate securities: The unrealized losses in these securities are due partially to the timing of purchases in 2012 and 2013. These securities carry yields less than those available at June 30, 2013 as the result of rising interest rates in the first half of 2013. In addition, a small number of securities have seen their credit spreads remain wide due to issuer or industry specific news while some financial and industrial sector credit spreads remain wide due to continued economic uncertainty and concerns of economic instability.
Residential mortgage backed securities: At June 30, 2013, we had no exposure to sub-prime residential mortgage backed securities. All of our residential mortgage backed securities are pools of first-lien residential mortgage loans. Substantially all of the securities that we own are in the most senior tranche of the securitization in which they are structured and are not subordinated to any other tranche. Our "Alt-A" residential mortgage backed securities are comprised of 36 securities with a total amortized cost basis of $341.4 million and a fair value of $372.5 million. Despite recent improvements in the capital markets, the fair values of RMBS with weaker borrower characteristics continue at prices below amortized cost. These RMBS prices will likely remain below our cost basis until the housing market is able to absorb current and future foreclosures.
Commercial mortgage backed securities: The unrealized losses in these securities are due partially to the timing of purchases in 2012 and 2013. A number of purchases made in the middle of the fourth quarter 2012 were at yields lower than what could be executed at the end of this quarter due to the increase in the treasury yield since the time of purchase. Yield spreads for commercial mortgage backed securities have narrowed but remain attractive.
Other asset backed securities: The unrealized losses in these securities are predominantly assigned to financial sector capital trust securities which have longer maturity dates and have declined in price due to prolonged stress in the financial sector. Only one security in an unrealized loss position is rated below investment grade.
Approximately 95% and 75% of the unrealized losses on fixed maturity securities shown in the above table for June 30, 2013 and December 31, 2012, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC designations. All of the securities with unrealized losses are current with respect to the payment of principal and interest.
Changes in net unrealized gains on investments for the three and six months ended June 30, 2013 and 2012 are as follows:
 
Three Months Ended
June 30,
 
Six Months Ended
June 30,
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
(Dollars in thousands)
Fixed maturity securities held for investment carried at amortized cost
$
(964
)
 
$
1,690

 
$
(353
)
 
$
11,879

Investments carried at fair value:
 
 
 
 
 
 
 
Fixed maturity securities, available for sale
$
(1,339,484
)
 
$
603,462

 
$
(1,458,554
)
 
$
388,374

Equity securities, available for sale
(10,168
)
 
(787
)
 
(7,949
)
 
3,637

 
(1,349,652
)
 
602,675

 
(1,466,503
)
 
392,011

Adjustment for effect on other balance sheet accounts:
 
 
 
 
 
 
 
Deferred policy acquisition costs and deferred sales inducements
707,525

 
(339,408
)
 
785,693

 
(203,330
)
Deferred income tax asset/liability
224,744

 
(92,142
)
 
238,283