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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2021
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number : 001-31911
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, including zip code)
(515) 221-0002
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Trading Symbol(s) Name of each exchange on which registered
Common stock, par value $1 AEL New York Stock Exchange
Depositary Shares, each representing a 1/1,000th interest in a share of 5.95% Fixed-Rate Reset Non-Cumulative Preferred Stock, Series A AELPRA New York Stock Exchange
Depositary Shares, each representing a 1/1,000th interest in a share of 6.625% Fixed-Rate Reset Non-Cumulative Preferred Stock, Series B AELPRB New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
As of November 4, 2021, there were 92,513,517 shares of the registrant's common stock, $1 par value, outstanding.



TABLE OF CONTENTS
Page
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2
3
4
5
6
8
8




PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share and per share data)
September 30, 2021 December 31, 2020
(Unaudited)
Assets
Investments:
Fixed maturity securities, available for sale, at fair value (amortized cost of $41,247,540 as of 2021 and $42,304,736 as of 2020; allowance for credit losses of $4,074 as of 2021 and $64,771 as of 2020)
$ 45,738,097  $ 47,538,893 
Mortgage loans on real estate (net of allowance for credit losses of $21,558 as of 2021 and $31,029 as of 2020)
4,288,742  4,165,489 
Real estate related to consolidated variable interest entities 259,262  — 
Derivative instruments 990,033  1,310,954 
Other investments 1,021,226  590,078 
Total investments 52,297,360  53,605,414 
Cash and cash equivalents (2021 includes $27,224 related to consolidated variable interest entities)
12,684,793  9,095,522 
Coinsurance deposits (net of allowance for credit losses of $2,697 as of 2021 and $1,888 as of 2020)
8,733,096  4,844,927 
Accrued investment income (2021 includes $309 related to consolidated variable interest entities)
413,370  398,082 
Deferred policy acquisition costs 2,193,889  2,225,199 
Deferred sales inducements 1,545,494  1,448,375 
Income taxes recoverable —  862 
Other assets (2021 includes $1,503 related to consolidated variable interest entities)
449,961  70,198 
Total assets $ 78,317,963  $ 71,688,579 
Liabilities and Stockholders' Equity
Liabilities:
Policy benefit reserves $ 64,810,504  $ 62,352,882 
Other policy funds and contract claims 229,199  240,904 
Notes payable 496,101  495,668 
Subordinated debentures 78,342  78,112 
Deferred income taxes 426,176  504,000 
Income taxes payable 39,478  — 
Other liabilities (2021 includes $12,191 related to consolidated variable interest entities)
5,862,955  1,668,025 
Total liabilities 71,942,755  65,339,591 
Stockholders' equity:
Preferred stock, Series A; par value $1 per share; $400,000 aggregate liquidation preference; 20,000 shares authorized; issued and outstanding:
     2021 - 16,000 shares;
     2020 - 16,000 shares
16  16 
Preferred stock, Series B; par value $1 per share; $300,000 aggregate liquidation preference; 12,000 shares authorized; issued and outstanding:
     2021 - 12,000 shares;
     2020 - 12,000 shares
12  12 
Common stock; par value $1 per share; 200,000,000 shares authorized; issued and outstanding:
     2021 - 92,513,517 shares (excluding 9,936,715 treasury shares);
     2020 - 95,720,622 shares (excluding 6,516,525 treasury shares)
92,513  95,721 
Additional paid-in capital 1,609,039  1,681,127 
Accumulated other comprehensive income 1,956,974  2,203,557 
Retained earnings 2,716,654  2,368,555 
Total stockholders' equity 6,375,208  6,348,988 
Total liabilities and stockholders' equity $ 78,317,963  $ 71,688,579 
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 
 September 30,
Nine Months Ended 
 September 30,
2021 2020 2021 2020
Revenues:
Premiums and other considerations $ 15,841  $ 10,407  $ 43,649  $ 29,103 
Annuity product charges 58,480  62,277  182,321  185,264 
Net investment income 526,366  543,331  1,522,876  1,660,353 
Change in fair value of derivatives (70,701) 205,011  826,484  (409,201)
Net realized gains (losses) on investments 4,933  (22,321) (2,764) (68,545)
Other revenue 7,644  —  7,644  — 
Loss on extinguishment of debt —  —  —  (2,024)
Total revenues 542,563  798,705  2,580,210  1,394,950 
Benefits and expenses:
Insurance policy benefits and change in future policy benefits 18,756  13,273  51,008  36,676 
Interest sensitive and index product benefits 817,014  576,147  2,106,590  1,217,358 
Amortization of deferred sales inducements (17,172) 416,983  93,283  415,396 
Change in fair value of embedded derivatives (536,404) (1,732,497) (545,104) (1,855,623)
Interest expense on notes payable 6,535  6,388  19,322  19,161 
Interest expense on subordinated debentures 1,342  1,323  3,994  4,232 
Amortization of deferred policy acquisition costs (1,588) 622,596  185,329  623,409 
Other operating costs and expenses 56,518  42,738  177,433  128,315 
Total benefits and expenses 345,001  (53,049) 2,091,855  588,924 
Income before income taxes 197,562  851,754  488,355  806,026 
Income tax expense 44,697  184,554  107,500  143,308 
Net income 152,865  667,200  380,855  662,718 
Less: Preferred stock dividends 10,918  5,950  32,756  18,511 
Net income available to common stockholders $ 141,947  $ 661,250  $ 348,099  $ 644,207 
Earnings per common share $ 1.53  $ 7.20  $ 3.69  $ 7.02 
Earnings per common share - assuming dilution $ 1.53  $ 7.17  $ 3.67  $ 7.00 
Weighted average common shares outstanding (in thousands):
Earnings per common share 92,478  91,861  94,326  91,770 
Earnings per common share - assuming dilution 93,044  92,163  94,867  92,071 
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 
 September 30,
Nine Months Ended 
 September 30,
2021 2020 2021 2020
Net income $ 152,865  $ 667,200  $ 380,855  $ 662,718 
Other comprehensive income (loss):
Change in net unrealized investment gains/losses (1) (85,990) 420,547  (308,740) 695,593 
Reclassification of unrealized investment gains/losses to net income (1) 1,260  2,392  (3,391) 9,810 
Other comprehensive income (loss) before income tax (84,730) 422,939  (312,131) 705,403 
Income tax effect related to other comprehensive income (loss) 17,793  (88,816) 65,548  (148,135)
Other comprehensive income (loss) (66,937) 334,123  (246,583) 557,268 
Comprehensive income $ 85,928  $ 1,001,323  $ 134,272  $ 1,219,986 
(1)Net of related adjustments to amortization of deferred sales inducements, deferred policy acquisition costs and policy benefit reserves
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)
(Unaudited)
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Retained
Earnings
Total
Stockholders'
Equity
For the three months ended September 30, 2021
Balance at June 30, 2021 $ 28  $ 92,554  $ 1,604,535  $ 2,023,911  $ 2,574,707  $ 6,295,735 
Net income for period —  —  —  —  152,865  152,865 
Other comprehensive loss —  —  —  (66,937) —  (66,937)
Share-based compensation —  —  6,109  —  —  6,109 
Issuance of common stock —  —  (306) —  —  (306)
Treasury stock acquired, common —  (41) (1,299) —  —  (1,340)
Dividends on preferred stock —  —  —  —  (10,918) (10,918)
Balance at September 30, 2021 $ 28  $ 92,513  $ 1,609,039  $ 1,956,974  $ 2,716,654  $ 6,375,208 
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Retained
Earnings
Total
Stockholders'
Equity
For the three months ended September 30, 2020
Balance at June 30, 2020 $ 28  $ 91,595  $ 1,508,171  $ 1,577,469  $ 1,742,426  $ 4,919,689 
Net income for period —  —  —  —  667,200  667,200 
Other comprehensive income —  —  —  334,123  —  334,123 
Share-based compensation —  —  3,121  —  —  3,121 
Issuance of common stock —  337  (305) —  —  32 
Dividends on preferred stock —  —  —  —  (5,950) (5,950)
Balance at September 30, 2020 $ 28  $ 91,932  $ 1,510,987  $ 1,911,592  $ 2,403,676  $ 5,918,215 
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Retained
Earnings
Total
Stockholders'
Equity
For the nine months ended September 30, 2021
Balance at December 31, 2020 $ 28  $ 95,721  $ 1,681,127  $ 2,203,557  $ 2,368,555  $ 6,348,988 
Net income for period —  —  —  —  380,855  380,855 
Other comprehensive loss —  —  —  (246,583) —  (246,583)
Share-based compensation
—  —  19,265  —  —  19,265 
Issuance of common stock —  459  4,395  —  —  4,854 
Treasury stock acquired, common —  (3,667) (95,748) —  —  (99,415)
Dividends on preferred stock —  —  —  —  (32,756) (32,756)
Balance at September 30, 2021 $ 28  $ 92,513  $ 1,609,039  $ 1,956,974  $ 2,716,654  $ 6,375,208 
Preferred
Stock
Common
Stock
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
Retained
Earnings
Total
Stockholders'
Equity
For the nine months ended September 30, 2020
Balance at December 31, 2019 $ 16  $ 91,107  $ 1,212,311  $ 1,354,324  $ 1,768,764  $ 4,426,522 
Net income for period —  —  —  —  662,718  662,718 
Other comprehensive income —  —  —  557,268  —  557,268 
Issuance of preferred stock 12  —  290,248  —  —  290,260 
Share-based compensation
—  —  7,515  —  —  7,515 
Issuance of common stock —  825  913  —  —  1,738 
Cumulative effect of change in accounting principle
—  —  —  —  (9,295) (9,295)
Dividends on preferred stock —  —  —  —  (18,511) (18,511)
Balance at September 30, 2020 $ 28  $ 91,932  $ 1,510,987  $ 1,911,592  $ 2,403,676  $ 5,918,215 
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)
Nine Months Ended 
 September 30,
2021 2020
Operating activities
Net income $ 380,855  $ 662,718 
Adjustments to reconcile net income to net cash provided by operating activities:
Interest sensitive and index product benefits 2,106,590  1,217,358 
Amortization of deferred sales inducements 93,283  415,396 
Annuity product charges (182,321) (185,264)
Change in fair value of embedded derivatives (545,104) (1,855,623)
Change in traditional life and accident and health insurance reserves 19,487  6,507 
Policy acquisition costs deferred (243,711) (178,251)
Amortization of deferred policy acquisition costs 185,329  623,409 
Provision for depreciation and other amortization 3,985  3,857 
Amortization of discounts and premiums on investments 18,438  37,110 
Realized gains/losses on investments 2,764  68,545 
Distributions from equity method investments 10,697  190 
Change in fair value of derivatives (826,484) 409,201 
Deferred income taxes (12,276) 171,265 
Loss on extinguishment of debt —  2,024 
Share-based compensation 19,265  7,515 
Change in accrued investment income (15,288) 20,179 
Change in income taxes recoverable/payable 40,340  (35,202)
Change in other assets (2,003) 2,307 
Change in other policy funds and contract claims (15,971) (18,951)
Change in collateral held for derivatives (170,371) (506,735)
Change in collateral held for securities lending —  (494,368)
Change in other liabilities (141,230) (22,281)
Other (88,983) 4,325 
Net cash provided by operating activities 637,291  355,231 
Investing activities
Sales, maturities, or repayments of investments:
Fixed maturity securities, available for sale 3,295,774  3,344,860 
Mortgage loans on real estate 500,140  230,042 
Derivative instruments 1,741,357  633,948 
Other investments 12,008  3,238 
Acquisitions of investments:
Fixed maturity securities, available for sale (2,283,419) (2,279,427)
Mortgage loans on real estate (621,002) (723,154)
Real estate acquired (259,262) — 
Derivative instruments (547,006) (557,709)
Other investments (422,070) (10,616)
Purchases of property, furniture and equipment (15,060) (12,440)
Net cash provided by investing activities 1,401,460  628,742 
6


AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(Dollars in thousands)
(Unaudited)
Nine Months Ended 
 September 30,
2021 2020
Financing activities
Receipts credited to annuity policyholder account balances $ 4,879,283  $ 1,811,843 
Coinsurance deposits 683,829  304,169 
Return of annuity policyholder account balances (3,861,391) (2,922,187)
Repayment of subordinated debentures —  (81,450)
Acquisition of treasury stock (99,415) — 
Proceeds from issuance of preferred stock, net —  290,260 
Proceeds from issuance of common stock, net 4,854  1,738 
Change in checks in excess of cash balance (23,884) (6,595)
Preferred stock dividends (32,756) (18,511)
Net cash provided by (used in) financing activities 1,550,520  (620,733)
Increase in cash and cash equivalents 3,589,271  363,240 
Cash and cash equivalents at beginning of period 9,095,522  2,293,392 
Cash and cash equivalents at end of period $ 12,684,793  $ 2,656,632 
Supplemental disclosures of cash flow information
Cash paid during period for:
Interest expense $ 15,000  $ 17,677 
Income taxes 80,169  4,810 
Non-cash operating activity:
Deferral of sales inducements 71,683  68,468 
See accompanying notes to unaudited consolidated financial statements.




7


AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2021
(Unaudited)

1. Significant Accounting Policies
Consolidation and Basis of Presentation
The accompanying consolidated financial statements of American Equity Investment Life Holding Company ("we", "us", "our" or the "Company") 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. The consolidated financial statements include a variable interest entity (“VIE”) in which we are the primary beneficiary. All of the adjustments in the consolidated financial statements are 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 nine month periods ended September 30, 2021 are not necessarily indicative of the results that may be expected for any other period, including for the year ended December 31, 2021. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements requires management estimates and assumptions using subjective and complex judgments that frequently require assumptions about matters that are inherently uncertain. Our actual results could differ from these 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, 2020.
Real Estate Investments
Beginning in the second quarter of 2021, we held residential real estate investments through consolidation of an investment company VIE. Residential real estate investments are reported at fair value and the change in fair value on these investments is reported in net income as a component of net investment income. Fair values of residential real estate are initially based on the cost to purchase the properties and subsequently based on a discounted cash flow methodology. See Note 3 – Fair Values of Financial Instruments for more information on the determination of fair value. The residential real estate investments are leased to renters through operating lease arrangements. Rental income is recognized on a straight-line basis over the term of the respective leases.
Variable Interest Entities
We have relationships with various special purpose entities and other legal entities that must be evaluated to determine if the entities meet the criteria of a VIE. This assessment is performed by reviewing contractual, ownership and other rights and requires use of judgment. First, we determine if we hold a variable interest in an entity by assessing if we have the right to receive expected losses and expected residual returns of the entity. If we hold a variable interest, then the entity is assessed to determine if it is a VIE. An entity is a VIE if the equity at risk is not sufficient to support its activities, if the equity holders lack a controlling financial interest or if the entity is structured with non-substantive voting rights. In addition to the previous criteria, if the entity is a limited partnership or similar entity, it is a VIE if the limited partners do not have the power to direct the entity’s most significant activities through substantive kick-out rights or participating rights. A VIE is evaluated to determine the primary beneficiary. The primary beneficiary of a VIE is the enterprise with (1) the power to direct the activities of a VIE that most significantly impact the entity's economic performance and (2) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE. When we are the primary beneficiary, we are required to consolidate the entity in our financial statements. We reassess our involvement with VIEs on a quarterly basis. For further information about VIEs, refer to Note 6 – Variable Interest Entities.
Adopted Accounting Pronouncements
There were no accounting pronouncements that were adopted during the current period.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update (“ASU”) that significantly changed the impairment model for most financial assets that are measured at amortized cost and certain other instruments from an incurred loss model to an expected loss model that requires these assets be presented at the net amount expected to be collected. In addition, credit losses on available for sale debt securities are recorded through an allowance account subsequent to the adoption of this ASU.  We adopted this ASU on January 1, 2020. The adoption of this ASU resulted in an increase in our mortgage loan allowance for credit losses of $8.6 million and the recognition of an allowance for credit losses on our reinsurance recoverable/coinsurance deposits balances of $3.2 million on the date of adoption. Retained earnings was decreased by $9.3 million, which reflects the net of tax impact of the increase in the mortgage loan allowance for credit losses and the recognition of an allowance for credit losses on our reinsurance recoverable/coinsurance deposits balances on the date of adoption.
8

New Accounting Pronouncements
In August 2018, the FASB issued an ASU that revises certain aspects of the measurement models and disclosure requirements for long duration insurance and investment contracts. The FASB’s objective in issuing this ASU is to improve, simplify, and enhance the accounting for long-duration contracts. The revisions include updating cash flow assumptions in the calculation of the liability for traditional life products, introducing the term ‘market risk benefit’ ("MRB") and requiring all contract features meeting the definition of an MRB to be measured at fair value, simplifying the method used to amortize deferred policy acquisition costs and deferred sales inducements to a constant basis over the expected term of the related contracts rather than based on actual and estimated gross profits and enhancing disclosure requirements. While this ASU is effective for us on January 1, 2023, the transition date (the remeasurement date) is January 1, 2021. Early adoption of this ASU is permitted. We are in the process of evaluating the impact this guidance will have on our consolidated financial statements.
9

2. Revision of Immaterial Misstatement in Prior Year Financial Statements
Management identified an error in the Company's historical financial statements as further described below. In accordance with the guidance set forth in SEC Staff Accounting Bulletin No. 99, Materiality, and SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, management concluded that the error was not material to the consolidated financial statements as presented in the Company's quarterly and annual financial statements that had been previously filed in the Company's Quarterly Reports on Form 10-Q and Annual Reports on Form 10-K. As a result, amendment of such reports is not required. The Company revised the previously issued annual consolidated financial statements for 2020 in this Form 10-Q to correct this error.
The corrected immaterial error was in the calculation of the impact of unrealized gains and losses on lifetime income benefit reserves as of December 31, 2020 determined in the first quarter of 2021. This immaterial error resulted in an increase in the lifetime income benefit reserves which are included in policy benefit reserves in the consolidated balance sheet, an increase in the deferred policy acquisition costs and deferred sales inducements and a decrease in deferred income taxes with an offsetting change in accumulated other comprehensive income which is a component of total stockholders' equity. The immaterial error had no impact on the consolidated statement of operations or consolidated statement of cash flows.
The effect of the revisions on the Company's previously issued financial statements are provided in the tables below. Amounts throughout the consolidated financial statements and notes thereto have been adjusted to incorporate the revised amounts, where applicable. The following tables reconcile selected lines from the Company's year-end December 31, 2020 consolidated balance sheet and the three and nine months ended September 30, 2020 consolidated statement of comprehensive income from the previously reported amounts to the revised amounts.
Revised Consolidated Balance Sheet Year Ended December 31, 2020
As Reported Adjustment As Revised
(Dollars in thousands)
Assets
Deferred policy acquisition costs $ 2,045,812  $ 179,387  $ 2,225,199 
Deferred sales inducements 1,328,857  119,518  1,448,375 
Total assets 71,389,674  298,905  71,688,579 
Liabilities and Stockholders' Equity
Liabilities:
Policy benefit reserves 61,768,246  584,636  62,352,882 
Deferred income taxes 564,003  (60,003) 504,000 
Total liabilities 64,814,958  524,633  65,339,591 
Stockholders' equity:
Accumulated other comprehensive income 2,429,285  (225,728) 2,203,557 
Total stockholders' equity 6,574,716  (225,728) 6,348,988 
Total liabilities and stockholders' equity 71,389,674  298,905  71,688,579 
Revised Consolidated Statement of Comprehensive Income Three Months Ended September 30, 2020
As Reported Adjustment As Revised
(Dollars in thousands)
Other comprehensive income:
Change in net unrealized investment gains/losses (1) $ 494,154  $ (73,607) $ 420,547 
Other comprehensive income before income tax 496,546  (73,607) 422,939 
Income tax effect related to other comprehensive income (104,274) 15,458  (88,816)
Other comprehensive income 392,272  (58,149) 334,123 
Comprehensive income 1,059,472  (58,149) 1,001,323 
Nine Months Ended September 30, 2020
As Reported Adjustment As Revised
(Dollars in thousands)
Other comprehensive income:
Change in net unrealized investment gains/losses (1) $ 767,646  $ (72,053) $ 695,593 
Other comprehensive income before income tax 777,456  (72,053) 705,403 
Income tax effect related to other comprehensive income (163,266) 15,131  (148,135)
Other comprehensive income 614,190  (56,922) 557,268 
Comprehensive income 1,276,908  (56,922) 1,219,986 
(1)Net of related adjustments to amortization of deferred sales inducements, deferred policy acquisition costs and policy benefit reserves
10

3. Fair Values of Financial Instruments
The following sets forth a comparison of the carrying amounts and fair values of our financial instruments:
September 30, 2021 December 31, 2020
Carrying
Amount
Fair Value Carrying
Amount
Fair Value
(Dollars in thousands)
Assets
Fixed maturity securities, available for sale $ 45,738,097  $ 45,738,097  $ 47,538,893  $ 47,538,893 
Mortgage loans on real estate 4,288,742  4,457,776  4,165,489  4,327,885 
Real estate investments 259,262  259,262  —  — 
Derivative instruments 990,033  990,033  1,310,954  1,310,954 
Other investments 1,021,226  1,021,226  590,078  590,078 
Cash and cash equivalents 12,684,793  12,684,793  9,095,522  9,095,522 
Coinsurance deposits 8,733,096  7,861,372  4,844,927  4,411,051 
Liabilities
Policy benefit reserves 64,429,370  55,935,990  61,406,599  52,928,174 
Single premium immediate annuity (SPIA) benefit reserves 228,508  235,456  240,226  247,679 
Notes payable 496,101  574,210  495,668  567,345 
Subordinated debentures 78,342  89,292  78,112  87,951 
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.
11

Our assets and liabilities which are measured at fair value on a recurring basis as of September 30, 2021 and December 31, 2020 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)
September 30, 2021
Assets
Fixed maturity securities, available for sale:
United States Government full faith and credit $ 38,486  $ 33,110  $ 5,376  $ — 
United States Government sponsored agencies 1,043,351  —  1,043,351  — 
United States municipalities, states and territories 3,596,256  —  3,596,256  — 
Foreign government obligations 195,341  —  195,341  — 
Corporate securities 31,021,887  31,021,882  — 
Residential mortgage backed securities 1,053,983  —  1,053,983  — 
Commercial mortgage backed securities 4,138,078  —  4,138,078  — 
Other asset backed securities 4,650,715  —  4,650,715  — 
Other investments: equity securities 362,149  350,000  5,800  6,349 
Real estate investments 259,262  —  —  259,262 
Derivative instruments 990,033  —  990,033  — 
Cash and cash equivalents 12,684,793  12,684,793  —  — 
$ 60,034,334  $ 13,067,908  $ 46,700,815  $ 265,611 
Liabilities
Fixed index annuities - embedded derivatives $ 7,547,840  $ —  $ —  $ 7,547,840 
December 31, 2020
Assets
Fixed maturity securities, available for sale:
United States Government full faith and credit $ 39,771  $ 33,940  $ 5,831  $ — 
United States Government sponsored agencies 1,039,551  —  1,039,551  — 
United States municipalities, states and territories 3,776,131  —  3,776,131  — 
Foreign government obligations 202,706  —  202,706  — 
Corporate securities 31,156,827  31,156,819  — 
Residential mortgage backed securities 1,512,831  —  1,512,831  — 
Commercial mortgage backed securities 4,261,227  —  4,261,227  — 
Other asset backed securities 5,549,849  —  5,549,849  — 
Derivative instruments 1,310,954  —  1,310,954  — 
Cash and cash equivalents 9,095,522  9,095,522  —  — 
$ 57,945,369  $ 9,129,470  $ 48,815,899  $ — 
Liabilities
Fixed index annuities - embedded derivatives $ 7,938,281  $ —  $ —  $ 7,938,281 
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
The fair values of fixed maturity 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.
12

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 quotes or prices from additional parties as needed. 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, comparison of the prices to a secondary pricing source, 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 September 30, 2021 and December 31, 2020.
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 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); therefore, fair value of mortgage loans falls into Level 3 in the fair value hierarchy.
Real estate investments
The fair values of residential real estate are initially calculated based on the cost to purchase the properties and subsequently calculated based on a discounted cash flow methodology. Under the discounted cash flow method, net operating income is forecasted assuming a 10-year hold period commencing as of the valuation date. An additional year is forecast in order to determine the residual sale price at the end of the hold period, using a residual (terminal) capitalization rate. The significant inputs into the fair value calculation under the discounted cash flow method include the capitalization rate, discount rate and vacancy rate. These inputs are unobservable market data; therefore, fair value of residential real estate falls into Level 3 in the fair value hierarchy. As of September 30, 2021, the fair value of residential real estate was calculated using purchase price as all properties were purchased recently and therefore the purchase price was determined to be an appropriate proxy of fair value.
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
Equity securities are the only financial instruments included in other investments that are measured at fair value on a recurring basis. The fair value for these securities are determined using the same methods discussed above for fixed maturity securities. Financial instruments included in other investments that are not measured at fair value on a recurring basis 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 values and the fair values are immaterial to our consolidated financial position. The fair values of our equity method investments are obtained from third parties and are determined using a variety of valuation techniques, including discounted cash flow analysis, valuation multiples analysis for comparable investments and appraisal values. As the risk spread and liquidity discount are unobservable market inputs, the fair value of our equity method investments falls within Level 3 of the fair value hierarchy. The fair value of equity method investments was $277.4 million and $179.7 million as of September 30, 2021 and December 31, 2020, respectively. The fair value of our COLI approximates the cash surrender value of the policies and falls within Level 2 of the fair value hierarchy. The fair value of COLI was $380.9 million and $373.6 million as of September 30, 2021 and December 31, 2020, respectively.
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.
13

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 issued 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 values of our senior unsecured notes are based upon quoted market prices 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.
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.
Within this determination we have the following significant unobservable inputs: 1) the expected cost of annual call options we will purchase in the future to fund index credits beyond the next policy anniversary and 2) our best estimates for future policy decrements, primarily lapse, partial withdrawal and mortality rates. As of both September 30, 2021 and December 31, 2020, we utilized an estimate of 2.10% for the expected cost of annual call options, which is based on estimated long-term account value growth and a historical review of our actual option costs.
Our best estimate assumptions for lapse, partial withdrawal and mortality rates are based on our actual experience and our outlook as to future expectations for such assumptions. These assumptions, which are consistent with the assumptions used in calculating deferred policy acquisition costs and deferred sales inducements, are reviewed on a quarterly basis and are updated as our experience develops and/or as future expectations change. The following table presents average lapse rate and partial withdrawal rate assumptions, by contract duration, used in estimating the fair value of the embedded derivative component of our fixed index annuity policy benefit reserves at each reporting date:
Average Lapse Rates Average Partial Withdrawal Rates
Contract Duration (Years) September 30, 2021 December 31, 2020 September 30, 2021 December 31, 2020
1 - 5
2.98% 1.22% 2.20% 2.63%
6 - 10
2.74% 1.50% 2.26% 3.14%
11 - 15
4.66% 5.66% 2.18% 3.58%
16 - 20
8.72% 7.08% 1.35% 3.79%
20+
4.92% 7.36% —% 3.63%
Lapse rates are generally expected to increase as surrender charge percentages decrease. Lapse expectations reflect a significant increase in the year in which the surrender charge period on a contract ends.
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The following table provides 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 nine months ended September 30, 2021 and 2020:
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
2021 2020 2021 2020
(Dollars in thousands)
Other investments: equity securities
Beginning balance $ —  $ —  $ —  $ — 
Transfers in 6,349  —  6,349  — 
Ending balance $ 6,349  $ —  $ 6,349  $ — 
Real estate investments
Beginning balance $ 258,237  $ —  $ —  $ — 
Purchases and sales, net 1,025  —  259,262  — 
Change in fair value —  —  —  — 
Ending balance $ 259,262  $ —  $ 259,262  $ — 
Fixed index annuities - embedded derivatives
Beginning balance $ 8,384,764  $ 9,418,485  $ 7,938,281  $ 9,624,395 
Premiums less benefits 365,474  78,244  1,062,994  243,421 
Change in fair value, net (681,509) (2,021,513) (932,546) (2,392,600)
Reserve release related to in-force ceded reinsurance (520,889) —  (520,889) — 
Ending balance $ 7,547,840  $ 7,475,216  $ 7,547,840  $ 7,475,216 
The fair value of our fixed index annuities embedded derivatives is net of coinsurance ceded of $1,162.4 million and $655.3 million as of September 30, 2021 and December 31, 2020, respectively. Change in fair value, net for each period in our embedded derivatives is 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 September 30, 2021, were to increase by 100 basis points, the fair value of the embedded derivatives would decrease by $562.4 million recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be a corresponding decrease of $239.8 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 rates used to discount the excess projected contract values would increase the fair value of the embedded derivatives by $619.5 million recorded through operations as an increase in the change in fair value of embedded derivatives and there would be a corresponding increase of $274.2 million to our combined balance for deferred policy acquisition costs and deferred sales inducements recorded through operations as a decrease in amortization of deferred policy acquisition costs and deferred sales inducements.
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4. Investments
At September 30, 2021 and December 31, 2020, the amortized cost and fair value of fixed maturity securities were as follows:
Amortized
Cost (1)
Gross
Unrealized
Gains
Gross
Unrealized
Losses (2)
Allowance for Credit Losses Fair Value
(Dollars in thousands)
September 30, 2021
Fixed maturity securities, available for sale:
United States Government full faith and credit $ 37,112  $ 1,398  $ (24) $ —  $ 38,486 
United States Government sponsored agencies 1,008,980  34,371  —  —  1,043,351 
United States municipalities, states and territories 3,142,857  457,359  (1,188) (2,772) 3,596,256 
Foreign government obligations 177,101  18,240  —  —  195,341 
Corporate securities 27,342,408  3,695,003  (14,518) (1,006) 31,021,887 
Residential mortgage backed securities 980,838  75,599  (2,158) (296) 1,053,983 
Commercial mortgage backed securities 3,963,733  197,750  (23,405) —  4,138,078 
Other asset backed securities 4,594,511  102,882  (46,678) —  4,650,715 
$ 41,247,540  $ 4,582,602  $ (87,971) $ (4,074) $ 45,738,097 
December 31, 2020
Fixed maturity securities, available for sale:
United States Government full faith and credit $ 37,471  $ 2,300  $ —  $ —  $ 39,771 
United States Government sponsored agencies 995,465  44,132  (46) —  1,039,551 
United States municipalities, states and territories 3,236,767  543,252  (1,044) (2,844) 3,776,131 
Foreign government obligations 177,062  25,644  —  —  202,706 
Corporate securities 26,745,196  4,507,716  (35,892) (60,193) 31,156,827 
Residential mortgage backed securities 1,399,956  117,135  (2,526) (1,734) 1,512,831 
Commercial mortgage backed securities 4,119,650  206,255  (64,678) —  4,261,227 
Other asset backed securities 5,593,169  103,320  (146,640) —  5,549,849 
$ 42,304,736  $ 5,549,754  $ (250,826) $ (64,771) $ 47,538,893 
(1)Amortized cost excludes accrued interest receivable of $388.4 million and $377.5 million as of September 30, 2021 and December 31, 2020, respectively.
(2)Gross unrealized losses are net of allowance for credit losses.
The amortized cost and fair value of fixed maturity securities at September 30, 2021, 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
Amortized
Cost
Fair Value
(Dollars in thousands)
Due in one year or less $ 1,688,694  $ 1,705,847 
Due after one year through five years 6,932,293  7,402,594 
Due after five years through ten years 6,728,152  7,453,463 
Due after ten years through twenty years 9,272,871  11,196,318 
Due after twenty years 7,086,448  8,137,099 
31,708,458  35,895,321 
Residential mortgage backed securities 980,838  1,053,983 
Commercial mortgage backed securities 3,963,733  4,138,078 
Other asset backed securities 4,594,511  4,650,715 
$ 41,247,540  $ 45,738,097 
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Net unrealized gains on available for sale fixed maturity securities reported as a separate component of stockholders' equity were comprised of the following:
September 30, 2021 December 31, 2020
(Dollars in thousands)
Net unrealized gains on available for sale fixed maturity securities $ 4,494,631  $ 5,297,040 
Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements and policy benefit reserves (2,045,973) (2,536,251)
Deferred income tax valuation allowance reversal 22,534  22,534 
Deferred income tax expense (514,218) (579,766)
Net unrealized gains reported as accumulated other comprehensive income $ 1,956,974  $ 2,203,557 
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 97% of our fixed maturity portfolio rated investment grade at both September 30, 2021 and December 31, 2020, respectively.
The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:
September 30, 2021 December 31, 2020
NAIC
Designation
Amortized
Cost
Fair
Value
Amortized
Cost
Fair
Value
(Dollars in thousands)
1 $ 22,823,664  $ 25,508,437  $ 23,330,149  $ 26,564,542 
2 17,170,505  18,928,256  17,312,485  19,377,013 
3 1,066,599  1,107,418  1,292,124  1,299,455 
4 145,455  157,196  282,049  256,651 
5 17,226  15,860  29,396  16,288 
6 24,091  20,930  58,533  24,944 
$ 41,247,540  $ 45,738,097  $ 42,304,736  $ 47,538,893 
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The following table shows our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 567 and 843 securities, respectively) have been in a continuous unrealized loss position, at September 30, 2021 and December 31, 2020:
Less than 12 months 12 months or more Total
Fair Value Unrealized
Losses (1)
Fair Value Unrealized
Losses (1)
Fair Value Unrealized
Losses (1)
(Dollars in thousands)
September 30, 2021
Fixed maturity securities, available for sale:
United States Government full faith and credit $ 1,019  $ (24) $ —  $ —  $ 1,019  $ (24)
United States municipalities, states and territories 40,043  (582) 23,961  (3,378) 64,004  (3,960)
Corporate securities 419,976  (6,997) 164,005  (8,527) 583,981  (15,524)
Residential mortgage backed securities 83,291  (455) 40,947  (1,999) 124,238  (2,454)
Commercial mortgage backed securities 56,781  (354) 349,533  (23,051) 406,314  (23,405)
Other asset backed securities 364,936  (1,842) 2,056,088  (44,836) 2,421,024  (46,678)
$ 966,046  $ (10,254) $ 2,634,534  $ (81,791) $ 3,600,580  $ (92,045)
December 31, 2020
Fixed maturity securities, available for sale:
United States Government sponsored agencies $ 250,475  $ (46) $ —  $ —  $ 250,475  $ (46)
United States municipalities, states and territories 31,802  (3,887) 868  (1) 32,670  (3,888)
Corporate securities 606,277  (45,150) 154,633  (50,935) 760,910  (96,085)
Residential mortgage backed securities 156,016  (2,384) 13,599  (1,876) 169,615  (4,260)
Commercial mortgage backed securities 934,593  (54,834) 35,153  (9,844) 969,746  (64,678)
Other asset backed securities 1,013,781  (16,607) 2,567,723  (130,033) 3,581,504  (146,640)
$ 2,992,944  $ (122,908) $ 2,771,976  $ (192,689) $ 5,764,920  $ (315,597)
(1)Unrealized losses have not been reduced to reflect the allowance for credit losses of $4.1 million and $64.8 million as of September 30, 2021 and December 31, 2020, respectively.
The unrealized losses at September 30, 2021 are principally related to the timing of the purchases of certain securities, which carry less yield than those available at September 30, 2021, and the continued impact the COVID-19 pandemic had on credit markets. Approximately 81% and 75% of the unrealized losses on fixed maturity securities shown in the above table for September 30, 2021 and December 31, 2020, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC designations.
We expect to recover our amortized cost on all securities except for those securities on which we recognized an allowance for credit loss. In addition, because we did not have the intent to sell fixed maturity securities with unrealized losses and it was not more likely than not that we would be required to sell these securities prior to recovery of the amortized cost, which may be maturity, we did not write down these investments to fair value through the consolidated statements of operations.
Changes in net unrealized gains/losses on investments for the three and nine months ended September 30, 2021 and 2020 are as follows:
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
2021 2020 2021 2020
(Dollars in thousands)
Fixed maturity securities available for sale carried at fair value $ (327,223) $ 800,492  $ (802,409) $ 1,285,600 
Adjustment for effect on other balance sheet accounts:
Deferred policy acquisition costs, deferred sales inducements and policy benefit reserves 242,493  (377,553) 490,278  (580,197)
Deferred income tax asset/liability 17,793  (88,816) 65,548  (148,135)
260,286  (466,369) 555,826  (728,332)
Change in net unrealized gains/losses on investments carried at fair value $ (66,937) $ 334,123  $ (246,583) $ 557,268 
Proceeds from sales of available for sale fixed maturity securities for the nine months ended September 30, 2021 and 2020 were $446.4 million and $1.1 billion, respectively. Scheduled principal repayments, calls and tenders for available for sale fixed maturity securities for the nine months ended September 30, 2021 and 2020 were $2.8 billion and $2.3 billion, respectively.
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Net realized gains (losses) on investments for the three and nine months ended September 30, 2021 and 2020, are as follows:
Three Months Ended 
 September 30,
Nine Months Ended 
 September 30,
2021 2020 2021 2020
(Dollars in thousands)
Available for sale fixed maturity securities:
Gross realized gains $ 1,001  $ 2,843  $ 7,430  $ 18,296 
Gross realized losses —  (51) (16,147) (1,521)
Net credit loss (provision) release 84  (25,923) (93) (82,335)
1,085  (23,131) (8,810) (65,560)
Mortgage loans on real estate:
Decrease (increase) in allowance for credit losses 5,023  810  9,471  (3,697)
Recovery of specific allowance —  —  —  712 
Loss on sale of mortgage loans (1,175) —  (3,425) — 
3,848  810  6,046  (2,985)
$ 4,933  $ (22,321) $ (2,764) $ (68,545)
Realized losses on available for sale fixed maturity securities in 2021 and 2020 were realized primarily due to strategies to reposition the fixed maturity security portfolio that result in improved net investment income, credit risk or duration profiles as they pertain to our asset liability management. In addition, certain realized gains and losses on available for sale fixed maturity securities in 2020 were realized as a result of efforts to de-risk the portfolio. Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date.
We review and analyze all investments on an ongoing basis for changes in market interest rates and credit deterioration. This review process includes analyzing our ability to recover the amortized cost basis of each investment that has a fair value that is materially lower than its amortized cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for credit loss is a quantitative and qualitative process, which is subject to risks and uncertainties.
We have a policy and process to identify securities that could potentially have credit loss. This process involves monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:
the extent to which the fair value has been less than amortized cost or cost;
whether the issuer is current on all payments and all contractual payments have been made as agreed;
the remaining payment terms and the financial condition and near-term prospects of the issuer;
the lack of ability to refinance due to liquidity problems in the credit market;
the fair value of any underlying collateral;
the existence of any credit protection available;
our intent to sell and whether it is more likely than not we would be required to sell prior to recovery for debt securities;
consideration of rating agency actions; and
changes in estimated cash flows of mortgage and asset backed securities.
We determine whether an allowance for credit loss should be established for debt securities by assessing all facts and circumstances surrounding each security. Where the decline in fair value of debt securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we do not consider these investments to have credit loss because we do not intend to sell these investments and it is not more likely than not we will be required to sell these investments before a recovery of amortized cost, which may be maturity.
If we intend to sell a debt security or if it is more likely than not that we will be required to sell a debt security before recovery of its amortized cost basis, credit loss has occurred and the difference between amortized cost and fair value will be recognized as a loss in operations.
If we do not intend to sell and it is not more likely than not we will be required to sell the debt security but also do not expect to recover the entire amortized cost basis of the security, a credit loss would be recognized in operations for the amount of the expected credit loss. We determine the amount of expected credit loss by calculating the present value of the cash flows expected to be collected discounted at each security's acquisition yield based on our consideration of whether the security was of high credit quality at the time of acquisition. The difference between the present value of expected future cash flows and the amortized cost basis of the security is the amount of credit loss recognized in operations. The recognized credit loss is limited to the total unrealized loss on the security (i.e., the fair value floor).
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The determination of the credit loss component of a mortgage backed security is based on a number of factors. The primary consideration in this evaluation process is the issuer's ability to meet current and future interest and principal payments as contractually stated at time of purchase. Our review of these securities includes an analysis of the cash flow modeling under various default scenarios considering independent third party benchmarks, the seniority of the specific tranche within the structure of the security, the composition of the collateral and the actual default, loss severity and prepayment experience exhibited. With the input of third party assumptions for default projections, loss severity and prepayment expectations, we evaluate the cash flow projections to determine whether the security is performing in accordance with its contractual obligation.
We utilize models from a leading structured product software specialist serving institutional investors. These models incorporate each security's seniority and cash flow structure. In circumstances where the analysis implies a potential for principal loss at some point in the future, we use the "best estimate" cash flow projection discounted at the security's effective yield at acquisition to determine the amount of our potential credit loss associated with this security. The discounted expected future cash flows equates to our expected recovery value. Any shortfall of the expected recovery when compared to the amortized cost of the security will be recorded as credit loss.
The determination of the credit loss component of a corporate bond is based on the underlying financial performance of the issuer and their ability to meet their contractual obligations. Considerations in our evaluation include, but are not limited to, credit rating changes, financial statement and ratio analysis, changes in management, significant changes in credit spreads, breaches of financial covenants and a review of the economic outlook for the industry and markets in which they trade. In circumstances where an issuer appears unlikely to meet its future obligation, an estimate of credit loss is determined. Credit loss is calculated using default probabilities as derived from the credit default swaps markets in conjunction with recovery rates derived from independent third party analysis or a best estimate of credit loss. This credit loss rate is then incorporated into a present value calculation based on an expected principal loss in the future discounted at the yield at the date of purchase and compared to amortized cost to determine the amount of credit loss associated with the security.
We do not measure a credit loss allowance on accrued interest receivable as we write off any accrued interest receivable balance to net investment income in a timely manner when we have concerns regarding collectability.
Amounts on available for sale fixed maturities that are deemed to be uncollectible are written off and removed from the allowance for credit loss. A write-off may also occur if we intend to sell a security or when it is more likely than not we will be required to sell the security before the recovery of its amortized cost.
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The following table provides a rollforward of the allowance for credit loss:
Three Months Ended September 30, 2021
United States
Municipalities,
States and
Territories
Corporate Securities Commercial Mortgage Backed Securities Residential Mortgage Backed Securities Other Asset Backed Securities Total
(Dollars in thousands)
Beginning balance $ 3,347  $ 10,723  $ —  $ 120  $ —  $ 14,190 
Additions for credit losses not previously recorded —  —  —  296  —  296 
Change in allowance on securities with previous allowance (575) 315  —  —  —  (260)
Reduction for securities sold during the period —  —  —  —  —  — 
Write-offs charged against the allowance —  (10,032) —  —  —  (10,032)
Recoveries of amounts previously written off —  —  —  (120) —  (120)
Ending balance $ 2,772  $ 1,006  $ —  $ 296  $ —  $ 4,074 
Three Months Ended September 30, 2020
United States
Municipalities,
States and
Territories
Corporate Securities Commercial Mortgage Backed Securities Residential Mortgage Backed Securities Other Asset Backed Securities Total
(Dollars in thousands)
Beginning balance $ —  $ 46,749  $ 2,660  $ 777  $ —  $ 50,186 
Additions for credit losses not previously recorded —  6,296  19,183  444  —  25,923 
Reduction for securities with credit losses due to intent to sell —  —  (14,490) —  —  (14,490)
Ending balance $ —  $ 53,045  $ 7,353  $ 1,221  $ —  $ 61,619 
Nine Months Ended September 30, 2021
United States
Municipalities,
States and
Territories
Corporate Securities Commercial Mortgage Backed Securities Residential Mortgage Backed Securities Other Asset Backed Securities Total
(Dollars in thousands)
Beginning balance $ 2,844  $ 60,193  $ —  $ 1,734  $ —  $ 64,771 
Additions for credit losses not previously recorded —  705  —  407  —  1,112 
Change in allowance on securities with previous allowance (72) 1,240  —  (631) —  537 
Reduction for securities sold during the period —  (50,758) —  —  —  (50,758)
Write-offs charged against the allowance —  (10,032) —  —  —  (10,032)
Recoveries of amounts previously written off —  (342) —  (1,214) —  (1,556)
Ending balance $ 2,772  $ 1,006  $ —  $ 296  $ —  $ 4,074 
Nine Months Ended September 30, 2020
United States
Municipalities,
States and
Territories
Corporate Securities Commercial Mortgage Backed Securities Residential Mortgage Backed Securities Other Asset Backed Securities Total
(Dollars in thousands)
Beginning balance $ —  $ —  $ —  $ —  $ —  $ — 
Additions for credit losses not previously recorded —  53,045  27,521  1,221  548  82,335 
Reduction for securities with credit losses due to intent to sell —  —  (20,168) —  (548) (20,716)
Ending balance $ —  $ 53,045  $ 7,353  $ 1,221  $ —  $ 61,619 
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5. Mortgage Loans on Real Estate
Our financing receivables consist of the following three portfolio segments: commercial mortgage loans, agricultural mortgage loans and residential mortgage loans. Our mortgage loan portfolios are summarized in the following table. There were commitments outstanding of $44.0 million at September 30, 2021.
September 30, 2021 December 31, 2020
(Dollars in thousands)
Commercial mortgage loans:
Principal outstanding $ 3,325,371  $ 3,580,154 
Deferred fees and costs, net (1,387) (1,266)
Amortized cost 3,323,984  3,578,888 
Valuation allowance (17,690) (25,529)
Commercial mortgage loans, carrying value 3,306,294  3,553,359 
Agricultural mortgage loans:
Principal outstanding 354,743  245,807 
Deferred fees and costs, net (1,002) (634)
Amortized cost 353,741  245,173 
Valuation allowance (628) (2,130)
Agricultural mortgage loans, carrying value 353,113  243,043 
Residential mortgage loans:
Principal outstanding 610,635  366,320 
Deferred fees and costs, net 1,479  925 
Unamortized discounts and premiums, net 20,461  5,212 
Amortized cost 632,575  372,457 
Valuation allowance (3,240) (3,370)
Residential mortgage loans, carrying value 629,335  369,087 
Mortgage loans, carrying value $ 4,288,742  $ 4,165,489 
Our commercial mortgage loan portfolio consists of loans collateralized by the related properties and diversified as to property type, location and loan size. Our lending policies establish limits on the amount that can be loaned to one borrower and other criteria to attempt to reduce the risk of default. The commercial mortgage loan portfolio is summarized by geographic region and property type as follows:
September 30, 2021 December 31, 2020
Principal Percent Principal Percent
(Dollars in thousands)
Geographic distribution
East $ 672,882  20.2  % $ 699,741  19.5  %
Middle Atlantic 292,152  8.8  % 281,971  7.9  %
Mountain 349,747  10.5  % 391,025  10.9  %
New England 24,325  0.7