AMERICAN EQUITY INVESTMENT LIFE HOLDING CO - Quarter Report: 2020 June (Form 10-Q)

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 June 30, 2020



☐	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, 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. (Check one):



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 ☒

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:

As of August 3, 2020, there were 91,954,552 shares of the registrant's common stock, $1 par value, outstanding.

TABLE OF CONTENTS



	Page
PART I — FINANCIAL INFORMATION
Item 1: Financial Statements:	2
Consolidated Balance Sheets	2
Consolidated Statements of Operations	3
Consolidated Statements of Comprehensive Income	4
Consolidated Statements of Changes in Stockholders’ Equity	5
Consolidated Statements of Cash Flows	6
Notes to Consolidated Financial Statements	8
Note 1. Significant Accounting Policies	8
Note 2. Fair Values of Financial Instruments	9
Note 3. Investments	14
Note 4. Mortgage Loans on Real Estate	20
Note 5. Derivative Instruments	24
Note 6. Notes Payable and Amounts Due Under Repurchase Agreements	25
Note 7. Commitments and Contingencies	26
Note 8. Earnings (Loss) Per Common Share and Stockholders' Equity	26
Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
Item 3: Quantitative and Qualitative Disclosures about Market Risk	47
Item 4: Controls and Procedures	48

PART II — OTHER INFORMATION
Item 1: Legal Proceedings	48
Item 1A: Risk Factors	48
Item 2: Unregistered Sales of Equity Securities and Use of Proceeds	50
Item 6: Exhibits	51

Signatures	52

Table of Contents

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)



	June 30, 2020		December 31, 2019
	(Unaudited)
Assets
Investments:
Fixed maturity securities, available for sale, at fair value (amortized cost of $46,951,043 as of 2020 and $48,238,946 as of 2019; allowance for credit losses of $50,186 as of 2020)	$	50,738,792	$	51,580,490
Mortgage loans on real estate (net of allowance for credit losses of $20,089 as of 2020 and $9,179 as of 2019)	3,958,233		3,448,793
Derivative instruments	672,958		1,355,989
Other investments	479,099		492,301
Total investments	55,849,082		56,877,573

Cash and cash equivalents	2,408,635		2,293,392
Coinsurance deposits (net of allowance for credit losses of $3,948 as of 2020 and $0 as of 2019)	4,962,859		5,115,013
Accrued investment income	450,290		472,826
Deferred policy acquisition costs	2,920,793		2,923,454
Deferred sales inducements	1,937,083		1,966,723
Income taxes recoverable	35,962		—
Other assets	43,592		47,571
Total assets	$	68,608,296	$	69,696,552

Liabilities and Stockholders' Equity
Liabilities:
Policy benefit reserves	$	61,669,232	$	61,893,945
Other policy funds and contract claims	244,186		256,105
Notes payable	495,388		495,116
Subordinated debentures	77,964		157,265
Deferred income taxes	229,757		177,897
Income taxes payable	—		429
Other liabilities	829,710		2,145,676
Total liabilities	63,546,237		65,126,433

Stockholders' equity:
Preferred stock, Series A; par value $1 per share; $400,000 aggregate liquidation preference; 20,000 shares authorized; issued and outstanding: 2020 - 16,000 shares; 2019 - 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: 2020 - 12,000 shares; 2019 - no shares	12		—
Common stock; par value $1 per share; 200,000,000 shares authorized; issued and outstanding: 2020 - 91,595,066 shares (excluding 1,171,451 treasury shares); 2019 - 91,107,555 shares (excluding 1,344,193 treasury shares)	91,595		91,107
Additional paid-in capital	1,508,171		1,212,311
Accumulated other comprehensive income	1,719,839		1,497,921
Retained earnings	1,742,426		1,768,764
Total stockholders' equity	5,062,059		4,570,119
Total liabilities and stockholders' equity	$	68,608,296	$	69,696,552

See accompanying notes to unaudited consolidated financial statements.

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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,
	2020			2019			2020			2019
Revenues:
Premiums and other considerations	$	11,032		$	4,126		$	18,696		$	9,536
Annuity product charges	63,438			60,700			122,987			113,666
Net investment income	543,704			570,568			1,117,022			1,129,006
Change in fair value of derivatives	327,662			76,045			(614,212		)	460,514
Net realized gains (losses) on investments	(25,888		)	(3,832		)	(46,224		)	(4,395		)
Other than temporary impairment (OTTI) losses on investments:
Total OTTI losses	—			(998		)	—			(998		)
Portion of OTTI losses recognized from other comprehensive income	—			(215		)	—			(215		)
Net OTTI losses recognized in operations	—			(1,213		)	—			(1,213		)
Loss on extinguishment of debt	—			—			(2,024		)	—
Total revenues	919,948			706,394			596,245			1,707,114

Benefits and expenses:
Insurance policy benefits and change in future policy benefits	13,331			6,939			23,403			16,238
Interest sensitive and index product benefits	240,992			251,103			641,211			387,777
Amortization of deferred sales inducements	(75,178		)	19,785			(1,587		)	53,094
Change in fair value of embedded derivatives	1,126,935			327,562			(123,126		)	1,093,885
Interest expense on notes payable	6,388			6,380			12,773			12,759
Interest expense on subordinated debentures	1,321			4,057			2,909			8,145
Amortization of deferred policy acquisition costs	(119,889		)	29,946			813			75,078
Other operating costs and expenses	41,951			37,426			85,577			76,405
Total benefits and expenses	1,235,851			683,198			641,973			1,723,381
Income (loss) before income taxes	(315,903		)	23,196			(45,728		)	(16,267		)
Income tax expense (benefit)	(68,474		)	4,606			(41,246		)	(4,847		)
Net income (loss)	(247,429		)	18,590			(4,482		)	(11,420		)
Less: Preferred stock dividends	5,950			—			12,561			—
Net income (loss) available to common stockholders	$	(253,379	)	$	18,590		$	(17,043	)	$	(11,420	)

Earnings (loss) per common share	$	(2.76	)	$	0.20		$	(0.19	)	$	(0.13	)
Earnings (loss) per common share - assuming dilution	$	(2.76	)	$	0.20		$	(0.19	)	$	(0.13	)

Weighted average common shares outstanding (in thousands):
Earnings (loss) per common share	91,803			91,103			91,724			90,994
Earnings (loss) per common share - assuming dilution	92,027			91,785			92,024			91,765

See accompanying notes to unaudited consolidated financial statements.

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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,
	2020			2019			2020			2019
Net income (loss)	$	(247,429	)	$	18,590		$	(4,482	)	$	(11,420	)
Other comprehensive income:
Change in net unrealized investment gains/losses (1)	1,898,567			677,320			273,492			1,394,233
Noncredit component of OTTI losses (1)	—			103			—			103
Reclassification of unrealized investment gains/losses to net income (loss) (1)	(2		)	1,422			7,418			1,128
Other comprehensive income before income tax	1,898,565			678,845			280,910			1,395,464
Income tax effect related to other comprehensive income	(398,700		)	(142,558		)	(58,992		)	(293,048		)
Other comprehensive income	1,499,865			536,287			221,918			1,102,416
Comprehensive income	$	1,252,436		$	554,877		$	217,436		$	1,090,996


(1)	Net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs.

See accompanying notes to unaudited consolidated financial statements.

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY

(Dollars in thousands, except share data)

(Unaudited)



	Preferred Stock		Common Stock		Additional Paid-in Capital			Accumulated Other Comprehensive Income			Retained Earnings			Total Stockholders' Equity
For the six months ended June 30, 2020
Balance at December 31, 2019	$	16	$	91,107	$	1,212,311		$	1,497,921		$	1,768,764		$	4,570,119
Net loss for period	—		—		—			—			(4,482		)	(4,482		)
Other comprehensive income	—		—		—			221,918			—			221,918
Issuance of preferred stock	12		—		290,248			—			—			290,260
Share-based compensation	—		—		4,394			—			—			4,394
Issuance of 487,511 shares of common stock under compensation plans	—		488		1,218			—			—			1,706
Cumulative effect of change in accounting principle	—		—		—			—			(9,295		)	(9,295		)
Dividends on preferred stock	—		—		—			—			(12,561		)	(12,561		)
Balance at June 30, 2020	$	28	$	91,595	$	1,508,171		$	1,719,839		$	1,742,426		$	5,062,059

	Preferred Stock		Common Stock		Additional Paid-in Capital			Accumulated Other Comprehensive Income			Retained Earnings			Total Stockholders' Equity
For the three months ended June 30, 2020
Balance at March 31, 2020	$	16	$	91,498	$	1,215,464		$	219,974		$	1,995,805		$	3,522,757
Net loss for period	—		—		—			—			(247,429		)	(247,429		)
Other comprehensive income	—		—		—			1,499,865			—			1,499,865
Issuance of preferred stock	12		—		290,248			—			—			290,260
Share-based compensation	—		—		2,105			—			—			2,105
Issuance of 97,225 shares of common stock under compensation plans	—		97		354			—			—			451
Dividends on preferred stock	—		—		—			—			(5,950		)	(5,950		)
Balance at June 30, 2020	$	28	$	91,595	$	1,508,171		$	1,719,839		$	1,742,426		$	5,062,059

	Preferred Stock		Common Stock		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings			Total Stockholders' Equity
For the six months ended June 30, 2019
Balance at December 31, 2018	$	—	$	90,369	$	811,186		$	(52,432	)	$	1,549,978		$	2,399,101
Net loss for period	—		—		—			—			(11,420		)	(11,420		)
Other comprehensive income	—		—		—			1,102,416			—			1,102,416
Share-based compensation	—		—		7,360			—			—			7,360
Issuance of 567,095 shares of common stock under compensation plans	—		567		(549		)	—			—			18
Balance at June 30, 2019	$	—	$	90,936	$	817,997		$	1,049,984		$	1,538,558		$	3,497,475

	Preferred Stock		Common Stock		Additional Paid-in Capital			Accumulated Other Comprehensive Income			Retained Earnings			Total Stockholders' Equity
For the three months ended June 30, 2019
Balance at March 31, 2019	$	—	$	90,784	$	815,088		$	513,697		$	1,519,968		$	2,939,537
Net income for period	—		—		—			—			18,590			18,590
Other comprehensive income	—		—		—			536,287			—			536,287
Share-based compensation	—		—		3,155			—			—			3,155
Issuance of 152,201 shares of common stock under compensation plans	—		152		(246		)	—			—			(94		)
Balance at June 30, 2019	$	—	$	90,936	$	817,997		$	1,049,984		$	1,538,558		$	3,497,475

See accompanying notes to unaudited consolidated financial statements.

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)



	Six Months Ended June 30,
	2020			2019
Operating activities
Net income (loss)	$	(4,482	)	$	(11,420	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Interest sensitive and index product benefits	641,211			387,777
Amortization of deferred sales inducements	(1,587		)	53,094
Annuity product charges	(122,987		)	(113,666		)
Change in fair value of embedded derivatives	(123,126		)	1,093,885
Change in traditional life and accident and health insurance reserves	3,322			(2,889		)
Policy acquisition costs deferred	(123,861		)	(236,076		)
Amortization of deferred policy acquisition costs	813			75,078
Provision for depreciation and other amortization	2,485			1,916
Amortization of discounts and premiums on investments	17,645			12,734
Realized gains/losses on investments	46,224			5,608
Distributions from equity method investments	—			753
Change in fair value of derivatives	614,212			(460,326		)
Deferred income taxes	(7,132		)	(11,207		)
Loss on extinguishment of debt	2,024			—
Share-based compensation	4,394			7,360
Change in accrued investment income	22,536			(11,935		)
Change in income taxes recoverable/payable	(36,391		)	(21,547		)
Change in other assets	3,055			(4,868		)
Change in other policy funds and contract claims	(15,222		)	(10,605		)
Change in collateral held for derivatives	(727,069		)	680,208
Change in collateral held for securities lending	(494,280		)	441,908
Change in other liabilities	(36,407		)	1,306
Other	6,727			(5,854		)
Net cash provided by (used in) operating activities	(327,896		)	1,871,234

Investing activities
Sales, maturities, or repayments of investments:
Fixed maturity securities, available for sale	2,413,147			859,767
Mortgage loans on real estate	129,531			136,035
Derivative instruments	430,662			238,557
Other investments	3,013			3,407
Acquisitions of investments:
Fixed maturity securities, available for sale	(1,137,134		)	(2,199,848		)
Mortgage loans on real estate	(654,936		)	(276,385		)
Derivative instruments	(389,877		)	(419,798		)
Other investments	(4,936		)	(291,519		)
Purchases of property, furniture and equipment	(11,624		)	(1,400		)
Net cash provided by (used in) investing activities	777,846			(1,951,184		)

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)

(Dollars in thousands)

(Unaudited)



	Six Months Ended June 30,
	2020			2019
Financing activities
Receipts credited to annuity policyholder account balances	$	1,248,172		$	2,732,241
Coinsurance deposits	204,759			59,190
Return of annuity policyholder account balances	(1,971,344		)	(1,726,013		)
Repayment of subordinated debentures	(81,450		)	—
Net proceeds from amounts due under repurchase agreements	—			(109,298		)
Proceeds from issuance of preferred stock, net	290,260			—
Proceeds from issuance of common stock, net	1,706			18
Change in checks in excess of cash balance	(14,249		)	(4,617		)
Preferred stock dividends	(12,561		)	—
Net cash provided by (used in) financing activities	(334,707		)	951,521
Increase in cash and cash equivalents	115,243			871,571
Cash and cash equivalents at beginning of period	2,293,392			344,396
Cash and cash equivalents at end of period	$	2,408,635		$	1,215,967

Supplemental disclosures of cash flow information
Cash paid (received) during period for:
Interest expense	$	16,427		$	22,513
Income taxes	(161		)	28,193
Non-cash operating activity:
Deferral of sales inducements	47,262			93,991

See accompanying notes to unaudited consolidated financial statements.

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AMERICAN EQUITY INVESTMENT LIFE HOLDING COMPANY AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

June 30, 2020

(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. 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, 2020 are not necessarily indicative of the results that may be expected for the year ended December 31, 2020. 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, 2019.

Adopted Accounting Pronouncements

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 will be 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.

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, 2022, the transition date (the remeasurement date) is January 1, 2020. 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.

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2. Fair Values of Financial Instruments

The following sets forth a comparison of the carrying amounts and fair values of our financial instruments:



	June 30, 2020				December 31, 2019
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(Dollars in thousands)
Assets
Fixed maturity securities, available for sale	$	50,738,792	$	50,738,792	$	51,580,490	$	51,580,490
Mortgage loans on real estate	3,958,233		4,044,873		3,448,793		3,536,446
Derivative instruments	672,958		672,958		1,355,989		1,355,989
Other investments	479,099		479,099		492,301		492,301
Cash and cash equivalents	2,408,635		2,408,635		2,293,392		2,293,392
Coinsurance deposits	4,962,859		4,527,374		5,115,013		4,635,926
Interest rate caps	—		—		6		6

Liabilities
Policy benefit reserves	61,312,957		51,865,732		61,540,992		51,800,247
Single premium immediate annuity (SPIA) benefit reserves	243,910		251,599		255,698		263,773
Notes payable	495,388		543,520		495,116		541,520
Subordinated debentures	77,964		74,084		157,265		168,357

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 any period presented.

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Our assets and liabilities which are measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 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, 2020
Assets
Fixed maturity securities, available for sale:
United States Government full faith and credit	$	39,342	$	33,057	$	6,285	$	—
United States Government sponsored agencies	343,387		—		343,387		—
United States municipalities, states and territories	3,778,710		—		3,778,710		—
Foreign government obligations	207,509		—		207,509		—
Corporate securities	33,330,711		10		33,330,701		—
Residential mortgage backed securities	1,712,725		—		1,712,725		—
Commercial mortgage backed securities	5,393,062		—		5,393,062		—
Other asset backed securities	5,933,346		—		5,933,346		—
Derivative instruments	672,958		—		672,958		—
Cash and cash equivalents	2,408,635		2,408,635		—		—
	$	53,820,385	$	2,441,702	$	51,378,683	$	—
Liabilities
Fixed index annuities - embedded derivatives	$	9,418,485	$	—	$	—	$	9,418,485

December 31, 2019
Assets
Fixed maturity securities, available for sale:
United States Government full faith and credit	$	161,765	$	155,945	$	5,820	$	—
United States Government sponsored agencies	625,020		—		625,020		—
United States municipalities, states and territories	4,527,671		—		4,527,671		—
Foreign government obligations	205,096		—		205,096		—
Corporate securities	32,536,839		4		32,536,835		—
Residential mortgage backed securities	1,575,664		—		1,575,664		—
Commercial mortgage backed securities	5,786,279		—		5,786,279		—
Other asset backed securities	6,162,156		—		6,162,156		—
Derivative instruments	1,355,989		—		1,355,989		—
Cash and cash equivalents	2,293,392		2,293,392		—		—
Interest rate caps	6		—		6		—
	$	55,229,877	$	2,449,341	$	52,780,536	$	—
Liabilities
Fixed index annuities - embedded derivatives	$	9,624,395	$	—	$	—	$	9,624,395

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.

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The independent pricing services also take in to 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 June 30, 2020 and December 31, 2019.

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.

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

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 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 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 our COLI approximates the cash surrender value of the policies and falls within Level 2 of the fair value hierarchy.

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 caps

The fair values of our interest rate caps are obtained from third parties and are determined by discounting expected future cash flows using a projected London Interbank Offered Rate ("LIBOR") for the term of the caps.

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.

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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 June 30, 2020 and December 31, 2019, we utilized an estimate of 2.90% 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 revised 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)	June 30, 2020	December 31, 2019	June 30, 2020	December 31, 2019
1 - 5	0.98%	0.90%	3.38%	3.33%
6 - 10	1.29%	1.29%	3.87%	3.84%
11 - 15	3.11%	3.31%	4.12%	4.12%
16 - 20	7.74%	8.52%	4.21%	4.18%
20+	7.29%	7.10%	4.12%	4.12%

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.

The following table provides a reconciliation of the beginning and ending balances for our Level 3 liabilities, which are measured at fair value on a recurring basis using significant unobservable inputs for the three and six months ended June 30, 2020 and 2019:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020			2019
	(Dollars in thousands)
Fixed index annuities - embedded derivatives
Beginning balance	$	8,451,482	$	8,876,055	$	9,624,395		$	8,165,405
Premiums less benefits	53,019		200,472		165,177			258,480
Change in fair value, net	913,984		204,590		(371,087		)	857,232
Ending balance	$	9,418,485	$	9,281,117	$	9,418,485		$	9,281,117

The fair value of our fixed index annuities embedded derivatives is net of coinsurance ceded of $637.2 million and $644.6 million as of June 30, 2020 and December 31, 2019, 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.

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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, 2020, were to increase by 100 basis points, the fair value of the embedded derivatives would decrease by $868.6 million recorded through operations as a decrease in the change in fair value of embedded derivatives and there would be a corresponding decrease of $360.2 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 rates used to discount the excess projected contract values would increase the fair value of the embedded derivatives by $967.6 million recorded through operations as an increase in the change in fair value of embedded derivatives and there would be a corresponding increase of $419.4 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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3. Investments

At June 30, 2020 and December 31, 2019, the amortized cost and fair value of fixed maturity securities were as follows:



	Amortized Cost (1)		Gross Unrealized Gains		Gross Unrealized Losses			Allowance for Credit Losses			Fair Value
	(Dollars in thousands)
June 30, 2020
Fixed maturity securities, available for sale:
United States Government full faith and credit	$	36,507	$	2,835	$	—		$	—		$	39,342
United States Government sponsored agencies	293,731		49,656		—			—			343,387
United States municipalities, states and territories	3,283,321		497,428		(2,039		)	—			3,778,710
Foreign government obligations	187,021		21,616		(1,128		)	—			207,509
Corporate securities	29,734,789		3,889,518		(246,847		)	(46,749		)	33,330,711
Residential mortgage backed securities	1,588,760		129,579		(4,837		)	(777		)	1,712,725
Commercial mortgage backed securities	5,524,081		138,590		(266,949		)	(2,660		)	5,393,062
Other asset backed securities	6,302,833		96,404		(465,891		)	—			5,933,346
	$	46,951,043	$	4,825,626	$	(987,691	)	$	(50,186	)	$	50,738,792

December 31, 2019
Fixed maturity securities, available for sale:
United States Government full faith and credit	$	161,492	$	369	$	(96	)	$	—		$	161,765
United States Government sponsored agencies	601,672		28,133		(4,785		)	—			625,020
United States municipalities, states and territories	4,147,343		388,578		(8,250		)	—			4,527,671
Foreign government obligations	186,993		18,103		—			—			205,096
Corporate securities	29,822,172		2,796,926		(82,259		)	—			32,536,839
Residential mortgage backed securities	1,477,738		101,617		(3,691		)	—			1,575,664
Commercial mortgage backed securities	5,591,167		208,895		(13,783		)	—			5,786,279
Other asset backed securities	6,250,369		90,978		(179,191		)	—			6,162,156
	$	48,238,946	$	3,633,599	$	(292,055	)	$	—		$	51,580,490

(1) Amortized cost excludes accrued interest receivable of $432.0 million as of June 30, 2020.

The amortized cost and fair value of fixed maturity securities at June 30, 2020, 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	$	425,542	$	432,132
Due after one year through five years	6,511,972		6,869,898
Due after five years through ten years	9,337,950		10,131,288
Due after ten years through twenty years	9,676,298		11,429,195
Due after twenty years	7,583,607		8,837,146
	33,535,369		37,699,659
Residential mortgage backed securities	1,588,760		1,712,725
Commercial mortgage backed securities	5,524,081		5,393,062
Other asset backed securities	6,302,833		5,933,346
	$	46,951,043	$	50,738,792

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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:



	June 30, 2020			December 31, 2019
	(Dollars in thousands)
Net unrealized gains on available for sale fixed maturity securities	$	3,826,652		$	3,341,544
Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements	(1,678,164		)	(1,473,966		)
Deferred income tax valuation allowance reversal	22,534			22,534
Deferred income tax expense	(451,183		)	(392,191		)
Net unrealized gains reported as accumulated other comprehensive income	$	1,719,839		$	1,497,921

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% and 98% of our fixed maturity portfolio rated investment grade at June 30, 2020 and December 31, 2019, respectively.

The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:



	June 30, 2020				December 31, 2019
NAIC Designation	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
1	$	25,587,355	$	28,327,288	$	27,781,525	$	30,122,657
2	19,487,757		20,765,334		19,278,355		20,316,911
3	1,577,056		1,430,998		1,001,087		977,191
4	185,879		156,234		114,497		112,534
5	51,893		31,644		57,952		45,205
6	61,103		27,294		5,530		5,992
	$	46,951,043	$	50,738,792	$	48,238,946	$	51,580,490

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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 1,613 and 1,033 securities, respectively) have been in a continuous unrealized loss position, at June 30, 2020 and December 31, 2019:



	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)
June 30, 2020
Fixed maturity securities, available for sale:
United States municipalities, states and territories	$	51,931	$	(2,039	)	$	—	$	—		$	51,931	$	(2,039	)
Foreign government obligations	23,057		(1,128		)	—		—			23,057		(1,128		)
Corporate securities:
Finance, insurance and real estate	626,564		(23,749		)	—		—			626,564		(23,749		)
Manufacturing, construction and mining	280,272		(12,977		)	18,451		(2,678		)	298,723		(15,655		)
Utilities and related sectors	457,237		(62,364		)	37,346		(9,405		)	494,583		(71,769		)
Wholesale/retail trade	185,882		(21,316		)	105,576		(27,228		)	291,458		(48,544		)
Services, media and other	570,547		(64,840		)	234,595		(69,039		)	805,142		(133,879		)
Residential mortgage backed securities	221,327		(3,882		)	12,675		(1,732		)	234,002		(5,614		)
Commercial mortgage backed securities	2,711,400		(249,494		)	88,303		(20,115		)	2,799,703		(269,609		)
Other asset backed securities	2,161,262		(125,269		)	2,677,210		(340,622		)	4,838,472		(465,891		)
	$	7,289,479	$	(567,058	)	$	3,174,156	$	(470,819	)	$	10,463,635	$	(1,037,877	)

December 31, 2019
Fixed maturity securities, available for sale:
United States Government full faith and credit	$	144,582	$	(96	)	$	—	$	—		$	144,582	$	(96	)
United States Government sponsored agencies	168,732		(1,229		)	201,444		(3,556		)	370,176		(4,785		)
United States municipalities, states and territories	285,481		(8,173		)	3,081		(77		)	288,562		(8,250		)
Corporate securities:
Finance, insurance and real estate	267,521		(4,785		)	121,993		(4,744		)	389,514		(9,529		)
Manufacturing, construction and mining	161,633		(6,039		)	44,606		(3,951		)	206,239		(9,990		)
Utilities and related sectors	334,635		(7,730		)	51,269		(3,482		)	385,904		(11,212		)
Wholesale/retail trade	54,289		(1,751		)	129,364		(9,411		)	183,653		(11,162		)
Services, media and other	275,135		(6,135		)	316,086		(34,231		)	591,221		(40,366		)
Residential mortgage backed securities	212,404		(2,686		)	11,332		(1,005		)	223,736		(3,691		)
Commercial mortgage backed securities	602,394		(9,366		)	194,328		(4,417		)	796,722		(13,783		)
Other asset backed securities	752,413		(11,709		)	3,375,016		(167,482		)	4,127,429		(179,191		)
	$	3,259,219	$	(59,699	)	$	4,448,519	$	(232,356	)	$	7,707,738	$	(292,055	)

(1) Unrealized losses have not been reduced to reflect the allowance for credit losses of $50.2 million as of June 30, 2020.

The unrealized losses at June 30, 2020 are principally related to the impacts the COVID-19 pandemic had on credit markets. In addition, certain unrealized losses at June 30, 2020 are related to the timing of the purchases of certain securities, which carry less yield than those currently available. Approximately 80% and 79% of the unrealized losses on fixed maturity securities shown in the above table for June 30, 2020 and December 31, 2019, 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 operations.

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Changes in net unrealized gains/losses on investments for the three and six months ended June 30, 2020 and 2019 are as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(Dollars in thousands)
Fixed maturity securities available for sale carried at fair value	$	3,347,516		$	1,383,290		$	485,108		$	2,900,810

Adjustment for effect on other balance sheet accounts:
Deferred policy acquisition costs and deferred sales inducements	(1,448,951		)	(704,445		)	(204,198		)	(1,505,346		)
Deferred income tax asset/liability	(398,700		)	(142,558		)	(58,992		)	(293,048		)
	(1,847,651		)	(847,003		)	(263,190		)	(1,798,394		)
Change in net unrealized gains/losses on investments carried at fair value	$	1,499,865		$	536,287		$	221,918		$	1,102,416

Proceeds from sales of available for sale fixed maturity securities for the six months ended June 30, 2020 and 2019 were $973.4 million and $359.3 million, respectively. Scheduled principal repayments, calls and tenders for available for sale fixed maturity securities for the six months ended June 30, 2020 and 2019 were $1.4 billion and $500.5 million, respectively.

Net realized gains (losses) on investments for the three and six months ended June 30, 2020 and 2019, are as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(Dollars in thousands)
Available for sale fixed maturity securities:
Gross realized gains	$	1,215		$	5,255		$	15,453		$	6,426
Gross realized losses	(264		)	(2,287		)	(1,470		)	(4,081		)
Credit losses (1)	(25,041		)	—			(56,412		)	—
	(24,090		)	2,968			(42,429		)	2,345
Other investments:
Gross realized gains	—			7,296			—			7,296
Gross realized losses	—			(14,446		)	—			(14,446		)
	—			(7,150		)	—			(7,150		)
Mortgage loans on real estate:
Increase (decrease) in allowance for credit losses	(2,510		)	350			(4,507		)	410
Recovery of specific allowance	712			—			712			—
	(1,798		)	350			(3,795		)	410
	$	(25,888	)	$	(3,832	)	$	(46,224	)	$	(4,395	)

(1) Prior to adopting authoritative guidance effective January 1, 2020, credit losses on available for sale fixed maturity securities were classified as other than temporary impairments and reported in a separate line item in the Consolidated statements of operations. We recognized $1.2 million of other than temporary impairments during the three and six months ended June 30, 2019.

Losses on available for sale fixed maturity securities in 2020 and 2019 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. 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;

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•	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).

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 June 30, 2020
	Corporate Securities		Commercial Mortgage Backed Securities			Residential Mortgage Backed Securities		Other Asset Backed Securities			Total
	(Dollars in thousands)
Beginning balance (1)	$	28,332	$	—		$	—	$	—		$	28,332
Additions for credit losses not previously recorded	18,417		5,847			777		—			25,041
Reduction for securities with credit losses due to intent to sell	—		(3,187		)	—		—			(3,187		)
Ending balance	$	46,749	$	2,660		$	777	$	—		$	50,186

	Six Months Ended June 30, 2020
	Corporate Securities		Commercial Mortgage Backed Securities			Residential Mortgage Backed Securities		Other Asset Backed Securities			Total
	(Dollars in thousands)
Beginning balance (1)	$	—	$	—		$	—	$	—		$	—
Additions for credit losses not previously recorded	46,749		8,338			777		548			56,412
Reduction for securities with credit losses due to intent to sell	—		(5,678		)	—		(548		)	(6,226		)
Ending balance	$	46,749	$	2,660		$	777	$	—		$	50,186

(1) The allowance for credit loss associated with available for sale fixed maturity securities was applied prospectively upon adoption of authoritative guidance effective January 1, 2020. See Note 1 for further details.

Prior to the implementation of authoritative guidance in 2020, we evaluated our investments for other than temporary impairments using a method consistent with our current credit loss evaluation process discussed above. In addition, we also considered length of time the fair value had been less than amortized cost or cost in our evaluation.

If we did not intend to sell and it was not more likely than not we would be required to sell the debt security but also did not expect to recover the entire amortized cost basis of the security, an impairment loss was recognized in operations in the amount of the expected credit loss. The difference between the present value of expected future cash flows and the amortized cost basis of the security was the amount of credit loss recognized in operations. The remaining amount of the other than temporary impairment was recognized in other comprehensive income.

In addition, for debt securities which we did not intend to sell and it was not more likely than not we would be required to sell, but our intent changed due to changes or events that could not have been reasonably anticipated, an other than temporary impairment charge was recognized. Once an impairment charge had been recorded, we then continued to review the other than temporarily impaired securities for appropriate valuation on an ongoing basis. Unrealized losses may have been recognized in future periods through a charge to earnings should we have later concluded that the decline in fair value below amortized cost was other than temporary pursuant to our accounting policy.

The cumulative portion of other than temporary impairments determined to be credit losses which have been recognized in operations for debt securities are summarized as follows:



	Three Months Ended June 30,			Six Months Ended June 30,
	2019			2019
	(Dollars in thousands)
Cumulative credit loss at beginning of period	$	(175,398	)	$	(175,398	)
Additions for the amount related to credit losses for which OTTI has not previously been recognized	(998		)	(998		)
Additional credit losses on securities for which OTTI has previously been recognized	(215		)	(215		)
Accumulated losses on securities that were disposed of during the period	10,960			10,960
Cumulative credit loss at end of period	$	(165,651	)	$	(165,651	)

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The following table summarizes the cumulative noncredit portion of OTTI and the change in fair value since recognition of OTTI, both of which were recognized in other comprehensive income, by major type of security, for securities that are part of our investment portfolio at December 31, 2019:



	Amortized Cost		OTTI Recognized in Other Comprehensive Income (Loss)			Change in Fair Value Since OTTI was Recognized			Fair Value
	(Dollars in thousands)
December 31, 2019
Fixed maturity securities, available for sale:
Corporate securities	$	50,755	$	(3,700	)	$	9,268		$	56,323
Residential mortgage backed securities	183,948		(145,446		)	172,577			211,079
Commercial mortgage backed securities	12,776		—			(401		)	12,375
Other asset backed securities	977		—			261			1,238
	$	248,456	$	(149,146	)	$	181,705		$	281,015

4. Mortgage Loans on Real Estate

Our financing receivables consist of the following two portfolio segments: commercial mortgage loans and residential mortgage loans. Our commercial and residential mortgage loan portfolios are summarized in the following table. There were commitments outstanding of $65.1 million at June 30, 2020.



	June 30, 2020			December 31, 2019
	(Dollars in thousands)
Commercial mortgage loans:
Principal outstanding	$	3,828,972		$	3,458,914
Deferred fees and costs, net	(1,858		)	(942		)
Amortized cost	3,827,114			3,457,972
Valuation allowance	(18,439		)	(9,179		)
Commercial mortgage loans, carrying value	3,808,675			3,448,793

Residential mortgage loans:
Principal outstanding	153,913			—
Deferred fees and costs, net	373			—
Unamortized discount	(3,078		)	—
Amortized cost	151,208			—
Valuation allowance	(1,650		)	—
Residential mortgage loans, carrying value	149,558			—
Mortgage loans, carrying value	$	3,958,233		$	3,448,793

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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:



	June 30, 2020				December 31, 2019
	Principal		Percent		Principal		Percent
	(Dollars in thousands)
Geographic distribution
East	$	714,198	18.7	%	$	645,991	18.7	%
Middle Atlantic	287,864		7.5	%	284,597		8.2	%
Mountain	444,495		11.6	%	389,892		11.3	%
New England	25,066		0.7	%	9,152		0.3	%
Pacific	782,240		20.4	%	655,518		19.0	%
South Atlantic	820,260		21.4	%	751,199		21.7	%
West North Central	308,874		8.1	%	302,534		8.7	%
West South Central	445,975		11.6	%	420,031		12.1	%
	$	3,828,972	100.0	%	$	3,458,914	100.0	%
Property type distribution
Office	$	259,888	6.8	%	$	250,287	7.3	%
Medical Office	27,372		0.7	%	29,990		0.9	%
Retail	1,225,212		32.0	%	1,225,670		35.4	%
Industrial/Warehouse	974,579		25.5	%	896,558		25.9	%
Apartment	971,536		25.4	%	858,679		24.8	%
Agricultural	177,333		4.6	%	51,303		1.5	%
Mixed use/Other	193,052		5.0	%	146,427		4.2	%
	$	3,828,972	100.0	%	$	3,458,914	100.0	%

Our residential mortgage loan portfolio consists of loans with an outstanding principal balance of $153.9 million that were purchased on June 25, 2020. These loans are collateralized by the related properties and diversified as to location within the United States.

Mortgage loans on real estate are generally reported at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method and net of valuation allowances. Interest income is accrued on the principal amount of the loan based on the loan's contractual interest rate. Interest income is included in Net investment income on our consolidated statements of operations. Accrued interest receivable, which was $15.5 million as of June 30, 2020, is included in Accrued investment income on our consolidated balance sheets.

Loan Valuation Allowance

We establish a valuation allowance to provide for the risk of credit losses inherent in our mortgage loan portfolios. The valuation allowance is maintained at a level believed adequate by management to absorb estimated expected credit losses. The valuation allowance is based on amortized cost, which excludes accrued interest receivable. We do not measure a credit loss allowance on accrued interest receivable as we write off any uncollectible accrued interest receivable balances to net investment income in a timely manner. We did not charge off any uncollectible accrued interest receivable on our commercial or residential mortgage loan portfolio for the three and six month periods ended June 30, 2020.

The valuation allowance for commercial mortgage loans is calculated by pooling our loans based on risk rating and property collateral type and applying an estimated loss ratio against each risk pool. Risk ratings are based on an analysis of the current state of the borrower's credit quality, which considers factors such as loan-to-value ("LTV") and debt service coverage ("DSC") ratios, loan performance and economic outlook, among others. The loss ratios are generally based upon historical loss experience for each risk pool and are adjusted for current and forecasted economic factors management believes to be relevant and supportable. Economic factors are forecasted for two years with immediate reversion to historical experience.

A commercial loan is individually evaluated for impairment if it does not continue to share similar risk characteristics of a pool. A commercial mortgage loan that is individually evaluated is impaired when it is probable that we will be unable to collect all amounts due according to the contractual terms of the loan agreement. If we determine that the value of any specific mortgage loan is impaired, the carrying amount of the mortgage loan will be reduced to its fair value, based upon the present value of expected future cash flows from the loan discounted at the loan's effective interest rate, or the fair value of the underlying collateral less estimated costs to sell.

The valuation allowance for residential mortgage loans is estimated by deriving probability of default and recovery rate assumptions based on the characteristics of the loans in our portfolio, historical economic data and loss information, and current and forecasted economics conditions. Key loan characteristics impacting the estimate include delinquency status, time to maturity, original credit scores and loan-to-value ratios.

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The following table represents a rollforward of the valuation of our mortgage loan portfolios:



	Three Months Ended June 30, 2020
	Commercial			Residential			Total
	(Dollars in thousands)
Beginning allowance balance (1)	$	(19,776	)	$	—		$	(19,776	)
Charge-offs	1,485			—			1,485
Recoveries	712			—			712
Change in provision for credit losses	(860		)	(1,650		)	(2,510		)
Ending allowance balance	$	(18,439	)	$	(1,650	)	$	(20,089	)

	Six Months Ended June 30, 2020
	Commercial			Residential			Total
	(Dollars in thousands)
Beginning allowance balance (1)	$	(17,779	)	$	—		$	(17,779	)
Charge-offs	1,485			—			1,485
Recoveries	712			—			712
Change in provision for credit losses	(2,857		)	(1,650		)	(4,507		)
Ending allowance balance	$	(18,439	)	$	(1,650	)	$	(20,089	)

(1) Upon adoption of authoritative guidance effective January 1, 2020, we updated our accounting policies and methodology for calculating the general loan loss allowance, resulting in an adjustment to our mortgage loan valuation allowance. See Note 1 for further details.

Charge-offs include allowances that have been established on loans that were satisfied either by taking ownership of the collateral or by some other means such as discounted pay-off or loan sale. When ownership of the property is taken it is recorded at the lower of the loan's carrying value or the property's fair value (based on appraised values) less estimated costs to sell. The real estate owned is recorded as a component of Other investments and the loan is recorded as fully paid, with any allowance for credit loss that has been established charged off. Fair value of the real estate is determined by third party appraisal. Recoveries are situations where we have received a payment from the borrower in an amount greater than the carrying value of the loan (principal outstanding less specific allowance). We did not own any real estate during the three and six months ended June 30, 2020 and 2019.

Credit Quality Indicators

We evaluate the credit quality of our commercial mortgage loans by analyzing LTV and DSC ratios and loan performance. We evaluate the credit quality of our residential mortgage loans by analyzing loan performance.

LTV and DSC ratios for our commercial mortgage loans are originally calculated at the time of loan origination and are updated annually for each loan using information such as rent rolls, assessment of lease maturity dates and property operating statements, which are reviewed in the context of current leasing and in place rents compared to market leasing and market rents. A DSC ratio of less than 1.0 indicates that a property's operations do not generate sufficient income to cover debt payments. An LTV ratio in excess of 100% indicates the unpaid loan amount exceeds the value of the underlying collateral. All of our commercial mortgage loans that have a debt service coverage ratio of less than 1.0 are performing under the original contractual loan terms at June 30, 2020. A summary of our commercial mortgage loan portfolio by LTV and DSC ratios based on the most recent information collected follows (by year of origination):



	2020				2019				2018				2017				2016				Prior				Total
As of June 30, 2020:	Amortized Cost		Average LTV		Amortized Cost		Average LTV		Amortized Cost		Average LTV		Amortized Cost		Average LTV		Amortized Cost		Average LTV		Amortized Cost		Average LTV		Amortized Cost		Average LTV
Debt Service Coverage Ratio:	(Dollars in thousands)
Greater than or equal to 1.5	$	316,727	64	%	$	455,910	67	%	$	405,363	61	%	$	310,373	58	%	$	378,311	55	%	$	816,947	46	%	$	2,683,631	56	%
Greater than or equal to 1.2 and less than 1.5	187,242		63	%	256,913		69	%	141,693		68	%	151,241		65	%	54,324		62	%	159,528		54	%	950,941		64	%
Greater than or equal to 1.0 and less than 1.2	5,966		68	%	61,471		58	%	8,931		75	%	15,548		64	%	—		—	%	22,868		63	%	114,784		62	%
Less than 1.0	8,784		60	%	25,220		44	%	18,550		65	%	2,996		62	%	—		—	%	22,208		51	%	77,758		54	%
Total	$	518,719	64	%	$	799,514	66	%	$	574,537	63	%	$	480,158	60	%	$	432,635	56	%	$	1,021,551	48	%	$	3,827,114	58	%

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We closely monitor loan performance for both our commercial and residential mortgage loan portfolios. Aging of financing receivables is summarized in the following table (by year of origination):



	2020		2019		2018		2017		2016		Prior		Total
As of June 30, 2020:	(Dollars in thousands)
Commercial mortgage loans
Current	$	518,719	$	799,514	$	574,537	$	480,158	$	432,635	$	1,021,551	$	3,827,114
30 - 59 days past due	—		—		—		—		—		—		—
60 - 89 days past due	—		—		—		—		—		—		—
Over 90 days past due	—		—		—		—		—		—		—
Total commercial mortgage loans	$	518,719	$	799,514	$	574,537	$	480,158	$	432,635	$	1,021,551	$	3,827,114

Residential mortgage loans
Current	138,749		$	12,459	$	—	$	—	$	—	$	—	$	151,208
30 - 59 days past due	—		—		—		—		—		—		—
60 - 89 days past due	—		—		—		—		—		—		—
Over 90 days past due	—		—		—		—		—		—		—
Total residential mortgage loans	$	138,749	$	12,459	$	—	$	—	$	—	$	—	$	151,208

As of December 31, 2019, none of our mortgage loans were 30 days or more past due.

Commercial and residential mortgage loans are considered delinquent when they become 60 days or more past due. When loans become more than 90 days past due they are considered nonperforming and we place them on non-accrual status and discontinue recognizing interest income. If payments are received on a delinquent loan, interest income is recognized to the extent it would have been recognized if normal principal and interest would have been received timely. If payments are received to bring a delinquent loan back to current, we will resume accruing interest income on that loan. There were no loans in non-accrual status at June 30, 2020 and December 31, 2019. We recognized no interest income on loans in non-accrual status during the three and six months ended June 30, 2020 and 2019.

Collateral dependent loans consist of loans for which we will depend on the value of the collateral real estate to satisfy the outstanding principal of the loan. There were no collateral dependent commercial or residential loans as of June 30, 2020 or December 31, 2019.

Troubled Debt Restructuring

A Troubled Debt Restructuring ("TDR") is a situation where we have granted a concession to a borrower for economic or legal reasons related to the borrower's financial difficulties that we would not otherwise consider. A mortgage loan that has been granted new terms, including workout terms as described previously, would be considered a TDR if it meets conditions that would indicate a borrower is experiencing financial difficulty and the new terms constitute a concession on our part. We analyze all loans where we have agreed to workout terms and all loans that we have refinanced to determine if they meet the definition of a TDR. We consider the following factors in determining whether or not a borrower is experiencing financial difficulty:


•	borrower is in default,


•	borrower has declared bankruptcy,


•	there is growing concern about the borrower's ability to continue as a going concern,


•	borrower has insufficient cash flows to service debt,


•	borrower's inability to obtain funds from other sources, and


•	there is a breach of financial covenants by the borrower.

If the borrower is determined to be in financial difficulty, we consider the following conditions to determine if the borrower is granted a concession:


•	assets used to satisfy debt are less than our recorded investment,


•	interest rate is modified,


•	maturity date extension at an interest rate less than market rate,


•	capitalization of interest,


•	delaying principal and/or interest for a period of three months or more, and


•	partial forgiveness of the balance or charge-off.

Mortgage loan workouts, refinances or restructures that are classified as TDRs are individually evaluated and measured for impairment. There were no mortgage loans on commercial real estate that we determined to be a TDR at June 30, 2020 and December 31, 2019.

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5. Derivative Instruments

None of our derivatives qualify for hedge accounting, thus, any change in the fair value of the derivatives is recognized immediately in the consolidated statements of operations. The fair value of our derivative instruments, including derivative instruments embedded in fixed index annuity contracts, presented in the consolidated balance sheets are as follows:



	June 30, 2020		December 31, 2019
	(Dollars in thousands)
Assets
Derivative instruments
Call options	$	672,958	$	1,355,989
Other assets
Interest rate caps	—		6
	$	672,958	$	1,355,995
Liabilities
Policy benefit reserves - annuity products
Fixed index annuities - embedded derivatives, net	$	9,418,485	$	9,624,395

The changes in fair value of derivatives included in the unaudited consolidated statements of operations are as follows:



	Three Months Ended June 30,					Six Months Ended June 30,
	2020		2019			2020			2019
	(Dollars in thousands)
Change in fair value of derivatives:
Call options	$	327,662	$	76,942		$	(614,274	)	$	462,108
Interest rate swap	—		(688		)	—			(1,056		)
Interest rate caps	—		(209		)	62			(538		)
	$	327,662	$	76,045		$	(614,212	)	$	460,514
Change in fair value of embedded derivatives:
Fixed index annuities - embedded derivatives	$	913,984	$	204,590		$	(371,087	)	$	857,232
Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting	212,951		122,972			247,961			236,653
	$	1,126,935	$	327,562		$	(123,126	)	$	1,093,885

The amounts presented as "Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting" represents the total change in the difference between policy benefit reserves for fixed index annuities computed under the derivative accounting standard and the long-duration contracts accounting standard at each balance sheet date, less the change in fair value of our fixed index annuities embedded derivatives that is presented as Level 3 liabilities in Note 2.

We have fixed index annuity products that guarantee the return of principal to the policyholder and credit interest based on a percentage of the gain in a specified market index. When fixed index annuity deposits are received, a portion of the deposit is used to purchase derivatives consisting of call options on the applicable market indices to fund the index credits due to fixed index annuity policyholders. Substantially all such call options are one year options purchased to match the funding requirements of the underlying policies. The call options are marked to fair value with the change in fair value included as a component of revenues. The change in fair value of derivatives includes the gains or losses recognized at the expiration of the option term and the changes in fair value for open positions. On the respective anniversary dates of the index policies, the index used to compute the index credit is reset and we purchase new call options to fund the next index credit. We manage the cost of these purchases through the terms of our fixed index annuities, which permit us to change caps, participation rates, and/or asset fees, subject to guaranteed minimums on each policy's anniversary date. By adjusting caps, participation rates, or asset fees, we can generally manage option costs except in cases where the contractual features would prevent further modifications.

Our strategy attempts to mitigate any potential risk of loss due to the nonperformance of the counterparties to these call options through a regular monitoring process which evaluates the program's effectiveness. We do not purchase call options that would require payment or collateral to another institution and our call options do not contain counterparty credit-risk-related contingent features. We are exposed to risk of loss in the event of nonperformance by the counterparties and, accordingly, we purchase our option contracts from multiple counterparties and evaluate the creditworthiness of all counterparties prior to purchase of the contracts. All non-exchange traded options have been purchased from nationally recognized financial institutions with a Standard and Poor's credit rating of A- or higher at the time of purchase and the maximum credit exposure to any single counterparty is subject to concentration limits. We also have credit support agreements that allow us to request the counterparty to provide collateral to us when the fair value of our exposure to the counterparty exceeds specified amounts.

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The notional amount and fair value of our call options by counterparty and each counterparty's current credit rating are as follows:



			June 30, 2020				December 31, 2019
Counterparty	Credit Rating (S&P)	Credit Rating (Moody's)	Notional Amount		Fair Value		Notional Amount		Fair Value
			(Dollars in thousands)
Bank of America	A+	Aa2	$	2,038,746	$	36,929	$	2,680,543	$	80,692
Barclays	A	A1	6,458,090		191,581		5,753,868		217,536
Canadian Imperial Bank of Commerce	A+	Aa2	4,080,916		110,616		4,110,525		154,917
Citibank, N.A.	A+	Aa3	3,917,488		41,372		4,075,544		109,046
Credit Suisse	A+	A1	4,442,148		21,101		4,526,414		116,659
J.P. Morgan	A+	Aa2	4,962,629		20,842		4,703,234		151,651
Morgan Stanley	A+	A1	2,535,021		25,478		1,886,995		41,253
Royal Bank of Canada	AA-	A2	1,776,753		35,503		2,565,202		101,511
Societe Generale	A	A1	1,731,241		21,407		3,280,286		139,101
SunTrust	A	A2	2,175,542		53,077		2,051,229		74,910
Wells Fargo	A+	Aa2	5,106,215		113,688		4,221,408		163,520
Exchange traded			166,248		1,364		191,948		5,193
			$	39,391,037	$	672,958	$	40,047,196	$	1,355,989

As of June 30, 2020 and December 31, 2019, we held $621.2 million and $1.3 billion, respectively, of cash and cash equivalents and other investments from counterparties for derivative collateral, which is included in Other liabilities on our consolidated balance sheets. This derivative collateral limits the maximum amount of economic loss due to credit risk that we would incur if parties to the call options failed completely to perform according to the terms of the contracts to $55.8 million and $25.2 million at June 30, 2020 and December 31, 2019, respectively.

The future index credits on our fixed index annuities are treated as a "series of embedded derivatives" over the expected life of the applicable contract. We do not purchase call options to fund the index liabilities which may arise after the next policy anniversary date. We must value both the call options and the related forward embedded options in the policies at fair value.

We entered into an interest rate swap and interest rate caps to manage interest rate risk associated with the floating rate component on certain of our subordinated debentures. See Note 10 in our Annual Report on Form 10-K for the year ended December 31, 2019 for more information on our subordinated debentures. As of June 30, 2020, all of our floating rate subordinated debentures have been redeemed and the interest rate swap and interest rate caps have been terminated. The terms of the interest rate swap provided that we paid a fixed rate of interest and received a floating rate of interest. The terms of the interest rate caps limited the three month LIBOR to 2.50%. The interest rate swap and caps were not effective hedges under accounting guidance for derivative instruments and hedging activities. Therefore, we recorded the interest rate swap and caps at fair value and any net cash payments received or paid were included in the change in fair value of derivatives in the unaudited consolidated statements of operations.

6. Notes Payable and Amounts Due Under Repurchase Agreements

Notes payable includes the following:



	June 30, 2020			December 31, 2019
	(Dollars in thousands)
Senior notes due 2027
Principal	$	500,000		$	500,000
Unamortized debt issue costs	(4,350		)	(4,607		)
Unamortized discount	(262		)	(277		)
	$	495,388		$	495,116

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On June 16, 2017, we issued $500 million aggregate principal amount of senior unsecured notes due 2027 which bear interest at 5.0% per year and will mature on June 15, 2027 (the "2027 Notes"). The 2027 Notes were issued at a $0.3 million discount, which is being amortized over the term of the 2027 Notes using the effective interest method. Contractual interest is payable semi-annually in arrears each June 15th and December 15th. The initial transaction fees and costs totaling $5.8 million were capitalized as deferred financing costs and are being amortized over the term of the 2027 Notes using the effective interest method.

As part of our investment strategy, we enter into securities repurchase agreements (short-term collateralized borrowings). When we do borrow cash on these repurchase agreements, we pledge collateral in the form of debt securities with fair values approximately equal to the amount due and we use the cash to purchase debt securities ahead of the time we collect the cash from selling annuity policies to avoid a lag between the investment of funds and the obligation to credit interest to policyholders. We earn investment income on the securities purchased with these borrowings at a rate in excess of the cost of these borrowings. Such borrowings averaged $32.8 million and $28.7 million during the three and six months ended June 30, 2020, respectively, compared to $20.4 million and $54.6 million for the same periods in 2019. The maximum amount borrowed was $186.4 million and $243.6 million during the six months ended June 30, 2020 and 2019, respectively. The weighted average interest rate on amounts due under repurchase agreements was 1.89% and 1.73% for the three and six months ended June 30, 2020, respectively, compared to 4.62% and 3.04% for the same periods in 2019.

7. Commitments and Contingencies

We are occasionally involved in litigation, both as a defendant and as a plaintiff. In addition, state and federal regulatory bodies, such as state insurance departments, the Securities and Exchange Commission ("SEC") and the Department of Labor, regularly make inquiries and conduct examinations or investigations concerning our compliance with, among other things, insurance laws, securities laws and the Employee Retirement Income Security Act of 1974, as amended.

In accordance with applicable accounting guidelines, we establish an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. As a litigation or regulatory matter is developing we, in conjunction with outside counsel, evaluate on an ongoing basis whether the matter presents a loss contingency that meets conditions indicating the need for accrual and/or disclosure, and if not, the matter will continue to be monitored for further developments. If and when the loss contingency related to litigation or regulatory matters is deemed to be both probable and estimable, we will establish an accrued liability with respect to that matter and will continue to monitor the matter for further developments that may affect the amount of the accrued liability.

There can be no assurance that any pending or future litigation will not have a material adverse effect on our business, financial condition, or results of operations.

In addition to our commitments to fund mortgage loans, we have unfunded commitments at June 30, 2020 to limited partnerships of $41.2 million.

8. Earnings (Loss) Per Common Share and Stockholders' Equity

Earnings (Loss) Per Common Share

The following table sets forth the computation of earnings (loss) per common share and earnings (loss) per common share - assuming dilution:



	Three Months Ended June 30,					Six Months Ended June 30,
	2020			2019		2020			2019
	(Dollars in thousands, except per share data)
Numerator:
Net income (loss) available to common stockholders - numerator for earnings (loss) per common share	$	(253,379	)	$	18,590	$	(17,043	)	$	(11,420	)

Denominator:
Weighted average common shares outstanding	91,803,312			91,103,151		91,723,814			90,993,810
Effect of dilutive securities:
Stock options and deferred compensation agreements	63,265			333,780		100,277			394,390
Restricted stock and restricted stock units	160,276			348,292		199,875			376,898
Denominator for earnings (loss) per common share - assuming dilution	92,026,853			91,785,223		92,023,966			91,765,098

Earnings (loss) per common share	$	(2.76	)	$	0.20	$	(0.19	)	$	(0.13	)
Earnings (loss) per common share - assuming dilution	$	(2.76	)	$	0.20	$	(0.19	)	$	(0.13	)

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During the three months ended June 30, 2020, there were 519,285 options to purchase shares of our common stock outstanding, with an exercise price of $24.79 - $26.70, excluded from the computation of diluted loss per common share. During the six months ended June 30, 2020, there were 50,000 options to purchase shares of our common stock outstanding, with an exercise price of $26.70, excluded from the computation of diluted loss per common share. There were no options to purchase shares of our common stock outstanding excluded from the computation of diluted earnings (loss) per common share during the three and six months ended June 30, 2019, as the exercise price of all options outstanding was less than the average market price of our common shares for those periods.

Stockholders' Equity

On June 10, 2020, we issued 12,000 shares of 6.625% Fixed-Rate Reset Non-Cumulative Preferred Stock, Series B ("Series B") with a $1.00 par value per share and a liquidation preference of $25,000 per share, for aggregate net proceeds of $290.3 million.

On November 21, 2019 we issued 16,000 shares of 5.95% Fixed-Rate Reset Non-Cumulative Preferred Stock, Series A ("Series A") with a $1.00 par value per share and a liquidation preference of $25,000 per share, for aggregate net proceeds of $388.9 million. We used a portion of the proceeds to redeem all of our floating rate subordinated debentures.

Dividends on the Series A and Series B preferred stock are payable on a non-cumulative basis only when, as and if declared, quarterly in arrears on the first day of March, June, September and December of each year, commencing on March 1, 2020 for Series A and on December 1, 2020 for Series B. On March 1 and June 1, 2020, we paid dividends totaling $6.6 million and $6.0 million, respectively, on the Series A preferred stock. The Series A and Series B preferred stock rank senior to our common stock with respect to dividends, to the extent declared, and in liquidation, to the extent of the liquidation preference. The Series A and Series B preferred stock are not subject to any mandatory redemption, sinking fund, retirement fund, purchase fund or similar provisions.

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Management's discussion and analysis reviews our unaudited consolidated financial position at June 30, 2020, and the unaudited consolidated results of operations for the three and six month periods ended June 30, 2020 and 2019, and where appropriate, factors that may affect future financial performance. This analysis should be read in conjunction with our unaudited consolidated financial statements and notes thereto appearing elsewhere in this Form 10-Q, and the audited consolidated financial statements, notes thereto and selected consolidated financial data appearing in our Annual Report on Form 10-K for the year ended December 31, 2019. Interim operating results for the three and six month periods ended June 30, 2020 are not necessarily indicative of the results expected for the entire year, particularly in light of the material risks and uncertainties surrounding the spread of COVID-19 and the impact it may have on our business, results of operations and financial condition. Preparation of financial statements requires use of management estimates and assumptions. Our estimates and assumptions could change in the future as more information becomes known about the impact of COVID-19.

Cautionary Statement Regarding Forward-Looking Information

All statements, trend analyses and other information contained in this report and elsewhere (such as in filings by us with the SEC, press releases, presentations by us or our management or oral statements) relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as "anticipate", "believe", "plan", "estimate", "expect", "intend", and other similar expressions, constitute forward-looking statements. We caution that these statements may and often do vary from actual results and the differences between these statements and actual results can be material. Accordingly, we cannot assure you that actual results will not differ materially from those expressed or implied by the forward-looking statements. Factors that could contribute to these differences include, among other things:

•

general economic conditions and other factors, including prevailing interest rate levels and stock and credit market performance which may affect (among other things) our ability to sell our products, our ability to access capital resources and the costs associated therewith, the fair value of our investments, which could result in credit losses, and certain liabilities, and the lapse rate and profitability of policies;


•	major public health issues, and specifically the COVID-19 pandemic and the resulting impacts on economic conditions and financial markets;


•	customer response to new products and marketing initiatives;


•	changes in Federal income tax laws and regulations which may affect the relative income tax advantages of our products;


•	increasing competition in the sale of fixed annuities;


•	regulatory changes or actions, including those relating to regulation of financial services affecting (among other things) bank sales and underwriting of insurance products and regulation of the sale, underwriting and pricing of products; and


•	the risk factors or uncertainties listed from time to time in our filings with the SEC.

For a detailed discussion of these and other factors that might affect our performance, see Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2019 and Item 1A of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020.

Our Business and Profitability

We specialize in the sale of individual annuities (primarily fixed index deferred annuities). Under U.S. GAAP, premium collections for deferred annuities are reported as deposit liabilities instead of as revenues. Similarly, cash payments to policyholders are reported as decreases in the liabilities for policyholder account balances and not as expenses. Sources of revenues for products accounted for as deposit liabilities are net investment income, surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for lifetime income benefit riders, net realized gains (losses) on investments and changes in fair value of derivatives. Components of expenses for products accounted for as deposit liabilities are interest sensitive and index product benefits (primarily interest credited to account balances and changes in the liability for lifetime income benefit riders), changes in fair value of embedded derivatives, amortization of deferred sales inducements and deferred policy acquisition costs, other operating costs and expenses and income taxes.

Our business model contemplates continued growth in invested assets and non-GAAP operating income while maintaining a high quality investment portfolio that will not experience significant credit losses. We are committed to maintaining a high quality investment portfolio with limited exposure to below investment grade securities and other riskier assets. Growth in invested assets is predicated on a continuation of our high sales achievements of the last five years while at the same time maintaining a high level of retention of the funds received.

Our profitability depends in large part upon:


•	the amount of assets under our management,


•	investment spreads we earn on our policyholder account balances,


•	our ability to manage our investment portfolio to maximize returns and minimize risks such as interest rate changes and defaults or credit losses,


•	our ability to appropriately price for lifetime income benefit riders offered on certain of our fixed rate and fixed index annuity policies,


•	our ability to manage interest rates credited to policyholders and costs of the options purchased to fund the annual index credits on our fixed index annuities,


•	our ability to manage the costs of acquiring new business (principally commissions paid to agents and distribution partners and bonuses credited to policyholders),


•	our ability to manage our operating expenses, and


•	income taxes.

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The outbreak of the novel coronavirus (COVID-19), recognized as a pandemic by the World Health Organization, has created significant economic and financial turmoil both in the U.S. and around the world which has had a material effect on the global economy and financial markets and raised concerns of a global recession. At this time, it is not possible to predict how COVID-19 will impact the Company, our results of operations or our financial condition and liquidity. See Item 1A. Risk Factors of our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 for a discussion of risk factors related to major public health issues, specifically the COVID-19 pandemic.

We moved decisively to first protect our employees and business partners and to pivot our operating platform to continue to provide industry leading levels of service to clients and producers, in a prolonged work from home environment. In addition, we increased our liquidity position and held $1.4 billion of unencumbered cash as of June 30, 2020. Currently, most of our employees are working remotely with only operationally critical employees working at our offices in West Des Moines, Iowa.

COVID-19 has caused significant economic effects where we operate, including closures of many businesses deemed non-essential due to shelter-in-place, stay-at-home, travel limitations and other governmental regulations or self imposed social distancing practices. These actions have caused disruption to the distribution channels through which we sell our products, including independent agents, and their clients. It is currently unclear how long such COVID-19 related actions will last.

Life insurance companies are subject to the NAIC risk-based capital ("RBC") requirements and rating agencies utilize a form of RBC to partially determine capital strength of insurance companies. Our RBC ratio at December 31, 2019 was 372%, and our estimated RBC ratio at June 30, 2020 was 389%.

We intend to manage our capitalization in normal economic conditions at a level that is consistent with a 400% RBC ratio; and allow it to drift downwards if necessary to approximately 320% RBC for reasons including, but not limited to, realized credit losses or temporary increases in required risk capital for ratings migrations. This level is intended to reflect a level that is consistent with the rating agencies expectations for capital adequacy ratios at different points in an economic cycle. This implies operating with a peak to trough swing whereby capital is absorbing risk at the low point of the economic cycle. As economic activity recovers, we would expect to grow capital adequacy back to or near the 400% RBC ratio level through a combination of earnings and balance sheet optimization actions while continuing to execute on our core business strategy.

During June of 2020, we strengthened our balance sheet by raising $300 million in preferred equity through the issuance of 12,000 shares of 6.625% Fixed-Rate Reset Non-Cumulative Preferred Stock with a liquidation preference of $25,000 per share, for aggregate net proceeds of approximately $290.3 million which is currently held at American Equity Investment Life Holding Company. This provides us a strong capital cushion to weather turbulence from potential ratings migration and credit losses and would provide an additional 27 points of RBC if such proceeds were contributed to American Equity Investment Life Insurance Company.

On June 26, 2020, A.M. Best affirmed its "A-" financial strength rating of American Equity Investment Life Insurance Company and its subsidiaries, American Equity Investment Life Insurance Company of New York and Eagle Life Insurance Company, its "bbb-" long-term issuer credit rating of American Equity Investment Life Holding Company, its "bbb-" senior unsecured debt ratings, and its "bb" perpetual, non-cumulative preferred stock ratings. The outlook for these credit ratings of "stable" was also affirmed by A.M. Best on June 26, 2020.

On March 26, 2020, S&P affirmed its "A-" financial strength rating on American Equity Investment Life Insurance Company and its "BBB-" long-term issuer credit rating on American Equity Investment Life Holding Company, but revised its outlook to "negative" from "stable" on both its financial strength and long-term issuer credit ratings due to its expectation for credit deterioration under current stressed market conditions. On April 24, 2020, Fitch affirmed its "A-" financial strength rating on American Equity Investment Life Insurance Company and its life insurance subsidiaries, its "BBB" issuer default rating on American Equity Investment Life Holding Company and its "BBB-" senior unsecured debt ratings, but revised its outlook to "negative" from "stable" on its financial strength, issuer default and senior unsecured debt ratings due to disruption to economic activity and the financial markets from the COVID-19 pandemic.

Earnings from products accounted for as deposit liabilities are primarily generated from the excess of net investment income earned over the interest credited or the cost of providing index credits to the policyholder, or the "investment spread." Our investment spread is summarized as follows:



	Three Months Ended June 30,		Six Months Ended June 30,
	2020	2019	2020	2019
Average yield on invested assets	4.12%	4.51%	4.24%	4.49%
Aggregate cost of money	1.73%	1.88%	1.73%	1.89%
Aggregate investment spread	2.39%	2.63%	2.51%	2.60%

Impact of:
Investment yield - additional prepayment income	0.03%	0.04%	0.04%	0.03%
Cost of money benefit from over (under) hedging	(0.01)%	0.04%	0.02%	0.03%

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The cost of money for fixed index annuities and average crediting rates for fixed rate annuities are computed based upon policyholder account balances and do not include the impact of amortization of deferred sales inducements. See Critical Accounting Policies - Deferred Policy Acquisition Costs and Deferred Sales Inducements included in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2019. With respect to our fixed index annuities, the cost of money includes the average crediting rate on amounts allocated to the fixed rate strategy and expenses we incur to fund the annual index credits. Proceeds received upon expiration of call options purchased to fund annual index credits are recorded as part of the change in fair value of derivatives, and are largely offset by an expense for interest credited to annuity policyholder account balances. See Critical Accounting Policies - Policy Liabilities for Fixed Index Annuities and Financial Condition - Derivative Instruments included in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2019.

The current environment of low interest rates and low yields for investments with the credit quality we prefer presents a strong headwind to achieving our target rate for investment spread. Active management of policyholder crediting rates has continued to lower the aggregate cost of money. The most recent actions include reductions to caps and crediting rates on $29.7 billion of policyholder funds in January of 2020 and reductions to participation rates on $4.3 billion of policyholder funds in June 2020. We continue to have flexibility to reduce our crediting rates if necessary and could decrease our cost of money by approximately 65 basis points if we reduce current rates to guaranteed minimums. Investment yields on fixed income securities purchased and mortgage loans funded during most of 2020 and 2019 were at average rates below the overall portfolio yield which has resulted in a decrease in the average yield on invested assets. In addition, the decline in yields on our floating rate investment portfolio, mark to market losses on investment partnerships and our decision to hold higher levels of cash and cash equivalents since March of 2020 contributed to the decrease in the average yield on invested assets for the three and six month periods ended June 30, 2020 compared to the same periods in 2019.

Results of Operations for the Three and Six Months Ended June 30, 2020 and 2019

Annuity deposits by product type collected during the three and six months ended June 30, 2020 and 2019, were as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(Dollars in thousands)
American Equity Investment Life Insurance Company:
Fixed index annuities	$	472,899	$	1,211,004	$	1,058,962	$	2,238,662
Annual reset fixed rate annuities	2,316		3,614		4,647		7,062
Multi-year fixed rate annuities	83		566		452		714
Single premium immediate annuities	10,084		1,747		15,482		3,815
	485,382		1,216,931		1,079,543		2,250,253
Eagle Life Insurance Company:
Fixed index annuities	72,371		235,558		178,873		413,038
Annual reset fixed rate annuities	17		66		58		193
Multi-year fixed rate annuities	1,031		47,004		5,180		72,572
	73,419		282,628		184,111		485,803
Consolidated:
Fixed index annuities	545,270		1,446,562		1,237,835		2,651,700
Annual reset fixed rate annuities	2,333		3,680		4,705		7,255
Multi-year fixed rate annuities	1,114		47,570		5,632		73,286
Single premium immediate annuities	10,084		1,747		15,482		3,815
Total before coinsurance ceded	558,801		1,499,559		1,263,654		2,736,056
Coinsurance ceded	5,691		72,487		23,394		126,551
Net after coinsurance ceded	$	553,110	$	1,427,072	$	1,240,260	$	2,609,505

Annuity deposits before and after coinsurance ceded decreased 63% and 61%, respectively, during the second quarter of 2020 compared to the same period in 2019 and decreased 54% and 52%, respectively, during the six months ended June 30, 2020 compared to the same period in 2019. The decrease in sales for the three and six months ended June 30, 2020 compared to the same periods in 2019 was primarily due to the impact of the COVID-19 pandemic on limitations of face to face meetings and increased social distancing requirements as well as competitive pressures within each of our distribution channels. We continue to face a challenging environment for sales of fixed index annuities due to a highly competitive market and until social distancing needs abate or producers find new ways to engage with clients, we would expect sales to remain subdued.

We coinsure 80% of the annuity deposits received from multi-year rate guaranteed annuities and 20% of certain fixed index annuities sold by Eagle Life Insurance Company ("Eagle Life") through broker/dealers and banks. The decrease in coinsurance ceded premiums was attributable to a decrease in multi-year rate guaranteed annuities and fixed index annuities sold by Eagle Life for the three and six months ended June 30, 2020 compared to the same periods in 2019.

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Net income (loss) available to common stockholders decreased to $(253.4) million in the second quarter of 2020 and to $(17.0) million for the six months ended June 30, 2020 compared to $18.6 million and $(11.4) million for the same periods in 2019. The net loss available to common stockholders for the three months ended June 30, 2020 was driven primarily by the tightening of our own credit spread with improving market conditions which reduces the interest rate used to discount the embedded derivative liability.

Net income (loss) is impacted by the change in fair value of derivatives and embedded derivatives which fluctuates from period to period based upon changes in fair values of call options purchased to fund the annual index credits for fixed index annuities and changes in interest rates used to discount the embedded derivative liability. Net income (loss) for the three and six months ended June 30, 2020 was negatively impacted by a net decrease in the discount rates used to estimate the fair value of our embedded derivative liabilities, the impact of which was partially offset by decreases in amortization of deferred policy acquisition costs and deferred sales inducements related to the change in fair value of derivatives and embedded derivatives. Net income (loss) for the three and six months ended June 30, 2019 was also negatively impacted by a net decrease in the discount rates used to estimate the fair value of our embedded derivative liabilities, the impact of which was partially offset by decreases in amortization of deferred policy acquisition costs and deferred sales inducements related to the change in fair value of derivatives and embedded derivatives. See Change in fair value of derivatives, Change in fair value of embedded derivatives, Amortization of deferred sales inducements and Amortization of deferred policy acquisition costs.

Net income for the three and six months ended June 30, 2020 includes a benefit from the revision of assumptions used in determining the embedded derivative component of our fixed index annuity policy benefit reserves. The revision consisted of a refinement in the derivation of the discount rate used in calculating the fair value of embedded derivatives. The impact decreased change in fair value of embedded derivatives by $230.1 million, increased amortization of deferred sales inducements and deferred policy acquisition costs by $36.7 million and $57.6 million, respectively, and decreased both net loss and net loss available to common stockholders by $106.5 million.

Net income, in general, has been positively impacted by the growth in the volume of business in force and the investment spread earned on this business. The average amount of annuity account balances outstanding (net of annuity liabilities ceded under coinsurance agreements) increased 2% to $53.2 billion for the second quarter of 2020 and 3% to $53.2 billion for the six months ended June 30, 2020 compared to $52.0 billion and $51.7 billion for the same periods in 2019. Our investment spread measured in dollars was $308.9 million for the second quarter of 2020 and $648.0 million for the six months ended June 30, 2020 compared to $322.4 million and $631.3 million for the same periods in 2019. Our investment spread has been negatively impacted by the extended low interest rate environment and by holding higher levels of cash and cash equivalents due to current economic conditions caused by COVID-19 (see Net investment income). The impact of the extended low interest rate environment and higher cash and cash equivalent holdings has been partially offset by a lower aggregate cost of money due to our continued active management of new business and renewal rates.

Net income (loss) and net income (loss) available to common stockholders for the six months ended June 30, 2020 were impacted by a discrete tax item that provided a tax benefit of $30.8 million related to the provision of the Coronavirus Aid, Relief, and Economic Security Act that allows net operating losses for 2018 through 2020 to be carried back to previous tax years in which a 35% statutory tax rate was in effect.

Non-GAAP operating income available to common stockholders, a non-GAAP financial measure, decreased to $93.1 million in the second quarter of 2020 and increased to $247.2 million for the six months ended June 30, 2020 compared to $99.6 million and $189.0 million for the same periods in 2019.

In addition to net income (loss) available to common stockholders, we have consistently utilized non-GAAP operating income available to common stockholders, a non-GAAP financial measure commonly used in the life insurance industry, as an economic measure to evaluate our financial performance. Non-GAAP operating income available to common stockholders equals net income (loss) available to common stockholders adjusted to eliminate the impact of items that fluctuate from quarter to quarter in a manner unrelated to core operations, and we believe measures excluding their impact are useful in analyzing operating trends. The most significant adjustments to arrive at non-GAAP operating income available to common stockholders eliminate the impact of fair value accounting for our fixed index annuity business and are not economic in nature but rather impact the timing of reported results. We believe the combined presentation and evaluation of non-GAAP operating income available to common stockholders together with net income (loss) available to common stockholders provides information that may enhance an investor's understanding of our underlying results and profitability.

Non-GAAP operating income available to common stockholders is not a substitute for net income (loss) available to common stockholders determined in accordance with GAAP. The adjustments made to derive non-GAAP operating income available to common stockholders are important to understand our overall results from operations and, if evaluated without proper context, non-GAAP operating income available to common stockholders possesses material limitations. As an example, we could produce a low level of net income available to common stockholders or a net loss available to common stockholders in a given period, despite strong operating performance, if in that period we experience significant net realized losses from our investment portfolio. We could also produce a high level of net income available to common stockholders in a given period, despite poor operating performance, if in that period we generate significant net realized gains from our investment portfolio. As an example of another limitation of non-GAAP operating income available to common stockholders, it does not include the decrease in cash flows expected to be collected as a result of credit losses on financial assets. Therefore, our management reviews net realized investment gains (losses) and analyses of our net investment income, including impacts related to credit losses, in connection with their review of our investment portfolio. In addition, our management examines net income (loss) available to common stockholders as part of their review of our overall financial results.

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The adjustments made to net income (loss) available to common stockholders to arrive at non-GAAP operating income available to common stockholders for the three and six months ended June 30, 2020 and 2019 are set forth in the table that follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(Dollars in thousands)
Reconciliation from net income (loss) available to common stockholders to non-GAAP operating income available to common stockholders:
Net income (loss) available to common stockholders	$	(253,379	)	$	18,590		$	(17,043	)	$	(11,420	)
Adjustments to arrive at non-GAAP operating income available to common stockholders:
Net realized gains/losses on financial assets, including credit losses	18,492			2,625			34,841			2,930
Change in fair value of derivatives and embedded derivatives - fixed index annuities	423,590			99,868			303,136			250,812
Change in fair value of derivatives - interest rate caps and swap	—			854			(848		)	1,490
Income taxes	(95,599		)	(22,346		)	(72,897		)	(54,819		)
Non-GAAP operating income available to common stockholders	$	93,104		$	99,591		$	247,189		$	188,993

The amounts disclosed in the reconciliation above are presented net of related adjustments to amortization of deferred sales inducements and deferred policy acquisition costs where applicable.

The decrease in non-GAAP operating income available to common stockholders for the three months ended June 30, 2020 compared to the same period in 2019 was attributable to lower investment income and a greater increase in the liability for lifetime income benefit riders partially offset by a decline in deferred policy acquisition cost and deferred sales inducement amortization. The increase in the liability for lifetime income benefit riders and the decline in deferred policy acquisition cost and deferred sales inducement amortization were primarily a result of actuarial revisions made in the third quarter of 2019.

The increase in non-GAAP operating income available to common stockholders for the six months ended June 30, 2020 compared to the same period in 2019 was attributable to a decline in deferred policy acquisition cost and deferred sales inducement amortization. In addition, non-GAAP operating income available to common stockholders for the six months ended June 30, 2020 was impacted by a $30.8 million tax benefit from a discrete tax item related to the Coronavirus Aid, Relief, and Economic Security Act. See Net income (loss) available to common stockholders. These items were partially offset by lower investment income and a greater increase in the liability for future benefits to be paid for lifetime income benefit riders during the six months ended June 30, 2020 compared to the same period in 2019. The decline in deferred policy acquisition cost and deferred sales inducement amortization and the increase in the liability for lifetime income benefit riders were primarily a result of actuarial revisions made in the third quarter of 2019.

Annuity product charges (surrender charges assessed against policy withdrawals and fees deducted from policyholder account balances for lifetime income benefit riders) increased 5% to $63.4 million in the second quarter of 2020 and 8% to $123.0 million for the six months ended June 30, 2020 compared to $60.7 million and $113.7 million for the same periods in 2019. The components of annuity product charges are set forth in the table that follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(Dollars in thousands)						(Dollars in thousands)
Surrender charges	$	19,390		$	19,480		$	39,095		$	35,936
Lifetime income benefit riders (LIBR) fees	44,048			41,220			83,892			77,730
	$	63,438		$	60,700		$	122,987		$	113,666

Withdrawals from annuity policies subject to surrender charges	$	202,187		$	167,744		$	396,977		$	309,844
Average surrender charge collected on withdrawals subject to surrender charges	9.6		%	11.6		%	9.8		%	11.6		%

Fund values on policies subject to LIBR fees	$	5,837,051		$	5,720,854		$	11,032,388		$	10,690,568
Weighted average per policy LIBR fee	0.75		%	0.72		%	0.76		%	0.73		%

The increase in annuity product charges for the three and six month periods ended June 30, 2020 compared to the same periods in 2019 was attributable to increases in fees assessed for lifetime income benefit riders due to a larger volume of business in force subject to the fee and increases in the average fees being charged as compared to prior periods and for the six months ended June 30, 2020 was also attributable to an increase in surrender charges due to an increase in withdrawals from annuity policies subject to surrender charges due to a larger volume of business in force and policyholder behavior, which were partially offset by lower average surrender charges collected on those withdrawals. See Interest sensitive and index product benefits below for corresponding expense recognized on lifetime income benefit riders.

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Net investment income decreased 5% to $543.7 million in the second quarter of 2020 and 1% to $1,117 million for the six months ended June 30, 2020 compared to $570.6 million and $1,129 million for the same periods in 2019. The decreases were attributable to a decrease in average yield earned on average invested assets during the three and six months ended June 30, 2020 compared to the same periods in 2019, partially offset by increases in our invested assets during the three and six months ended June 30, 2020 compared to the same periods in 2019. Average invested assets excluding derivative instruments (on an amortized cost basis) increased 4% to $52.9 billion for the second quarter of 2020 and 5% to $52.8 billion for the six months ended June 30, 2020 compared to $50.7 billion and $50.3 billion for the same periods in 2019.

The average yield earned on average invested assets was 4.12% for the second quarter of 2020 and 4.24% for the six months ended June 30, 2020 compared to 4.51% and 4.49% for the same periods in 2019. The decrease in average yield earned for the three and six months ended June 30, 2020 compared to the same periods in 2019 was primarily attributable to investment of new premiums and portfolio cash flows during most of 2020 and 2019 at average rates below the overall portfolio yield, a decline in yields on our floating rate investment portfolio due to decreases in the average benchmark rates associated with these investments, an increase in the level of cash and cash equivalent holdings due to our decision to hold higher levels of cash and cash equivalents since March 2020 and mark to market losses on investment partnerships during the three and six months ended June 30, 2020 due to changes in fair market valuations. The average yield on fixed income securities purchased and mortgage loans funded during the three and six months ended June 30, 2020 was 4.58% and 3.78%, compared to 4.42% and 4.52% for the same periods in 2019. At the end of the second quarter of 2020, we executed a block trade of residential mortgage loans at a yield of 5.92% which provided a meaningful increase in the purchase yield for the three and six months ended June 30, 2020.

Change in fair value of derivatives consists of call options purchased to fund annual index credits on fixed index annuities, and an interest rate swap and interest rate caps that hedge our floating rate subordinated debentures. The components of change in fair value of derivatives are as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(Dollars in thousands)
Call options:
Gain (loss) on option expiration	$	(109,367	)	$	(42,483	)	$	736		$	(166,163	)
Change in unrealized gains/losses	437,029			119,425			(615,010		)	628,271
Interest rate swap	—			(688		)	—			(1,056		)
Interest rate caps	—			(209		)	62			(538		)
	$	327,662		$	76,045		$	(614,212	)	$	460,514

The differences between the change in fair value of derivatives between periods for call options are primarily due to the performance of the indices upon which our call options are based which impacts the fair values and changes in the fair values of those call options between periods. The change in unrealized gains/losses on call options for the three and six months ended June 30, 2020 as compared to the same periods in 2019 reflect the impact from equity market volatility throughout 2020 related to the economic uncertainty caused by the COVID-19 pandemic. A substantial portion of our call options are based upon the S&P 500 Index with the remainder based upon other equity and bond market indices. The range of index appreciation (after applicable caps, participation rates and asset fees) for options expiring during the three and six months ended June 30, 2020 and 2019 is as follows:



	Three Months Ended June 30,		Six Months Ended June 30,
	2020	2019	2020	2019
S&P 500 Index
Point-to-point strategy	0.0% - 7.0%	0.0% - 7.0%	0.0% - 17.4%	0.0% - 7.0%
Monthly average strategy	0.0% - 8.0%	0.0% - 6.9%	0.0% - 11.9%	0.0% - 6.9%
Monthly point-to-point strategy	0.0% - 0.0%	0.0% - 4.3%	0.0% - 14.0%	0.0% - 4.3%
Fixed income (bond index) strategies	0.0% - 10.0%	0.0% - 10.0%	0.0% - 13.6%	0.0% - 10.0%

The change in fair value of derivatives is also influenced by the aggregate cost of options purchased. The aggregate cost of options for the three and six months ended June 30, 2020 were lower than for the same periods in 2019 as option costs generally decreased during 2019 and into 2020. The decrease in aggregate option costs was partially offset by an increase in the amount of fixed index annuities in force during the three and six months ended June 30, 2020 compared to the same periods in 2019. The aggregate cost of options is also influenced by the amount of policyholder funds allocated to the various indices and market volatility which affects option pricing. See Critical Accounting Policies - Policy Liabilities for Fixed Index Annuities included in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2019.

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Net realized gains (losses) on investments includes gains and losses on the sale of securities and other investments and credit losses on our securities and mortgage loans on real estate. Net realized gains (losses) on investments fluctuate from year to year primarily due to changes in the interest rate and economic environment and the timing of the sale of investments. See Note 3 to our unaudited consolidated financial statements and Financial Condition - Credit Losses for a detailed presentation of the types of investments that generated the gains (losses) as well as discussion of credit losses on our securities recognized during the periods presented and Financial Condition - Investments and Note 4 to our unaudited consolidated financial statements for discussion of credit losses recognized on mortgage loans on real estate.

During the six months ended June 30, 2020, securities were sold at gains as we looked to increase our cash and cash equivalent holdings in response to the COVID-19 pandemic. Securities sold at losses are generally due to our long-term fundamental concern with the issuers' ability to meet their future financial obligations or to improve our risk or duration profiles as they pertain to our asset liability management.

Interest sensitive and index product benefits decreased 4% to $241.0 million in the second quarter of 2020 and increased 65% to $641.2 million for the six months ended June 30, 2020 compared to $251.1 million and $387.8 million for the same periods in 2019. The components of interest sensitive and index product benefits are summarized as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(Dollars in thousands)
Index credits on index policies	$	97,875	$	161,752	$	376,815	$	217,677
Interest credited (including changes in minimum guaranteed interest for fixed index annuities)	48,025		52,186		100,036		101,404
Lifetime income benefit riders	95,092		37,165		164,360		68,696
	$	240,992	$	251,103	$	641,211	$	387,777

The increase in index credits for the six months ended June 30, 2020 and decrease in index credits for the three months ended June 30, 2020 compared to the same periods in 2019 were due to changes in the level of appreciation of the underlying indices (see discussion above under Change in fair value of derivatives) and the amount of funds allocated by policyholders to the respective index options. Total proceeds received upon expiration of the call options purchased to fund the annual index credits were $97.0 million and $382.3 million for the three and six months ended June 30, 2020, compared to $166.4 million and $224.9 million for the same periods in 2019. The increases in benefits recognized for lifetime income benefit riders for the three and six months ended June 30, 2020 compared to the same periods in 2019 were primarily due to the impact that assumption revisions made during the third quarter of 2019 had on the lifetime income benefit riders liability. Benefits recognized for lifetime income benefit riders also increased for the three and six months ended June 30, 2020 as compared to the same periods in 2019 due to an increase in fund value of policies with lifetime income benefit riders, which correlates to the increase in fees discussed in Annuity product charges.

The liability (net of coinsurance ceded) for lifetime income benefit riders was $1.5 billion and $1.3 billion at June 30, 2020 and December 31, 2019, respectively.

Amortization of deferred sales inducements before gross profit adjustments decreased for the three and six months ended June 30, 2020 compared to the same periods in 2019 primarily due to the impact that assumption revisions made during the third quarter of 2019 had on the pattern of amortization. Bonus products represented 77% and 79% of our net annuity account values at June 30, 2020 and June 30, 2019, respectively. The amount of amortization is affected by amortization associated with fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business and amortization associated with net realized gains (losses) on investments including credit losses on fixed maturity securities. Fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business creates differences in the recognition of revenues and expenses from derivative instruments including the embedded derivative liabilities in our fixed index annuity contracts. The change in fair value of the embedded derivatives will not correspond to the change in fair value of the derivatives (purchased call options), because the purchased call options are one-year options while the options valued in the fair value of embedded derivatives cover the expected lives of the contracts which typically exceed ten years.

Amortization of deferred sales inducements is summarized as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(Dollars in thousands)
Amortization of deferred sales inducements before gross profit adjustments	$	40,333		$	68,886		$	84,241		$	137,689
Gross profit adjustments:
Fair value accounting for derivatives and embedded derivatives	(112,842		)	(48,034		)	(81,043		)	(83,421		)
Net realized gains (losses) on investments	(2,669		)	(1,067		)	(4,785		)	(1,174		)
Amortization of deferred sales inducements after gross profit adjustments	$	(75,178	)	$	19,785		$	(1,587	)	$	53,094

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Change in fair value of embedded derivatives includes changes in the fair value of our fixed index annuity embedded derivatives (see Note 5 to our unaudited consolidated financial statements). The components of change in fair value of embedded derivatives are as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020			2019
	(Dollars in thousands)
Fixed index annuities - embedded derivatives	$	913,984	$	204,590	$	(371,087	)	$	857,232
Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting	212,951		122,972		247,961			236,653
	$	1,126,935	$	327,562	$	(123,126	)	$	1,093,885

The change in fair value of the fixed index annuity embedded derivatives resulted from (i) changes in the expected index credits on the next policy anniversary dates, which are related to the change in fair value of the call options acquired to fund those index credits discussed above in Change in fair value of derivatives; (ii) changes in the discount rates used in estimating our embedded derivative liabilities; and (iii) the growth in the host component of the policy liability. The amounts presented as "Other changes in difference between policy benefit reserves computed using derivative accounting vs. long-duration contracts accounting" represent the total change in the difference between policy benefit reserves for fixed index annuities computed under the derivative accounting standard and the long-duration contracts accounting standard at each balance sheet date, less the change in fair value of our fixed index annuities embedded derivative. See Critical Accounting Policies - Policy Liabilities for Fixed Index Annuities included in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2019.

The primary reasons for the decrease in the change in fair value of the fixed index annuity embedded derivatives during the six months ended June 30, 2020 were decreases in the expected index credits on the next policy anniversary dates resulting from decreases in the fair value of the call options acquired to fund these index credits during the six months ended June 30, 2020 compared to increases in the expected index credits on the next policy anniversary dates resulting from increases in the fair value of the call options acquired to fund these index credits during the six months ended June 30, 2019 partially offset by a larger decrease in the net discount rate during the six months ended June 30, 2020 compared to the same period of 2019. The decrease in the net discount rate for the six months ended June 30, 2020 consists of a decrease in treasury rates partially offset by a widening of credit spreads. The discount rates used in estimating our embedded derivative liabilities fluctuate based on the changes in the general level of risk free interest rates and our own credit spread. The primary reasons for the increase in the change in fair value of the fixed index annuity embedded derivatives during the three months ended June 30, 2020 were a larger increase in the expected index credits on the next policy anniversary dates resulting from a larger increase in the fair value of the call options acquired to fund these index credits during the three months ended June 30, 2020 compared to the same period of 2019 and a larger decrease in the discount rates during the three months ended June 30, 2020 compared to the same period of 2019. The decrease in the discount rates for the three months ended June 30, 2020 consists of a tightening of credit spreads and a decrease in treasury rates. See Net Income above for discussion of the impact of assumption revisions on the fair value of of the fixed index annuity embedded derivative for the three and six months ended June 30, 2020.

Amortization of deferred policy acquisition costs before gross profit adjustments decreased for the three and six months ended June 30, 2020 compared to the same periods in 2019 primarily due to the impact that assumption revisions made during the third quarter of 2019 had on the pattern of amortization. The amount of amortization is affected by amortization associated with fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business and amortization associated with net realized gains (losses) on investments including credit losses on fixed maturity securities. As discussed above, fair value accounting for derivatives and embedded derivatives utilized in our fixed index annuity business creates differences in the recognition of revenues and expenses from derivative instruments including the embedded derivative liabilities in our fixed index annuity contracts.

Amortization of deferred policy acquisition costs is summarized as follows:



	Three Months Ended June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
	(Dollars in thousands)
Amortization of deferred policy acquisition costs before gross profit adjustments	$	61,240		$	101,444		$	127,496		$	201,515
Gross profit adjustments:
Fair value accounting for derivatives and embedded derivatives	(177,014		)	(70,144		)	(119,375		)	(124,933		)
Net realized gains (losses) on investments	(4,115		)	(1,354		)	(7,308		)	(1,504		)
Amortization of deferred policy acquisition costs after gross profit adjustments	$	(119,889	)	$	29,946		$	813		$	75,078

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Other operating costs and expenses increased 12% to $42.0 million in the second quarter of 2020 and 12% to $85.6 million for the six months ended June 30, 2020 compared to $37.4 million and $76.4 million for the same periods in 2019 and are summarized as follows:



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(Dollars in thousands)
Salary and benefits	$	21,832	$	20,874	$	43,987	$	41,093
Risk charges	11,107		9,322		21,947		18,031
Other	9,012		7,230		19,643		17,281
Total other operating costs and expenses	$	41,951	$	37,426	$	85,577	$	76,405

Salary and benefits for the three and six months ended June 30, 2020 reflect increases of $2.3 million and $4.2 million, respectively, due to an increased number of employees related to our growth. These increases were offset by decreases of $1.1 million and $1.0 million, respectively, related to compensation costs for our incentive compensation programs for the three and six months ended June 30, 2020 compared to the same periods in the prior year. The decreases in expenses for our incentive compensation programs were primarily due to lower expected payouts based on estimated financial results as compared to the prior year as well as lower stock compensation expense compared to the prior year due to the prior year containing expense related to a 2018 grant that had a one year vesting period that was fully expensed prior to 2020.

The increase in risk charges expense for the three and six months ended June 30, 2020 compared to the same periods in 2019 was due to an increase in the amount of excess regulatory reserves ceded to an unaffiliated reinsurer pursuant to a reinsurance agreement primarily as a result of the replacement of the previous agreement with a new agreement effective April 1, 2019. The impact from increasing the amount of excess regulatory reserves ceded was partially offset by a lower risk charge percentage in the new agreement. The excess regulatory reserves ceded at June 30, 2020 and 2019 were $1,276.6 million and $1,050.9 million, respectively.

Other expenses increased for the three and six months ended June 30, 2020 as compared to the same periods in 2019 primarily as a result of increases in consulting fees, depreciation and maintenance expense related to software and hardware assets, licensing fees which are based on the level of policyholder funds under management allocated to index strategies and non-deferrable commission expenses. These increases were offset by decreases in expenses related to lower sales promotion activity due to the COVID-19 pandemic.

Income tax expense (benefit) was $(68.5) million in the second quarter of 2020 and $(41.2) million for the six months ended June 30, 2020 compared to $4.6 million and $(4.8) million for the same periods in 2019. The change in income tax expense (benefit) was primarily due to changes in income (loss) before income taxes. The effective income tax rates for the three and six months ended June 30, 2020 were 21.7% and 90.2%, respectively, and 19.9% and 29.8% for the same periods in 2019, respectively.

Income tax expense (benefit) and the resulting effective tax rate are based upon two components of income (loss) before income taxes ("pretax income") that are taxed at different tax rates. Life insurance income is generally taxed at an effective rate of approximately 21.6% reflecting the absence of state income taxes for substantially all of the states that the life insurance subsidiaries do business in. The income (loss) for the parent company and other non-life insurance subsidiaries (the "non-life insurance group") is generally taxed at an effective tax rate of 29.5% reflecting the combined federal / state income tax rates. The effective income tax rates resulting from the combination of the income tax provisions for the life / non-life sources of income (loss) vary from period to period based primarily on the relative size of pretax income (loss) from the two sources.

The effective tax rate for the six months ended June 30, 2020 was impacted by a discrete tax item that provided a tax benefit of $30.8 million related to the provision of the Coronavirus Aid, Relief, and Economic Security Act that allows net operating losses for 2018 through 2020 to be carried back to previous tax years in which a 35% statutory tax rate was in effect. The effective income tax rate was also impacted by a discrete tax item related to share-based compensation that provided a tax benefit for the six months ended June 30, 2020 of approximately $0.4 million compared to a tax benefit for the three and six months ended June 30, 2019 of $0.3 million and $1.4 million, respectively. The effective income tax rates excluding the impact of these discrete items were 21.7% and 22.0%, respectively, for the three and six months ended June 30, 2020 and 21.3% and 21.4% for the same periods in 2019, respectively.

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Financial Condition

Investments

Our investment strategy is to maintain a predominantly investment grade fixed income portfolio, provide adequate liquidity to meet our cash obligations to policyholders and others and maximize current income and total investment return through active investment management. Consistent with this strategy, our investments principally consist of fixed maturity securities and mortgage loans on real estate.

Insurance statutes regulate the type of investments that our life subsidiaries are permitted to make and limit the amount of funds that may be used for any one type of investment. In light of these statutes and regulations and our business and investment strategy, we generally seek to invest in United States government and government-sponsored agency securities, corporate securities, residential and commercial mortgage backed securities, other asset backed securities and United States municipalities, states and territories securities rated investment grade by established NRSRO's or in securities of comparable investment quality, if not rated and mortgage loans on real estate.

The composition of our investment portfolio is summarized as follows:



	June 30, 2020				December 31, 2019
	Carrying Amount		Percent		Carrying Amount		Percent
	(Dollars in thousands)
Fixed maturity securities:
United States Government full faith and credit	$	39,342	0.1	%	$	161,765	0.3	%
United States Government sponsored agencies	343,387		0.6	%	625,020		1.1	%
United States municipalities, states and territories	3,778,710		6.8	%	4,527,671		7.9	%
Foreign government obligations	207,509		0.4	%	205,096		0.3	%
Corporate securities	33,330,711		59.7	%	32,536,839		57.2	%
Residential mortgage backed securities	1,712,725		3.1	%	1,575,664		2.8	%
Commercial mortgage backed securities	5,393,062		9.6	%	5,786,279		10.2	%
Other asset backed securities	5,933,346		10.6	%	6,162,156		10.8	%
Total fixed maturity securities	50,738,792		90.9	%	51,580,490		90.6	%
Mortgage loans on real estate	3,958,233		7.1	%	3,448,793		6.1	%
Derivative instruments	672,958		1.2	%	1,355,989		2.4	%
Other investments	479,099		0.8	%	492,301		0.9	%
	$	55,849,082	100.0	%	$	56,877,573	100.0	%

Fixed Maturity Securities

Our fixed maturity security portfolio is managed to minimize risks such as interest rate changes and defaults or impairments while earning a sufficient and stable return on our investments. The largest portion of our fixed maturity securities are in investment grade (NAIC designation 1 or 2) publicly traded or privately placed corporate securities.

A summary of our fixed maturity securities by NRSRO ratings is as follows:



	June 30, 2020				December 31, 2019
Rating Agency Rating	Carrying Amount		Percent of Fixed Maturity Securities		Carrying Amount		Percent of Fixed Maturity Securities
	(Dollars in thousands)
Aaa/Aa/A	$	29,240,135	57.6	%	$	30,662,644	59.4	%
Baa	19,857,663		39.1	%	19,833,309		38.4	%
Total investment grade	49,097,798		96.7	%	50,495,953		97.8	%
Ba	1,347,637		2.7	%	821,902		1.6	%
B	126,141		0.3	%	81,407		0.2	%
Caa	68,192		0.1	%	95,676		0.2	%
Ca and lower	99,024		0.2	%	85,552		0.2	%
Total below investment grade	1,640,994		3.3	%	1,084,537		2.2	%
	$	50,738,792	100.0	%	$	51,580,490	100.0	%

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The NAIC's Securities Valuation Office ("SVO") is responsible for the day-to-day credit quality assessment and the valuation of fixed maturity securities owned by state regulated insurance companies. The purpose of such assessment and valuation is for determining regulatory capital requirements and regulatory reporting. Insurance companies report ownership to the SVO when such securities are eligible for regulatory filings. The SVO conducts credit analysis on these securities for the purpose of assigning a NAIC designation and/or unit price. Typically, if a security has been rated by an NRSRO, the SVO utilizes that rating and assigns an NAIC designation based upon the following system:



NAIC Designation		NRSRO Equivalent Rating
1		Aaa/Aa/A
2		Baa
3		Ba
4		B
5		Caa
6		Ca and lower

For most of the bonds held in our portfolio the NAIC designation matches the NRSRO equivalent rating. However, for certain loan-backed and structured securities, as defined by the NAIC, the NAIC rating is not always equivalent to the NRSRO rating presented in the previous table. The NAIC has adopted revised rating methodologies for certain loan-backed and structured securities comprised of non-agency residential mortgage backed securities ("RMBS") and commercial mortgage backed securities ("CMBS"). The NAIC’s objective with the revised rating methodologies for these structured securities is to increase the accuracy in assessing expected losses and use the improved assessment to determine a more appropriate capital requirement for such structured securities. The revised methodologies reduce regulatory reliance on rating agencies and allow for greater regulatory input into the assumptions used to estimate expected losses from structured securities.

The use of this process by the SVO may result in certain non-agency RMBS and CMBS being assigned an NAIC designation that is higher than the equivalent NRSRO rating. The NAIC designations for non-agency RMBS and CMBS are based on security level expected losses as modeled by an independent third party (engaged by the NAIC) and the statutory carrying value of the security, including any purchase discounts or impairment charges previously recognized. Evaluation of non-agency RMBS and CMBS held by insurers using the NAIC rating methodologies is performed on an annual basis.

As stated previously, our fixed maturity security portfolio is managed to minimize risks such as defaults or impairments while earning a sufficient and stable return on our investments. Our strategy has been to invest primarily in investment grade fixed maturity securities. Investment grade is NAIC 1 and 2 securities and Baa3/BBB- and better securities on the NRSRO scale. This strategy meets the objective of minimizing risk while also managing asset capital charges on a regulatory capital basis.

A summary of our fixed maturity securities by NAIC designation is as follows:



	June 30, 2020								December 31, 2019
NAIC Designation	Amortized Cost		Fair Value		Carrying Amount		Percent of Total Carrying Amount		Amortized Cost		Fair Value		Carrying Amount		Percent of Total Carrying Amount
	(Dollars in thousands)								(Dollars in thousands)
1	$	25,587,355	$	28,327,288	$	28,327,288	55.8	%	$	27,781,525	$	30,122,657	$	30,122,657	58.4	%
2	19,487,757		20,765,334		20,765,334		40.9	%	19,278,355		20,316,911		20,316,911		39.4	%
3	1,577,056		1,430,998		1,430,998		2.8	%	1,001,087		977,191		977,191		1.9	%
4	185,879		156,234		156,234		0.3	%	114,497		112,534		112,534		0.2	%
5	51,893		31,644		31,644		0.1	%	57,952		45,205		45,205		0.1	%
6	61,103		27,294		27,294		0.1	%	5,530		5,992		5,992		—	%
	$	46,951,043	$	50,738,792	$	50,738,792	100.0	%	$	48,238,946	$	51,580,490	$	51,580,490	100.0	%

The amortized cost and fair value of fixed maturity securities at June 30, 2020, by contractual maturity, are presented in Note 3 to our unaudited consolidated financial statements in this Form 10-Q, which is incorporated by reference in this Item 2.

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Unrealized Losses

The amortized cost and fair value of fixed maturity securities that were in an unrealized loss position were as follows:



	Number of Securities	Amortized Cost		Unrealized Losses, Net of Allowance			Allowance for Credit Losses			Fair Value
		(Dollars in thousands)
June 30, 2020
Fixed maturity securities, available for sale:
United States municipalities, states and territories	12	$	53,970	$	(2,039	)	$	—		$	51,931
Foreign government obligations	2	24,185		(1,128		)	—			23,057
Corporate securities:
Finance, insurance and real estate	46	650,313		(23,749		)	—			626,564
Manufacturing, construction and mining	38	314,378		(15,655		)	—			298,723
Utilities and related sectors	68	566,352		(71,642		)	(127		)	494,583
Wholesale/retail trade	33	340,002		(48,544		)	—			291,458
Services, media and other	105	939,021		(87,257		)	(46,622		)	805,142
Residential mortgage backed securities	53	239,616		(4,837		)	(777		)	234,002
Commercial mortgage backed securities	432	3,069,312		(266,949		)	(2,660		)	2,799,703
Other asset backed securities	824	5,304,363		(465,891		)	—			4,838,472
	1,613	$	11,501,512	$	(987,691	)	$	(50,186	)	$	10,463,635

December 31, 2019
Fixed maturity securities, available for sale:
United States Government full faith and credit	5	$	144,678	$	(96	)	$	—		$	144,582
United States Government sponsored agencies	6	374,961		(4,785		)	—			370,176
United States municipalities, states and territories	42	296,812		(8,250		)	—			288,562
Corporate securities:
Finance, insurance and real estate	38	399,043		(9,529		)	—			389,514
Manufacturing, construction and mining	20	216,229		(9,990		)	—			206,239
Utilities and related sectors	32	397,116		(11,212		)	—			385,904
Wholesale/retail trade	12	194,815		(11,162		)	—			183,653
Services, media and other	65	631,587		(40,366		)	—			591,221
Residential mortgage backed securities	34	227,427		(3,691		)	—			223,736
Commercial mortgage backed securities	127	810,505		(13,783		)	—			796,722
Other asset backed securities	652	4,306,620		(179,191		)	—			4,127,429
	1,033	$	7,999,793	$	(292,055	)	$	—		$	7,707,738

The unrealized losses at June 30, 2020 are principally related to the impacts the COVID-19 pandemic had on credit markets. Approximately 80% and 79% of the unrealized losses on fixed maturity securities shown in the above table for June 30, 2020 and December 31, 2019, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC designations.

The increase in unrealized losses from December 31, 2019 to June 30, 2020 was primarily related to the impacts the COVID-19 pandemic had on credit markets. While treasury yields declined during the six months ended June 30, 2020, credit spreads have widened. The widening of credit spreads in most cases was driven by a flight to quality into treasury securities due to illiquidity and uncertainty of the impact of the COVID-19 pandemic on the economy. The 10-year U.S. Treasury yields at June 30, 2020 and December 31, 2019 were 0.66% and 1.92%, respectively. The 30-year U.S. Treasury yields at June 30, 2020 and December 31, 2019 were 1.41% and 2.39%, respectively.

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The following table sets forth the composition by credit quality (NAIC designation) of fixed maturity securities with gross unrealized losses:



NAIC Designation	Carrying Value of Securities with Gross Unrealized Losses		Percent of Total		Gross Unrealized Losses (1)			Percent of Total
	(Dollars in thousands)
June 30, 2020
1	$	5,001,440	47.8	%	$	(343,963	)	34.8	%
2	4,136,595		39.5	%	(441,530		)	44.7	%
3	1,124,164		10.7	%	(161,065		)	16.3	%
4	143,697		1.4	%	(32,929		)	3.3	%
5	31,644		0.3	%	(4,329		)	0.5	%
6	26,095		0.3	%	(3,875		)	0.4	%
	$	10,463,635	100.0	%	$	(987,691	)	100.0	%
December 31, 2019
1	$	3,580,578	46.4	%	$	(79,638	)	27.3	%
2	3,412,695		44.3	%	(151,826		)	52.0	%
3	613,240		8.0	%	(38,216		)	13.1	%
4	74,027		1.0	%	(8,575		)	2.9	%
5	26,998		0.3	%	(13,437		)	4.6	%
6	200		—	%	(363		)	0.1	%
	$	7,707,738	100.0	%	$	(292,055	)	100.0	%

(1) Gross unrealized losses have been adjusted to reflect the allowance for credit loss as of June 30, 2020 of $50.2 million.

Our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 1,613 and 1,033 securities, respectively) have been in a continuous unrealized loss position at June 30, 2020 and December 31, 2019, along with a description of the factors causing the unrealized losses is presented in Note 3 to our unaudited consolidated financial statements in this Form 10-Q, which is incorporated by reference in this Item 2.

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The amortized cost and fair value of fixed maturity securities in an unrealized loss position and the number of months in a continuous unrealized loss position (fixed maturity securities that carry an NRSRO rating of BBB/Baa or higher are considered investment grade) were as follows:



	Number of Securities	Amortized Cost, Net of Allowance (1)		Fair Value		Gross Unrealized Losses, Net of Allowance (1)
		(Dollars in thousands)
June 30, 2020
Fixed maturity securities, available for sale:
Investment grade:
Less than six months	962	$	6,829,739	$	6,391,626	$	(438,113	)
Six months or more and less than twelve months	29	240,206		219,279		(20,927		)
Twelve months or greater	388	2,875,775		2,561,199		(314,576		)
Total investment grade	1,379	9,945,720		9,172,104		(773,616		)
Below investment grade:
Less than six months	109	751,445		659,535		(91,910		)
Six months or more and less than twelve months	10	22,034		19,039		(2,995		)
Twelve months or greater	115	732,127		612,957		(119,170		)
Total below investment grade	234	1,505,606		1,291,531		(214,075		)
	1,613	$	11,451,326	$	10,463,635	$	(987,691	)

December 31, 2019
Fixed maturity securities, available for sale:
Investment grade:
Less than six months	352	$	2,960,557	$	2,911,909	$	(48,648	)
Six months or more and less than twelve months	46	290,674		282,347		(8,327		)
Twelve months or greater	513	4,003,478		3,829,474		(174,004		)
Total investment grade	911	7,254,709		7,023,730		(230,979		)
Below investment grade:
Less than six months	11	32,607		31,695		(912		)
Six months or more and less than twelve months	8	35,080		33,268		(1,812		)
Twelve months or greater	103	677,397		619,045		(58,352		)
Total below investment grade	122	745,084		684,008		(61,076		)
	1,033	$	7,999,793	$	7,707,738	$	(292,055	)

(1) Amortized cost and gross unrealized losses have been adjusted to reflect the allowance for credit loss as of June 30, 2020 of $50.2 million.

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The amortized cost and fair value of fixed maturity securities (excluding United States Government and United States Government sponsored agency securities) segregated by investment grade (NRSRO rating of BBB/Baa or higher) and below investment grade that had unrealized losses greater than 20% and the number of months in a continuous unrealized loss position were as follows:



	Number of Securities	Amortized Cost, Net of Allowance (1)		Fair Value		Gross Unrealized Losses, Net of Allowance (1)
		(Dollars in thousands)
June 30, 2020
Investment grade:
Less than six months	57	$	400,583	$	282,437	$	(118,146	)
Six months or more and less than twelve months	—	—		—		—
Twelve months or greater	—	—		—		—
Total investment grade	57	400,583		282,437		(118,146		)
Below investment grade:
Less than six months	38	262,422		186,330		(76,092		)
Six months or more and less than twelve months	3	1,603		794		(809		)
Twelve months or greater	4	15,684		12,356		(3,328		)
Total below investment grade	45	279,709		199,480		(80,229		)
	102	$	680,292	$	481,917	$	(198,375	)

December 31, 2019
Investment grade:
Less than six months	—	$	—	$	—	$	—
Six months or more and less than twelve months	—	—		—		—
Twelve months or greater	—	—		—		—
Total investment grade	—	—		—		—
Below investment grade:
Less than six months	—	—		—		—
Six months or more and less than twelve months	1	2,640		1,755		(885		)
Twelve months or greater	4	53,800		35,541		(18,259		)
Total below investment grade	5	56,440		37,296		(19,144		)
	5	$	56,440	$	37,296	$	(19,144	)

(1) Amortized cost and gross unrealized losses have been adjusted to reflect the allowance for credit loss as of June 30, 2020 of $50.2 million.

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The amortized cost and fair value of fixed maturity securities, by contractual maturity, that were in an unrealized loss position 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 a separate line.



	Available for sale
	Amortized Cost		Fair Value
	(Dollars in thousands)
June 30, 2020
Due in one year or less	$	5,177	$	5,058
Due after one year through five years	508,870		469,413
Due after five years through ten years	1,084,846		980,602
Due after ten years through twenty years	569,854		506,516
Due after twenty years	719,474		629,869
	2,888,221		2,591,458
Residential mortgage backed securities	239,616		234,002
Commercial mortgage backed securities	3,069,312		2,799,703
Other asset backed securities	5,304,363		4,838,472
	$	11,501,512	$	10,463,635

December 31, 2019
Due in one year or less	$	5,073	$	5,071
Due after one year through five years	278,165		273,869
Due after five years through ten years	555,200		544,687
Due after ten years through twenty years	1,041,474		1,008,487
Due after twenty years	775,329		727,737
	2,655,241		2,559,851
Residential mortgage backed securities	227,427		223,736
Commercial mortgage backed securities	810,505		796,722
Other asset backed securities	4,306,620		4,127,429
	$	7,999,793	$	7,707,738

International Exposure

We hold fixed maturity securities with international exposure. As of June 30, 2020, 25% of the carrying value of our fixed maturity securities was comprised of corporate debt securities of issuers based outside of the United States and debt securities of foreign governments. All of our fixed maturity securities with international exposure are denominated in U.S. dollars. Our investment professionals analyze each holding for credit risk by economic and other factors of each country and industry. The following table presents our international exposure in our fixed maturity portfolio by country or region:



	June 30, 2020
	Amortized Cost		Carrying Amount/ Fair Value		Percent of Total Carrying Amount
	(Dollars in thousands)
GIIPS (1)	$	251,477	$	273,003	0.5	%
Asia/Pacific	436,587		495,818		1.0	%
Non-GIIPS Europe	3,043,061		3,337,126		6.6	%
Latin America	268,867		291,746		0.6	%
Non-U.S. North America	1,415,331		1,546,324		3.1	%
Australia & New Zealand	1,114,659		1,182,517		2.3	%
Other	5,629,293		5,296,541		10.4	%
	$	12,159,275	$	12,423,075	24.5	%


(1)	Greece, Ireland, Italy, Portugal and Spain ("GIIPS"). All of our exposure in GIIPS are corporate securities with issuers domiciled in these countries. None of our foreign government obligations were held in any of these countries.

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All of the securities presented in the table above are investment grade (NAIC designation of either 1 or 2), except for the following:



	June 30, 2020
	Amortized Cost		Carrying Amount/ Fair Value
	(Dollars in thousands)
GIIPS	$	14,544	$	16,271
Asia/Pacific	11,000		10,860
Non-GIIPS Europe	145,635		128,521
Latin America	81,913		81,634
Non-U.S. North America	84,630		77,096
Other	524,486		443,300
	$	862,208	$	757,682

Watch List

At each balance sheet date, we identify invested assets which have characteristics (i.e., significant unrealized losses compared to amortized cost and industry trends) creating uncertainty as to our future assessment of credit losses. As part of this assessment, we review not only a change in current price relative to its amortized cost but the issuer's current credit rating and the probability of full recovery of principal based upon the issuer's financial strength. For corporate issues we evaluate the financial stability and quality of asset coverage for the securities relative to the term to maturity for the issues we own. For asset-backed securities we evaluate changes in factors such as collateral performance, default rates, loss severities and expected cash flows. At June 30, 2020, the amortized cost and fair value of securities on the watch list (all fixed maturity securities) are as follows:



General Description	Number of Securities	Amortized Cost		Allowance for Credit Losses			Amortized Cost, Net of Allowance		Net Unrealized Losses, Net of Allowance			Fair Value
		(Dollars in thousands)
Corporate securities - Public securities	6	$	59,078	$	(46,622	)	$	12,456	$	(1,718	)	$	10,738
Corporate securities - Private placement securities	34	359,141		(127		)	359,014		(25,933		)	333,081
Residential mortgage backed securities	16	35,860		(777		)	35,083		(458		)	34,625
Commercial mortgage backed securities	16	137,801		(2,660		)	135,141		(19,966		)	115,175
Other asset backed securities	5	83,892		—			83,892		(12,200		)	71,692
	77	$	675,772	$	(50,186	)	$	625,586	$	(60,275	)	$	565,311

We expect to recover the unrealized losses, net of allowances, as we did not have the intent to sell and it was not more likely than not that we would be required to sell these securities prior to recovery of the amortized cost basis, net of allowances. Our analysis of these securities and their credit performance at June 30, 2020 is as follows:

Corporate securities - public securities: The decline in the values of these securities, which are all securities related to domestic oil drillers, relates to the continuing low level of oil prices, which has caused credit metrics to continue to be under pressure. As a result of our process for identifying securities that could potentially have credit losses we recognized credit losses of $18.4 million and $46.7 million, respectively, on these securities for the three and six months ended June 30, 2020.

Corporate securities - private placement securities: The private placement securities included on the watch list are spread across numerous industries, the most significant of which is the airlines industry. The heightened credit risk on these securities is primarily due to the impact COVID-19 has had on the travel industry. While there is a heightened level of credit risk for the private placement securities included on the watch list, we expect minimal credit losses on these securities based on our current analyses. Based on these analyses, we recognized credit losses of $0.1 million on these securities for the three and six months ended June 30, 2020.

Residential mortgage backed securities: The residential mortgage backed securities included on the watch list have generally experienced higher levels of stress due to the impact COVID-19 is having on the economy. While there is a heightened level of credit risk for the residential mortgage backed securities included on the watch list, we expect minimal credit losses on these securities based on our current analyses. Based on these analyses, we recognized credit losses of $0.8 million on these securities for the three and six months ended June 30, 2020.

Commercial mortgage backed securities: The commercial mortgage backed securities included on the watch list have generally experienced higher levels of stress due to the impact COVID-19 is having on the economy. For the three and six months ended June 30, 2020 we recognized credit losses of $5.8 million and $8.3 million, respectively, on these securities.

Other asset backed securities: The decline the value of these securities, which are all securities related to the auto rental industry, is primarily a result of the impact COVID-19 has had on the travel industry. We have not taken any credit losses on these securities as of June 30, 2020 as we do not expect any credit losses on the securities based on our current analyses.

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Credit Losses

We have a policy and process to identify securities in our investment portfolio for which we recognize credit loss. See Note 3 to our unaudited consolidated financial statements.

During the three and six months ended June 30, 2020, we recognized credit losses of $18.4 million and $46.7 million, respectively, on corporate securities with exposure to the offshore drilling industry as discussed above and $5.8 million and $8.3 million, respectively, on commercial mortgage backed securities due to the impact of COVID-19 on the performance of the underlying collateral or our intent to sell the securities. In addition, during both the three and six months ended June 30, 2020, we recognized credit losses of $0.8 million on residential mortgage backed securities due to the performance of the underlying collateral and $0.1 million on a private placement security with exposure to the airlines industry. During the six months ended June 30, 2020 we recognized a credit loss of $0.5 million on an asset backed security due to our intent to sell such security.

We recognized other than temporary impairments of $1.2 million during the three and six months ended June 30, 2019 related to residential mortgage backed securities and an other asset backed security for which we have previously recognized OTTI and an other than temporary impairment related to a commercial mortgage backed security due to our intent to sell the security.

Several factors led us to believe that full recovery of amortized cost is not expected on the securities for which we recognized credit losses. A discussion of these factors, our policy and process to identify securities that could potentially have credit loss is presented in Note 3 to our unaudited consolidated financial statements in this Form 10-Q, which is incorporated by reference in this Item 2.

Mortgage Loans on Real Estate

Our financing receivables consist of two mortgage loan portfolio segments: commercial mortgage loans and residential mortgage loans. Our commercial mortgage loan portfolio consists of mortgage loans collateralized by the related properties and diversified as to property type, location and loan size. Our mortgage 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. Our residential mortgage loan portfolio consists of loans with an outstanding principal balance of $153.9 million that were purchased on June 25, 2020. These loans are collateralized by the related properties and diversified as to location within the United States. Mortgage loans on real estate are generally reported at cost adjusted for amortization of premiums and accrual of discounts, computed using the interest method and net of valuation allowances.

At June 30, 2020 and December 31, 2019, the largest principal amount outstanding for any single commercial mortgage loan was $35.0 million and $28.5 million, respectively, and the average loan size was $4.7 million and $4.4 million, respectively. In addition, the average loan to value ratio for commercial mortgage loans was 54.0% and 54.3% at June 30, 2020 and December 31, 2019, respectively, based upon the underwriting and appraisal at the time the loan was made. This loan to value is indicative of our conservative underwriting policies and practices for making commercial mortgage loans and may not be indicative of collateral values at the current reporting date. Our current practice is to only obtain market value appraisals of the underlying collateral at the inception of the loan unless we identify indicators of impairment in our ongoing analysis of the portfolio, in which case, we either calculate a value of the collateral using a capitalization method or obtain a third party appraisal of the underlying collateral. The commercial mortgage loan portfolio is summarized by geographic region and property type in Note 4 to our unaudited consolidated financial statements in this Form 10-Q, incorporated by reference in this Item 2.

In the normal course of business, we commit to fund commercial mortgage loans up to 90 days in advance. At June 30, 2020, we had commitments to fund commercial mortgage loans totaling $65.1 million, with interest rates ranging from 3.20% to 7.00%. During 2020 and 2019, due to historically low interest rates, the commercial mortgage loan industry has been very competitive. This competition has resulted in a number of borrowers refinancing with other lenders. For the six months ended June 30, 2020, we received $67.5 million in cash for loans being paid in full compared to $83.3 million for the six months ended June 30, 2019. Some of the loans being paid off have either reached their maturity or are nearing maturity; however, some borrowers are paying the prepayment fee and refinancing at a lower rate.

See Note 4 to our unaudited consolidated financial statements, incorporated by reference, for a presentation of our valuation allowance, foreclosure activity and troubled debt restructure analysis. We have a process by which we evaluate the credit quality of each of our commercial mortgage loans. This process utilizes each loan's loan-to-value and debt service coverage ratios as primary metrics. See Note 4 to our unaudited consolidated financial statements, incorporated by reference, for a summary of our portfolio by loan-to-value and debt service coverage ratios.

We closely monitor loan performance for both our commercial and residential mortgage loan portfolios. Commercial and residential loans are considered nonperforming when they are 90 days or more past due. Aging of financing receivables is summarized in the following table:



	Current		30-59 days past due		60-89 days past due		Over 90 days past due		Total
As of June 30, 2020:	(Dollars in thousands)
Commercial mortgage loans	$	3,827,114	$	—	$	—	$	—	$	3,827,114
Residential mortgage loans	151,208		—		—		—		151,208
Total mortgage loans	$	3,978,322	$	—	$	—	$	—	$	3,978,322

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Derivative Instruments

Our derivative instruments primarily consist of call options purchased to provide the income needed to fund the annual index credits on our fixed index annuity products. The fair value of the call options is based upon the amount of cash that would be required to settle the call options obtained from the counterparties adjusted for the nonperformance risk of the counterparty. The nonperformance risk for each counterparty is based upon its credit default swap rate. We have no performance obligations related to the call options.

None of our derivatives qualify for hedge accounting, thus, any change in the fair value of the derivatives is recognized immediately in the consolidated statements of operations. A presentation of our derivative instruments along with a discussion of the business strategy involved with our derivatives is included in Note 5 to our unaudited consolidated financial statements in this Form 10-Q, which is incorporated by reference in this Item 2.

Liquidity and Capital Resources

Our insurance subsidiaries generally have adequate cash flows from annuity deposits and investment income to meet their policyholder and other obligations. Net cash flows from annuity deposits and funds returned to policyholders as surrenders, withdrawals and death claims were $(518.4) million for the six months ended June 30, 2020 compared to $1.1 billion for the six months ended June 30, 2019, with the decrease attributable to a $1.4 billion decrease in net annuity deposits after coinsurance and a $203 million (after coinsurance) increase in funds returned to policyholders. As a result of funds returned to policyholders being in excess cash flows from annuity deposits for the six months ended June 30, 2020, we experienced a net cash outflow related to policyholder activity which was funded primarily by cash flows from investment income. We may continue to experience net cash outflows related to policyholder activity due to lower sales as a result of social distancing due to COVID-19. We continue to invest the net proceeds from policyholder transactions and investment activities in high quality fixed maturity securities and mortgage loans.

We, as the parent company, are a legal entity separate and distinct from our subsidiaries, and have no business operations. We need liquidity primarily to service our debt (senior notes and subordinated debentures issued to subsidiary trusts), pay operating expenses and pay dividends to common and preferred stockholders. Our assets consist primarily of the capital stock and surplus notes of our subsidiaries. Accordingly, our future cash flows depend upon the availability of dividends, surplus note interest payments and other statutorily permissible payments from our subsidiaries, such as payments under our investment advisory agreements and tax allocation agreement with our subsidiaries. These sources provide adequate cash flow for us to meet our current and reasonably foreseeable future obligations.

The ability of our life insurance subsidiaries to pay dividends or distributions, including surplus note payments, will be limited by applicable laws and regulations of the states in which our life insurance subsidiaries are domiciled, which subject our life insurance subsidiaries to significant regulatory restrictions. These laws and regulations require, among other things, our insurance subsidiaries to maintain minimum solvency requirements and limit the amount of dividends these subsidiaries can pay.

Currently, American Equity Investment Life Insurance Company ("American Equity Life") may pay dividends or make other distributions without the prior approval of the Iowa Insurance Commissioner, unless such payments, together with all other such payments within the preceding twelve months, exceed the greater of (1) American Equity Life's net gain from operations for the preceding calendar year, or (2) 10% of American Equity Life's statutory capital and surplus at the preceding December 31. For 2020, up to $349.0 million can be distributed as dividends by American Equity Life without prior approval of the Iowa Insurance Commissioner. In addition, dividends and surplus note payments may be made only out of statutory earned surplus, and all surplus note payments are subject to prior approval by regulatory authorities in the life subsidiary's state of domicile. American Equity Life had $2.1 billion of statutory earned surplus at June 30, 2020.

The maximum distribution permitted by law or contract is not necessarily indicative of an insurer's actual ability to pay such distributions, which may be constrained by business and regulatory considerations, such as the impact of such distributions on surplus, which could affect the insurer's ratings or competitive position, the amount of premiums that can be written and the ability to pay future dividends or make other distributions. Further, state insurance laws and regulations require that the statutory surplus of our life subsidiaries following any dividend or distribution must be reasonable in relation to their outstanding liabilities and adequate for their financial needs. Along with solvency regulations, the primary driver in determining the amount of capital used for dividends is the level of capital needed to maintain desired financial strength ratings from rating agencies. Both regulators and rating agencies could become more conservative in their methodology and criteria, including increasing capital requirements for our insurance subsidiaries which, in turn, could negatively affect the cash available to us from insurance subsidiaries. As of June 30, 2020, we estimate American Equity Life has sufficient statutory capital and surplus, combined with capital available to the holding company, to maintain this rating objective. However, this capital may not be sufficient if significant future losses are incurred or a rating agency modifies its rating criteria and access to additional capital could be limited.

The transfer of funds by American Equity Life is also restricted by a covenant in our line of credit agreement which requires American Equity Life to maintain a minimum RBC ratio of 275% and a minimum level of statutory surplus equal to the sum of 1) 80% of statutory surplus at June 30, 2016, 2) 50% of the statutory net income for each fiscal quarter ending after June 30, 2016, and 3) 50% of all capital contributed to American Equity Life after June 30, 2016. American Equity Life's RBC ratio was 372% at December 31, 2019. Under this agreement, we are also required to maintain a maximum ratio of adjusted debt to total adjusted capital of 0.35.

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On November 21, 2019 we issued $400 million of 5.95% fixed-rate reset non-cumulative preferred stock and received net proceeds of $388.9 million. We used a portion of the proceeds to redeem $165 million of our floating rate subordinated debentures in the fourth quarter of 2019 and the first quarter of 2020 and contributed $200 million to American Equity Life during May of 2020.

Cash and cash equivalents of the parent holding company at June 30, 2020, were $349.0 million which includes the $290.3 million of net proceeds from the Series B preferred issuance described above. In addition, we have a $150 million revolving line of credit, with no borrowings outstanding, available through September 2021 for general corporate purposes of the parent company and its subsidiaries. We also have the ability to issue equity, debt or other types of securities through one or more methods of distribution. The terms of any offering would be established at the time of the offering, subject to market conditions.

New Accounting Pronouncements

See Note 1 to our unaudited consolidated financial statements in this Form 10-Q, which is incorporated by reference in this Item 2.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We seek to invest our available funds in a manner that will maximize shareholder value and fund future obligations to policyholders and debtors, subject to appropriate risk considerations. We seek to meet this objective through investments that: (i) consist substantially of investment grade fixed maturity securities, (ii) have projected returns which satisfy our spread targets, and (iii) have characteristics which support the underlying liabilities. Many of our products incorporate surrender charges, market interest rate adjustments or other features, including lifetime income benefit riders, to encourage persistency.

We seek to maximize the total return on our fixed maturity securities through active investment management. Accordingly, we have determined that our available for sale portfolio of fixed maturity securities is available to be sold in response to: (i) changes in market interest rates, (ii) changes in relative values of individual securities and asset sectors, (iii) changes in prepayment risks, (iv) changes in credit quality outlook for certain securities, (v) liquidity needs, and (vi) other factors.

Interest rate risk is our primary market risk exposure. Substantial and sustained increases and decreases in market interest rates can affect the profitability of our products and the fair value of our investments. The profitability of most of our products depends on the spreads between interest yield on investments and rates credited on insurance liabilities. We have the ability to adjust crediting rates (caps, participation rates or asset fee rates for fixed index annuities) on substantially all of our annuity liabilities at least annually (subject to minimum guaranteed values). Substantially all of our annuity products have surrender and withdrawal penalty provisions designed to encourage persistency and to help ensure targeted spreads are earned. In addition, a significant amount of our fixed index annuity policies and many of our annual reset fixed rate deferred annuities were issued with a lifetime income benefit rider which we believe improves the persistency of such annuity products. However, competitive factors, including the impact of the level of surrenders and withdrawals, may limit our ability to adjust or maintain crediting rates at levels necessary to avoid narrowing of spreads under certain market conditions.

A major component of our interest rate risk management program is structuring the investment portfolio with cash flow characteristics consistent with the cash flow characteristics of our insurance liabilities. We use models to simulate cash flows expected from our existing business under various interest rate scenarios. These simulations enable us to measure the potential gain or loss in fair value of our interest rate-sensitive financial instruments, to evaluate the adequacy of expected cash flows from our assets to meet the expected cash requirements of our liabilities and to determine if it is necessary to lengthen or shorten the average life and duration of our investment portfolio. The "duration" of a security is the time weighted present value of the security's expected cash flows and is used to measure a security's sensitivity to changes in interest rates. When the durations of assets and liabilities are similar, exposure to interest rate risk is minimized because a change in value of assets should be largely offset by a change in the value of liabilities.

If interest rates were to increase 10% (14 basis points) from levels at June 30, 2020, we estimate that the fair value of our fixed maturity securities would decrease by approximately $519.8 million. The impact on stockholders' equity of such decrease (net of income taxes and certain adjustments for changes in amortization of deferred policy acquisition costs and deferred sales inducements) would be a decrease of $239.9 million in accumulated other comprehensive income and a decrease in stockholders' equity. The models used to estimate the impact of a 10% change in market interest rates incorporate numerous assumptions, require significant estimates and assume an immediate and parallel change in interest rates without any management of the investment portfolio in reaction to such change. Consequently, potential changes in value of our financial instruments indicated by the simulations will likely be different from the actual changes experienced under given interest rate scenarios, and the differences may be material. Because we actively manage our investments and liabilities, our net exposure to interest rates can vary over time. However, any such decreases in the fair value of our fixed maturity securities (unless related to credit concerns of the issuer requiring recognition of a credit loss) would generally be realized only if we were required to sell such securities at losses prior to their maturity to meet our liquidity needs, which we manage using the surrender and withdrawal provisions of our annuity contracts and through other means. See Financial Condition - Liquidity for Insurance Operations included in Management's Discussion and Analysis in our Annual Report on Form 10-K for the year ended December 31, 2019 for a further discussion of liquidity risk.

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The amortized cost of fixed maturity securities that are callable at the option of the issuer, excluding securities with a make-whole provision, was $7.6 billion as of June 30, 2020. We have reinvestment risk related to these redemptions to the extent we cannot reinvest the net proceeds in assets with credit quality and yield characteristics similar to the redeemed bonds. Such reinvestment risk typically occurs in a declining rate environment. In addition, we have $4.9 billion of floating rate fixed maturity securities as of June 30, 2020. Generally, interest rates on these floating rate fixed maturity securities are based on the 3 month LIBOR rate and are reset quarterly. Should rates decline to levels which tighten the spread between our average portfolio yield and average cost of interest credited on annuity liabilities, we have the ability to reduce crediting rates (caps, participation rates or asset fees for fixed index annuities) on most of our annuity liabilities to maintain the spread at our targeted level. At June 30, 2020, approximately 99% of our annuity liabilities were subject to annual adjustment of the applicable crediting rates at our discretion, limited by minimum guaranteed crediting rates specified in the policies. At June 30, 2020, approximately 19% of our annuity liabilities were at minimum guaranteed crediting rates.

We purchase call options on the applicable indices to fund the annual index credits on our fixed index annuities. These options are primarily one-year instruments purchased to match the funding requirements of the underlying policies. Fair value changes associated with those investments are substantially offset by an increase or decrease in the amounts added to policyholder account balances for fixed index products. The difference between proceeds received at expiration of these options and index credits, as shown in the following table, is primarily due to under or over-hedging as a result of policyholder behavior being different than our expectations.



	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
	(Dollars in thousands)
Proceeds received at expiration of options related to such credits	$	97,015	$	166,430	$	382,278	$	224,890
Annual index credits to policyholders on their anniversaries	97,875		161,752		376,815		217,677

On the anniversary dates of the index policies, we purchase new one-year call options to fund the next annual index credits. The risk associated with these prospective purchases is the uncertainty of the cost, which will determine whether we are able to earn our spread on our fixed index business. We manage this risk through the terms of our fixed index annuities, which permit us to change caps, participation rates and asset fees, subject to contractual features. By modifying caps, participation rates or asset fees, we can limit option costs to budgeted amounts, except in cases where the contractual features would prevent further modifications. Based upon actuarial testing which we conduct as a part of the design of our fixed index products and on an ongoing basis, we believe the risk that contractual features would prevent us from controlling option costs is not material.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

In accordance with the Securities Exchange Act Rules 13a-15(e) and 15d-15(e), our management, under the supervision of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded the design and operation of our disclosure controls and procedures were effective as of June 30, 2020 in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by us in the reports that we file or submit under the Exchange Act.

There were no changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 7 - Commitments and Contingencies to the unaudited consolidated financial statements in this Form 10-Q, which is incorporated by reference in this Item 1, for litigation and regulatory disclosures.

Item 1A. Risk Factors

Our 2019 Annual Report on Form 10-K described our Risk Factors. We added the risk factor titled Major public health issues, specifically the COVID-19 pandemic, and the resulting economic uncertainty, may adversely impact our business, financial condition and results of operations in our Form 10-Q for the quarterly period ended March 31, 2020.

In addition, the risk factor from our 2019 Annual Report on Form 10-K titled Changes in state and federal laws and regulation may adversely affect our business, financial condition, results of operations and cash flows has been revised as follows to reflect the Department of Labor issuing a proposed new fiduciary regulation on June 29, 2020 related to the provision of investment advice in retirement accounts. There have been no other material changes to the Risk Factors during the six months ended June 30, 2020.

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Changes in state and federal laws and regulation may adversely affect our business, financial condition, results of operations and cash flows.

We are subject to regulation under applicable insurance statutes, including insurance holding company statutes, in the various states in which our life insurance subsidiaries transact business. Our life insurance subsidiaries are domiciled in Iowa and New York. We are currently licensed to sell our products in 50 states and the District of Columbia. Insurance regulation is intended to provide safeguards for policyholders rather than to protect shareholders of insurance companies or their holding companies. As increased scrutiny has been placed upon the insurance regulatory framework, a number of state legislatures have considered or enacted legislative proposals that alter, and in many cases increase, state authority to regulate insurance companies and holding company systems.

Regulators oversee matters relating to trade practices, policy forms, claims practices, guaranty funds, types and amounts of investments, reserve adequacy, insurer solvency, minimum amounts of capital and surplus, transactions with related parties, changes in control and payment of dividends.

The NAIC and state insurance regulators continually reexamine existing laws and regulations. The NAIC may develop and recommend adoption of new or modify existing Model Laws and Regulations. State insurance regulators may impose those recommended changes, or others, in the future. The NAIC has adopted best interest enhancements to the existing Suitability in Annuity Transactions Model Law. Several states have adopted the best interest standard with effective dates in 2021. Additional states are expected to adopt the best interest standard in the near future. Some states may adopt a heightened fiduciary standard of conduct.

Our life insurance subsidiaries are subject to state insurance regulations based on the NAIC's risk-based capital requirements which are intended to be used by insurance regulators as an early warning tool to identify deteriorating or weakly capitalized insurance companies for the purpose of initiating regulatory action. Our life insurance subsidiaries also may be required, under solvency or guaranty laws of most states in which they do business, to pay assessments up to certain prescribed limits to fund policyholder losses or liabilities for insolvent insurance companies.

Although the federal government does not directly regulate the insurance business, federal legislation and administrative policies in several areas, including financial services regulation, securities regulation, federal taxation and employment matters, can significantly affect the insurance business. Heightened standards of conduct as a result of a fiduciary or best interest standard or other similar rules or regulations could increase the compliance and regulatory burdens on our representatives. On June 29, 2020, the Department of Labor (DOL) issued a proposed new fiduciary regulation and interpretative guidance regarding the provision of investment advice in retirement accounts. The proposed DOL fiduciary regulation is subject to public comment. The requirements of any regulation that may be adopted cannot be predicted as this time. In addition, legislation has been enacted which could result in the federal government assuming some role in the regulation of the insurance industry.

In July 2010, the Dodd-Frank Act became law. The Dodd-Frank Act made extensive changes to the laws regulating the financial services industry and requires various federal agencies to adopt a broad range of new rules and regulations, including those surrounding the use of derivatives. The Dodd-Frank Act and any such regulations may subject us to additional restrictions on our derivative positions which may have an adverse effect on our ability to manage risks associated with our business, including our fixed index annuity business, or on the cost of the derivatives purchased for our fixed index annuity business.

We are subject to numerous federal and state regulations regarding the privacy and security of personal information. These laws vary by jurisdiction. Recent regulations with a significant impact on our operations include the New York Department of Financial Services Part 500 cybersecurity requirements for financial services companies and the California Consumer Privacy Act. The New York Department of Financial Services Part 500 cybersecurity requirements became effective January 1, 2017 and focus on minimum standards for cybersecurity programs. The California Consumer Privacy Act became effective January 1, 2020 and contains protections for individuals, including but not limited to notification requirements for data breaches, the right to access personal data and the right to be forgotten. It applies to companies doing business in California. Similar standards are set forth in the NAIC’s Insurance Data Security Model Law. It is anticipated that additional federal and state regulations will be enacted in the future. Changes in cybersecurity and privacy regulations or the enactment of new regulations may increase our compliance costs and failure to comply with these regulations may lead to reputational damage, fines or civil damages, and increased regulatory scrutiny.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Securities

The following table presents the amount of our share purchase activity for the periods indicated:



Period	Total Number of Shares Purchased (a)	Average Price Paid Per Share
January 1, 2020 - January 31, 2020	357	$	29.89
February 1, 2020 - February 29, 2020	—	$	—
March 1, 2020 - March 31, 2020	10,169	$	18.70
April 1, 2020 - April 30, 2020	—	$	—
May 1, 2020 - May 31, 2020	—	$	—
June 1, 2020 - June 30, 2020	234	$	24.68
Total	10,760


(a)	Includes the number of shares of common stock utilized to execute certain stock incentive awards.

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Item 6. Exhibits



Exhibit Number		Description
10.1		Form of Restricted Stock Unit Award Agreement
10.2		Form of Performance Restricted Stock Unit Award Agreement
10.3		Form of Employee Stock Option Agreement
10.4		American Equity Investment Life Holding Company Amended and Restated Equity Incentive Plan (Incorporated by reference to the Appendix A to the Company's proxy statement on Form DEF 14A filed on April 24, 2020)
31.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		The following materials from American Equity Investment Life Holding Company's Quarterly Report on Form 10-Q for the period ended June 30, 2020 formatted in iXBRL (Inline eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders' Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to Unaudited Consolidated Financial Statements.
104		The cover page from American Equity Investment Life Holding Company's Quarterly Report on Form 10-Q for the period ended June 30, 2020 formatted in iXBRL and contained in Exhibit 101.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



Date:	August 10, 2020	AMERICAN EQUITY INVESTMENT LIFE
		HOLDING COMPANY

		By:	/s/ Ted M. Johnson
			Ted M. Johnson, Chief Financial Officer and Treasurer
			(Principal Financial Officer and Duly Authorized Officer)

		By:	/s/ Scott A. Samuelson
			Scott A. Samuelson, Vice President and Chief Accounting Officer
			(Principal Accounting Officer)