(4) Investments

AFS Securities. The period-end cost or amortized cost, gross unrealized gains and losses, and fair value of AFS fixed-maturity and equity securities were as follows:

	December 31, 2017
	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In thousands)
Securities available-for-sale, carried at fair value:
Fixed-maturity securities:
U.S. government and agencies	$	11,577	$	283	$	(47	)	$	11,813
Foreign government		139,486		5,651		(648	)		144,489
States and political subdivisions		54,714		1,554		(141	)		56,127
Corporates		1,337,321		42,616		(3,655	)		1,376,282
Residential mortgage-backed securities		119,672		3,583		(297	)		122,958
Commercial mortgage-backed securities		134,003		2,299		(910	)		135,392
Other asset-backed securities		80,553		452		(224	)		80,781
Total fixed-maturity securities⁽¹⁾		1,877,326		56,438		(5,922	)		1,927,842
Equity securities		31,331		9,796		(20	)		41,107
Total fixed-maturity and equity securities	$	1,908,657	$	66,234	$	(5,942	)	$	1,968,949

⁽¹⁾	Includes approximately $0.2 million of OTTI losses related to corporates and mortgage- and asset-backed securities recognized in accumulated other comprehensive income.

	December 31, 2016
	Cost or amortized cost		Gross unrealized gains		Gross unrealized losses			Fair value
	(In thousands)
Securities available-for-sale, carried at fair value:
Fixed-maturity securities:
U.S. government and agencies	$	10,148	$	350	$	(24	)	$	10,474
Foreign government		124,274		5,719		(687	)		129,306
States and political subdivisions		43,950		1,903		(129	)		45,724
Corporates		1,281,630		49,272		(5,529	)		1,325,373
Residential mortgage-backed securities		94,708		4,963		(120	)		99,551
Commercial mortgage-backed securities		107,201		2,712		(470	)		109,443
Other asset-backed securities		72,772		98		(303	)		72,567
Total fixed-maturity securities⁽¹⁾		1,734,683		65,017		(7,262	)		1,792,438
Equity securities		36,818		8,589		(513	)		44,894
Total fixed-maturity and equity securities	$	1,771,501	$	73,606	$	(7,775	)	$	1,837,332

⁽¹⁾	Includes approximately $0.1 million of OTTI losses related to corporates and mortgage- and asset-backed securities recognized in accumulated other comprehensive income.

All of our AFS mortgage- and asset-backed securities represent variable interests in variable interest entities (“VIEs”). We are not the primary beneficiary of these VIEs because we do not have the power to direct the activities that most significantly impact the entities’ economic performance. The maximum exposure to loss as a result of our involvement in these VIEs equals the carrying value of the securities.

The scheduled maturity distribution of the AFS fixed-maturity portfolio at December 31, 2017 was as follows:

	Amortized cost		Fair value
	(In thousands)
Due in one year or less	$	145,260	$	147,078
Due after one year through five years		808,100		831,979
Due after five years through 10 years		537,979		552,982
Due after 10 years		51,759		56,672
		1,543,098		1,588,711
Mortgage- and asset-backed securities		334,228		339,131
Total fixed-maturity securities	$	1,877,326	$	1,927,842

Expected maturities may differ from scheduled contractual maturities because issuers of securities may have the right to call or prepay obligations with or without call or prepayment penalties.

Unrealized Gains and Losses on Investments. The net effect on stockholders’ equity of unrealized gains and losses on AFS securities was as follows:

	December 31, 2017			December 31, 2016
	(In thousands)
Net unrealized investment gains including OTTI:
Fixed-maturity and equity securities	$	60,292		$	65,831
OTTI		174			95
Net unrealized investment gains excluding OTTI		60,466			65,926
Deferred income taxes		(20,780	)		(23,074	)
Net unrealized investment gains excluding OTTI, net of tax	$	39,686		$	42,852

Trading Securities. The costs and fair values of the fixed-maturity and equity securities classified as trading securities were as follows:

	December 31, 2017				December 31, 2016
	Cost		Fair value		Cost		Fair value
	(In thousands)
Fixed-maturity securities	$	4,801	$	4,800	$	7,332	$	7,332
Equity securities		1,371		1,428		50		51
Total fixed-maturity and equity securities	$	6,172	$	6,228	$	7,382	$	7,383

Held-to-maturity Security. Concurrent with the execution of the Vidalia Re Coinsurance Agreement, Vidalia Re entered into a Surplus Note Purchase Agreement (the “Surplus Note Purchase Agreement”) with Hannover Life Reassurance Company of America and certain of its affiliates (collectively, “Hannover Re”) and a newly formed limited liability company (the “LLC”) owned by a third- party service provider. Under the Surplus Note Purchase Agreement, Vidalia Re issued a surplus note (the “Surplus Note”) to the LLC in exchange for a credit enhanced note from the LLC with an equal principal amount (the “LLC Note”). The principal amount of both the LLC Note and the Surplus Note will fluctuate over time to coincide with the amount of reserves contractually supported under the Vidalia Re Coinsurance Agreement. Both the LLC Note and the Surplus Note mature on December 31, 2030 and bear interest at an annual interest rate of 4.50%. The LLC Note is guaranteed by Hannover Re through a credit enhancement feature in exchange for a fee, which is reflected in interest expense on our consolidated statements of income.

The LLC is a VIE as its owner does not have an equity investment at risk that is sufficient to permit the LLC to finance its activities without Vidalia Re or Hannover Re. The Parent Company, Primerica Life, and Vidalia Re share the power to direct the activities of the LLC with Hannover Re, but do not have the obligation to absorb losses or the right to receive any residual returns related to the LLC’s primary risks or sources of variability. Through the credit enhancement feature, Hannover Re is the ultimate risk taker in this transaction and bears the obligation to absorb the LLC’s losses in the event of a Surplus Note default in exchange for the fee. Accordingly, the Company is not the primary beneficiary of the LLC and does not consolidate the LLC within its consolidated financial statements.

The LLC Note is classified as a held-to-maturity debt security in the Company’s invested asset portfolio as we have the positive intent and ability to hold the security until maturity. As of December 31, 2017, the LLC Note, which was rated A+ by Fitch Ratings, had an estimated unrealized holding gain of approximately $42.3 million based on its amortized cost and estimated fair value, which is derived using the valuation techniques described in Note 5 (Fair Value of Financial Instruments).

See Note 10 (Debt) for more information on the Surplus Note.

Investments on Deposit with Governmental Authorities. As required by law, we have investments on deposit with governmental authorities and banks for the protection of policyholders. The fair values of investments on deposit were approximately $11.1 million and $18.2 million as of December 31, 2017 and 2016, respectively.

Securities Lending Transactions. We participate in securities lending transactions with broker-dealers and other financial institutions to increase investment income with minimal risk. We require minimum collateral on securities loaned equal to 102% of the fair value of the loaned securities. We accept collateral in the form of securities, which we are not able to sell or encumber, and to the extent the collateral declines in value below 100%, we require additional collateral from the borrower. Any securities collateral received is not reflected on our consolidated balance sheets. We also accept collateral in the form of cash, all of which we reinvest. For loans involving unrestricted cash collateral, the collateral is reported as an asset with a corresponding liability representing our obligation to return the collateral. We continue to carry the loaned securities as invested assets on our consolidated balance sheets during the terms of the loans, and we do not report them as sales. Cash collateral received and reinvested was approximately $89.8 million and $73.6 million as of December 31, 2017 and 2016, respectively.

Investment Income. The components of net investment income were as follows:

	Year ended December 31,
	2017			2016			2015
	(In thousands)
Fixed-maturity securities (available-for-sale)	$	76,877		$	74,673		$	77,271
Fixed-maturity security (held-to-maturity)		26,865			18,880			13,048
Equity securities		2,095			2,053			2,059
Policy loans and other invested assets		1,413			1,340			1,368
Cash and cash equivalents		1,123			632			228
Total return on deposit asset underlying 10% coinsurance agreement		2,970			5,212			482
Gross investment income		111,343			102,790			94,456
Investment expenses		(5,461	)		(4,885	)		(4,899	)
Investment income net of investment expenses		105,882			97,905			89,557
Interest expense on surplus note		(26,865	)		(18,880	)		(13,048	)
Net investment income	$	79,017		$	79,025		$	76,509

The components of net realized investment gains (losses), as well as details on gross realized investment gains and (losses) and proceeds from sales or other redemptions were as follows:

	Year ended December 31,
	2017			2016			2015
	(In thousands)
Net realized investment gains (losses):
Gross gains from sales	$	3,249		$	8,126		$	5,762
Gross losses from sales		(107	)		(751	)		(465	)
OTTI losses		(1,553	)		(3,420	)		(6,893	)
Gains (losses) from bifurcated options		(250	)		133			(142	)
Net realized investment gains (losses)	$	1,339		$	4,088		$	(1,738	)

OTTI. We conduct a review each quarter to identify and evaluate impaired investments that have indications of possible OTTI. An investment in a debt or equity security is impaired if its fair value falls below its cost. Factors considered in determining whether an impairment is temporary include the length of time and extent to which fair value has been below cost, the financial condition and near-term prospects for the issue, and our ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery, which may be maturity for fixed-maturity securities or within a reasonable period of time for equity securities.

Our review for OTTI generally entails:

•

Analysis of individual investments that have fair values less than a pre-defined percentage of amortized cost, including consideration of the length of time the investment has been in an unrealized loss position;

•

Analysis of corporate fixed-maturity securities by reviewing the issuer’s most recent performance to date, including analyst reviews, analyst outlooks and rating agency information;

•

Analysis of commercial mortgage-backed securities based on an assessment of performance to date, credit enhancement, risk analytics and outlook, underlying collateral, loss projections, rating agency information and available third-party reviews and analytics;

•

Analysis of residential mortgage-backed securities based on loss projections provided by models compared to current credit enhancement levels;

•

Analysis of our other fixed-maturity and equity security investments, as required based on the type of investment; and

•

Analysis of downward credit migrations that occurred during the quarter.

AFS fixed-maturity and equity securities with a cost basis in excess of their fair values were approximately $529.2 million and $450.9 million as of December 31, 2017 and 2016, respectively.

The following tables summarize, for all AFS securities in an unrealized loss position, the aggregate fair value and the gross unrealized loss by length of time such securities have continuously been in an unrealized loss position:

	December 31, 2017
	Less than 12 months							12 months or longer
	Fair value		Unrealized losses			Number of securities		Fair value		Unrealized losses			Number of securities
	(Dollars in thousands)
Fixed-maturity securities:
U.S. government and agencies	$	4,754	$	(34	)		5	$	2,975	$	(13	)		3
Foreign government		40,287		(465	)		45		7,102		(183	)		7
States and political subdivisions		7,369		(43	)		7		6,267		(98	)		7
Corporates		247,613		(2,323	)		216		39,767		(1,332	)		43
Residential mortgage-backed securities		33,610		(263	)		16		2,592		(34	)		8
Commercial mortgage-backed securities		60,116		(394	)		52		22,149		(516	)		25
Other asset-backed securities		32,605		(121	)		33		14,819		(103	)		19
Total fixed-maturity securities		426,354		(3,643	)				95,671		(2,279	)
Equity securities		1,076		(16	)		4		170		(4	)		2
Total fixed-maturity and equity securities	$	427,430	$	(3,659	)			$	95,841	$	(2,283	)

	December 31, 2016
	Less than 12 months							12 months or longer
	Fair value		Unrealized losses			Number of securities		Fair value		Unrealized losses			Number of securities
	(Dollars in thousands)
Fixed-maturity securities:
U.S. government and agencies	$	3,668	$	(24	)		4	$	-	$	-			-
Foreign government		34,538		(526	)		36		3,048		(161	)		3
States and political subdivisions		8,902		(129	)		12		-		-			-
Corporates		232,070		(3,484	)		225		45,471		(2,045	)		51
Residential mortgage-backed securities		15,232		(92	)		9		3,606		(28	)		9
Commercial mortgage-backed securities		33,335		(423	)		33		7,663		(47	)		11
Other asset-backed securities		48,275		(260	)		45		1,315		(43	)		3
Total fixed-maturity securities		376,020		(4,938	)				61,103		(2,324	)
Equity securities		4,179		(269	)		12		1,852		(244	)		8
Total fixed-maturity and equity securities	$	380,199	$	(5,207	)			$	62,955	$	(2,568	)

The amortized cost and fair value of AFS fixed-maturity securities in default were as follows:

	December 31, 2017				December 31, 2016
	Amortized cost		Fair value		Amortized cost		Fair value
	(In thousands)
Fixed-maturity securities in default	$	503	$	654	$	5	$	125

OTTI recognized in earnings on AFS securities were as follows:

	Year ended December 31,
	2017		2016		2015
	(In thousands)
OTTI on fixed-maturity securities not in default	$	1,001	$	3,257	$	5,108
OTTI on fixed-maturity securities in default		267		121		29
OTTI on equity securities		285		42		1,756
Total OTTI recognized in earnings	$	1,553	$	3,420	$	6,893

The securities noted above were considered to be other-than-temporarily impaired due to our intent to sell them; adverse credit events, such as news of an impending filing for bankruptcy; analyses of the issuer’s most recent financial statements or other information in which liquidity deficiencies, significant losses and large declines in capitalization were evident; or analyses of rating agency information for issuances with severe ratings downgrades that indicated a significant increase in the possibility of default. We also recognized OTTI related to invested assets held at the Parent Company that we intended to sell to fund share repurchases, as well as impairments on equity securities where we do not expect to recover its cost basis.

As of December 31, 2017, the unrealized losses on our AFS invested asset portfolio were largely caused by interest rate sensitivity and changes in credit spreads. We believe that fluctuations caused by movement in interest rates and credit spreads have little bearing on the recoverability of our investments. We do not consider these investments to be other-than-temporarily impaired because we have the ability to hold these investments until maturity or a market price recovery, and we have no present intention to dispose of them.

OTTI recognized in earnings for AFS securities were as follows:

	Year ended December 31,
	2017		2016		2015
	(In thousands)
Total OTTI related to securities which the Company does not intend to sell or more-likely-than-not will not be required to sell:
Total OTTI losses recognized	$	1,476	$	1,486	$	706
Less portion of OTTI recognized in accumulated other comprehensive income (loss)		147		-		-
OTTI recognized in earnings for securities which the Company does not intend to sell or more-likely than-not will not be required to sell		1,329		1,486		706
OTTI recognized in earnings for securities which the Company intends to sell or more-likely-than-not will be required to sell before recovery		224		1,934		6,187
OTTI recognized in earnings	$	1,553	$	3,420	$	6,893

The rollforward of the OTTI recognized in net income for all fixed-maturity securities still held was as follows:

	Year ended December 31,
	2017			2016
	(In thousands)
Cumulative OTTI recognized in net income for securities still held, beginning of period	$	5,774		$	11,856
Additions for securities where no OTTI were recognized prior to the beginning of the period		351			1,694
Additions for securities where OTTI have been recognized prior to the beginning of the period		917			1,684
Reductions due to sales, maturities, calls, amortization or increases in cash flows expected to be collected over the remaining life of credit impaired securities		(1,513	)		(7,114	)
Reductions for exchanges of securities previously impaired		(1,183	)		(2,346	)
Cumulative OTTI recognized in net income for securities still held, end of period	$	4,346		$	5,774

As of December 31, 2017, no OTTI have been recognized on the LLC Note held-to-maturity security.

Derivatives. Embedded conversion options associated with fixed-maturity securities are bifurcated from the fixed-maturity security host contracts and separately recognized as equity securities. The change in fair value of these bifurcated conversion options is reflected in realized investment gains (losses), including OTTI losses. As of December 31, 2017 and 2016, the fair value of these bifurcated options was approximately $0.9 million and $4.3 million, respectively.

We have a deferred loss related to closed forward contracts, which were settled several years ago, that were used to mitigate our exposure to foreign currency exchange rates that resulted from the net investment in our Canadian operations. The amount of deferred loss included in accumulated other comprehensive income was approximately $26.4 million as of December 31, 2017 and 2016. These deferred losses will not be recognized until such time as we sell or substantially liquidate our Canadian operations, although we have no such intention.