The Company’s investment portfolio includes free-standing derivative financial instruments (currently over the counter (“OTC”) index call option contracts) to economically hedge risk associated with its fixed indexed annuity (“FIA”) and indexed universal life (“IUL”) products’ contingent liabilities. The Company’s FIA and IUL products include embedded derivative features that are discussed in “Note 1 -- Summary of Significant Accounting Policies -- Investment Contract and Life Policy Reserves -- Reserves for Fixed Indexed Annuities and Indexed Universal Life Policies” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The Company’s investment portfolio included no other free-standing derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics), and there were no other embedded derivative features related to the Company’s investment or insurance products during the six months ended June 30, 2017 and 2016.

Fixed Maturity and Equity Securities

The Company’s investment portfolio is comprised primarily of fixed maturity securities and also includes equity securities. The amortized cost or cost, unrealized investment gains and losses, fair values and other-than-temporary impairment (“OTTI”) included in accumulated other comprehensive income (“AOCI”) of all fixed maturity and equity securities in the portfolio were as follows:



($ in thousands)	Amortized Cost or Cost		Unrealized Investment Gains		Unrealized Investment Losses		Fair Value		OTTI in AOCI (1)
June 30, 2017
Fixed maturity securities
U.S. Government and federally sponsored agency obligations (2):
Mortgage-backed securities	$	589,643	$	36,054	$	2,633	$	623,064	$	—
Other, including
U.S. Treasury securities	588,713		23,550		5,913		606,350		—
Municipal bonds	1,659,648		168,001		10,429		1,817,220		—
Foreign government bonds	93,779		6,272		5		100,046		—
Corporate bonds	2,645,268		186,601		4,261		2,827,608		—
Other mortgage-backed securities	1,584,866		26,076		6,645		1,604,297		1,447
Totals	$	7,161,917	$	446,554	$	29,886	$	7,578,585	$	1,447

Equity securities (3)	$	140,553	$	17,911	$	1,555	$	156,909	$	—

December 31, 2016
Fixed maturity securities
U.S. Government and federally sponsored agency obligations (2):
Mortgage-backed securities	$	587,355	$	34,256	$	6,720	$	614,891	$	—
Other, including
U.S. Treasury securities	458,745		18,518		10,120		467,143		—
Municipal bonds	1,648,252		143,733		22,588		1,769,397		—
Foreign government bonds	93,864		5,102		297		98,669		—
Corporate bonds	2,672,818		152,229		14,826		2,810,221		—
Other mortgage-backed securities	1,691,093		21,153		15,859		1,696,387		1,618
Totals	$	7,152,127	$	374,991	$	70,410	$	7,456,708	$	1,618

Equity securities (3)	$	134,013	$	13,210	$	5,574	$	141,649	$	—

(1)

Related to securities for which an unrealized loss was bifurcated to distinguish the credit-related portion and the portion driven by other market factors. Represents the amount of OTTI losses in AOCI which was not included in earnings; amounts also include net unrealized investment gains and losses on such impaired securities relating to changes in the fair value of those securities subsequent to the impairment measurement date.


(2)	Fair value includes securities issued by Federal National Mortgage Association (“FNMA”) of $310,403 thousand and $272,668 thousand; Federal Home Loan Mortgage Corporation (“FHLMC”) of $368,396 thousand and $378,683 thousand; and Government National Mortgage Association (“GNMA”) of $111,458 thousand and $115,627 thousand as of June 30, 2017 and December 31, 2016, respectively.


(3)	Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.

The following table presents the fair value and gross unrealized losses of fixed maturity and equity securities in an unrealized loss position at June 30, 2017 and December 31, 2016, respectively. The Company views the decrease in value of all of the securities with unrealized losses at June 30, 2017 -- which was driven largely by changes in interest rates, spread widening, financial market illiquidity and/or market volatility from the date of acquisition -- as temporary. For fixed maturity securities, management does not have the intent to sell the securities and it is not more likely than not the Company will be required to sell the securities before the anticipated recovery of the amortized cost bases, and management expects to recover the entire amortized cost bases of the fixed maturity securities. For equity securities, the Company has the ability and intent to hold the securities for the recovery of cost and recovery of cost is expected within a reasonable period of time.



($ in thousands)	12 Months or Less					More than 12 Months					Total
	Fair Value			Gross Unrealized Losses		Fair Value			Gross Unrealized Losses		Fair Value			Gross Unrealized Losses
June 30, 2017
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	101,350		$	2,320	$	3,480		$	313	$	104,830		$	2,633
Other	223,396			5,913		—			—		223,396			5,913
Municipal bonds	179,314			6,893		10,023			3,536		189,337			10,429
Foreign government bonds	1,980			5		—			—		1,980			5
Corporate bonds	157,230			2,949		26,907			1,312		184,137			4,261
Other mortgage-backed securities	449,341			4,764		133,899			1,881		583,240			6,645
Total fixed maturity securities	1,112,611			22,844		174,309			7,042		1,286,920			29,886
Equity securities (1)	8,748			727		4,863			828		13,611			1,555
Combined totals	$	1,121,359		$	23,571	$	179,172		$	7,870	$	1,300,531		$	31,441

Number of positions with a gross unrealized loss	413					60					473
Fair value as a percentage of total fixed maturity and equity securities fair value	14.5		%			2.3		%			16.8		%

December 31, 2016
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	186,439		$	6,176	$	3,235		$	544	$	189,674		$	6,720
Other	219,372			10,120		—			—		219,372			10,120
Municipal bonds	408,163			19,006		9,928			3,582		418,091			22,588
Foreign government bonds	24,182			297		—			—		24,182			297
Corporate bonds	459,402			11,056		57,261			3,770		516,663			14,826
Other mortgage-backed securities	640,691			10,470		229,106			5,389		869,797			15,859
Total fixed maturity securities	1,938,249			57,125		299,530			13,285		2,237,779			70,410
Equity securities (1)	56,676			4,567		7,956			1,007		64,632			5,574
Combined totals	$	1,994,925		$	61,692	$	307,486		$	14,292	$	2,302,411		$	75,984

Number of positions with a gross unrealized loss	629					102					731
Fair value as a percentage of total fixed maturity and equity securities fair value	26.3		%			4.0		%			30.3		%


(1)	Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.

Fixed maturity and equity securities with an investment grade rating represented 82% of the gross unrealized losses as of June 30, 2017. With respect to fixed maturity securities involving securitized financial assets, the underlying collateral cash flows were stress tested to determine there was no adverse change in the present value of cash flows below the amortized cost basis.

Credit Losses

The following table summarizes the cumulative amounts related to the Company’s credit loss component of OTTI losses on fixed maturity securities held as of June 30, 2017 and 2016 that the Company did not intend to sell as of those dates, and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of the amortized cost bases, for which the non-credit portions of OTTI losses were recognized in other comprehensive income:



($ in thousands)	Six Months Ended June 30,
	2017			2016
Cumulative credit loss (1)
Beginning of period	$	13,703		$	7,844
New credit losses	—			300
Increases to previously recognized credit losses	1,910			2,480
Gains related to securities sold or paid down during the period	(2		)	—
End of period	$	15,611		$	10,624


(1)	The cumulative credit loss amounts exclude OTTI losses on securities held as of the periods indicated that the Company intended to sell or it was more likely than not that the Company would be required to sell the security before the recovery of the amortized cost basis.

Maturities/Sales of Fixed Maturity and Equity Securities

The following table presents the distribution of the Company’s fixed maturity securities portfolio by estimated expected maturity. Estimated expected maturities differ from contractual maturities, reflecting assumptions regarding borrowers’ utilization of the right to call or prepay obligations with or without call or prepayment penalties. For structured securities, including mortgage-backed securities and other asset-backed securities, estimated expected maturities consider broker-dealer survey prepayment assumptions and are verified for consistency with the interest rate and economic environments.



($ in thousands)	Percent of Total Fair Value				June 30, 2017
	June 30, 2017		December 31, 2016		Fair Value		Amortized Cost
Estimated expected maturity:
Due in 1 year or less	3.6	%	3.9	%	$	275,005	$	269,431
Due after 1 year through 5 years	27.4		28.7		2,079,595		1,981,639
Due after 5 years through 10 years	34.1		35.2		2,580,296		2,478,678
Due after 10 years through 20 years	22.8		19.5		1,729,382		1,609,894
Due after 20 years	12.1		12.7		914,307		822,275
Total	100.0	%	100.0	%	$	7,578,585	$	7,161,917

Average option-adjusted duration, in years	6.0		5.9

Proceeds received from sales of fixed maturity and equity securities, each determined using the specific identification method, and gross gains and gross losses realized as a result of those sales for each period were:



($ in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Fixed maturity securities
Proceeds received	$	118,818		$	174,944		$	229,690		$	257,033
Gross gains realized	4,080			8,382			6,569			10,858
Gross losses realized	(496		)	(948		)	(1,377		)	(1,440		)

Equity securities
Proceeds received	$	11,507		$	6,474		$	16,996		$	12,622
Gross gains realized	1,702			650			2,750			1,170
Gross losses realized	(236		)	(195		)	(428		)	(841		)

Net Unrealized Investment Gains and Losses on Fixed Maturity and Equity Securities

Net unrealized investment gains and losses are computed as the difference between fair value and amortized cost for fixed maturity securities or cost for equity securities. The following table reconciles the net unrealized investment gains and losses, net of tax, included in accumulated other comprehensive income (loss), before the impact on deferred policy acquisition costs:



($ in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Net unrealized investment gains and losses on fixed maturity securities, net of tax
Beginning of period	$	219,385		$	276,381		$	197,978		$	198,714
Change in net unrealized investment gains and losses	51,523			89,744			73,414			168,085
Reclassification of net realized investment gains to net income	(74		)	5,331			(558		)	4,657
End of period	$	270,834		$	371,456		$	270,834		$	371,456

Net unrealized investment gains and losses on equity securities, net of tax
Beginning of period	$	8,952		$	5,030		$	4,963		$	2,649
Change in net unrealized investment gains and losses	2,670			4,710			5,972			6,898
Reclassification of net realized investment losses to net income	(991		)	(1,557		)	(304		)	(1,364		)
End of period	$	10,631		$	8,183		$	10,631		$	8,183

Offsetting of Assets and Liabilities

The Company’s derivative instruments (call options) are subject to enforceable master netting arrangements. Collateral support agreements associated with each master netting arrangement provide that the Company will receive or pledge financial collateral in the event minimum thresholds are reached.

The following table presents the instruments that were subject to a master netting arrangement for the Company.



($ in thousands)			Gross Amounts Offset in the		Net Amounts of Assets/ Liabilities Presented in the		Gross Amounts Not Offset in the Consolidated Balance Sheets
	Gross Amounts		Consolidated Balance Sheets		Consolidated Balance Sheets		Financial Instruments		Cash Collateral Received		Net Amount
June 30, 2017
Asset derivatives:
Free-standing derivatives	$	9,969	$	—	$	9,969	$	—	$	10,959	$	(990	)

December 31, 2016
Asset derivatives:
Free-standing derivatives	$	8,694	$	—	$	8,694	$	—	$	8,824	$	(130	)

Deposits

At June 30, 2017 and December 31, 2016, fixed maturity securities with a fair value of $18,038 thousand and $18,119 thousand, respectively, were on deposit with governmental agencies as required by law in various states in which the insurance subsidiaries of HMEC conduct business. In addition, at June 30, 2017 and December 31, 2016, fixed maturity securities with a fair value of $621,068 thousand and $620,489 thousand, respectively, were on deposit with the Federal Home Loan Bank of Chicago (“FHLB”) as collateral for amounts subject to funding agreements which were equal to $575,000 thousand at both of the respective dates. The deposited securities are included in Fixed maturity securities on the Company’s Consolidated Balance Sheets.