Investments

6 Months Ended

Jun. 30, 2018

Investments, Debt and Equity Securities [Abstract]

Investments

The Company’s investment portfolio includes free-standing derivative financial instruments (currently over the counter 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, 2017. 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 month periods ended June 30, 2018 and 2017.

Fixed Maturity Securities

The Company’s investment portfolio is comprised primarily of fixed maturity securities. The amortized cost, net unrealized investment gains and losses and fair values of all fixed maturity securities in the portfolio were as follows:

($ in thousands)	Amortized Cost/Cost		Unrealized Investment Gains		Unrealized Investment Losses		Fair Value
June 30, 2018 (1)
Fixed maturity securities
U.S. Government and federally sponsored agency obligations (2):
Mortgage-backed securities	$	704,330	$	19,586	$	16,592	$	707,324
Other, including U.S. Treasury securities	790,687		15,444		23,908		782,223
Municipal bonds	1,696,693		141,937		11,119		1,827,511
Foreign government bonds	92,872		3,217		584		95,505
Corporate bonds	2,342,531		82,113		26,920		2,397,724
Other mortgage-backed securities	1,664,910		15,663		15,295		1,665,278
Totals	$	7,292,023	$	277,960	$	94,418	$	7,475,565
December 31, 2017
Fixed maturity securities
U.S. Government and federally sponsored agency obligations (2):
Mortgage-backed securities	$	669,297	$	30,460	$	3,032	$	696,725
Other, including U.S. Treasury securities	714,613		26,311		5,516		735,408
Municipal bonds	1,711,581		184,107		2,435		1,893,253
Foreign government bonds	96,780		5,958		—		102,738
Corporate bonds	2,409,426		173,862		4,334		2,578,954
Other mortgage-backed securities	1,701,253		22,935		7,191		1,716,997
Totals	$	7,302,950	$	443,633	$	22,508	$	7,724,075
Equity securities (3)	$	116,320	$	19,425	$	279	$	135,466

________________

(1) Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, available for sale equity securities were reclassified to equity securities at fair value and are excluded from the table above as of June 30, 2018.

(2) Fair value includes securities issued by Federal National Mortgage Association (FNMA) of $384,676 thousand and $361,955 thousand; Federal Home Loan Mortgage Corporation (FHLMC) of $395,043 thousand and $400,001 thousand; and Government National Mortgage Association (GNMA) of $97,103 thousand and $104,168 thousand as of June 30, 2018 and December 31, 2017, 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 securities in an unrealized loss position at June 30, 2018 and December 31, 2017, respectively. The Company views the decrease in value of all of the securities with unrealized losses at June 30, 2018 -- 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. Therefore, it was determined that the unrealized losses on the securities presented in the table below were not other than temporarily impaired as of June 30, 2018.

($ 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, 2018 (1)
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	354,474		$	12,787	$	40,302		$	3,805	$	394,776		$	16,592
Other	413,744			14,379		120,081			9,529		533,825			23,908
Municipal bonds	269,872			6,713		75,715			4,406		345,587			11,119
Foreign government bonds	19,912			584		—			—		19,912			584
Corporate bonds	833,370			23,370		36,587			3,550		869,957			26,920
Other mortgage-backed securities	888,965			10,400		158,524			4,895		1,047,489			15,295
Total	$	2,780,337		$	68,233	$	431,209		$	26,185	$	3,211,546		$	94,418
Number of positions with a gross unrealized loss	1,091					160					1,251
Fair value as a percentage of total fixed maturity securities fair value	36.6		%			5.7		%			42.3		%
December 31, 2017
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	134,032		$	1,053	$	40,606		$	1,979	$	174,638		$	3,032
Other	168,634			1,849		122,753			3,667		291,387			5,516
Municipal bonds	29,437			100		79,140			2,335		108,577			2,435
Foreign government bonds	—			—		—			—		—			—
Corporate bonds	115,113			2,701		36,081			1,633		151,194			4,334
Other mortgage-backed securities	457,166			2,791		168,972			4,400		626,138			7,191
Total fixed maturity securities	904,382			8,494		447,552			14,014		1,351,934			22,508
Equity securities (2)	6,027			249		1,277			30		7,304			279
Combined totals	$	910,409		$	8,743	$	448,829		$	14,044	$	1,359,238		$	22,787
Number of positions with a gross unrealized loss	354					158					512
Fair value as a percentage of total fixed maturity and equity securities fair value	11.6		%			5.7		%			17.3		%

________________

(1) Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, available for sale equity securities were reclassified to equity securities at fair value and are excluded from the table above as of June 30, 2018.

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

Fixed maturity securities with an investment grade rating represented 96.6% of the gross unrealized losses as of June 30, 2018. 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 other-than-temporary impairment (OTTI) losses on fixed maturity securities held as of June 30, 2018 and 2017 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 OCI:

($ in thousands)	Six Months Ended June 30,
	2018		2017
Cumulative credit loss (1)
Beginning of period	$	3,825	$	13,703
New credit losses	—		—
Increases to previously recognized credit losses	246		1,910
Gains (losses) related to securities sold or paid down during the period	—		(2		)
End of period	$	4,071	$	15,611

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(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 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, 2018
	June 30, 2018		December 31, 2017		Fair Value		Amortized Cost
Estimated expected maturity:
Due in 1 year or less	4.2	%	3.2	%	$	312,584	$	308,703
Due after 1 year through 5 years	24.5		26.7		1,829,489		1,794,597
Due after 5 years through 10 years	32.4		32.6		2,423,204		2,405,751
Due after 10 years through 20 years	25.2		24.2		1,885,539		1,828,415
Due after 20 years	13.7		13.3		1,024,749		954,557
Total	100.0	%	100.0	%	$	7,475,565	$	7,292,023
Average option-adjusted duration, in years	6.0		5.9

Sales of Fixed Maturity and Equity Securities

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,
	2018			2017			2018			2017
Fixed maturity securities
Proceeds received	$	100,129		$	118,818		$	190,023		$	229,690
Gross gains realized	2,352			4,080			4,022			6,569
Gross losses realized	(1,584		)	(496		)	(1,637		)	(1,377		)
Equity securities
Proceeds received	$	3,735		$	11,507		$	5,783		$	16,996
Gross gains realized	977			1,702			1,593			2,750
Gross losses realized	(147		)	(236		)	(181		)	(428		)

Net Investment Gains (Losses)

The following table reconciles the net investment gains and losses (pretax) by transaction type:

($ in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018				2017
Impairment write-downs	$	—		$	—		$	—			$	(1,777	)
Change in intent write-downs	(1,177		)	(3,564		)	(1,287		)		(4,583		)
Net OTTI losses recognized in earnings	(1,177		)	(3,564		)	(1,287		)	—	(6,360		)
Sales and other, net	1,789			5,202			3,992				7,685
Change in fair value - equity securities (1)	(1,156		)	—			(6,342		)		—
Change in fair value and gains (losses) realized on settlements - derivative instruments	1,279			434			2,718				505
Net investment gains (losses)	$	735		$	2,072		$	(919	)	—	$	1,830

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(1) Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, equity securities are reported at fair value with change in fair value recognized in Net investment gains (losses) and are no longer included in impairment write-downs or change in intent write-downs.

Net Unrealized Investment Gains and Losses on Securities

The following table reconciles the net unrealized investment gains and losses, net of tax, included in AOCI, before the impact of deferred policy acquisition costs (DAC):

($ in thousands)	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2017			2018			2017
Net unrealized investment gains and losses on securities, net of tax
Beginning of period	$	206,293		$	228,337		$	286,176		$	202,941
Change in net unrealized investment gains	(61,724		)	54,193			(129,009		)	79,386
Reclassification of net investment (gains) losses to net income	429			(1,065		)	2,872			(862		)
Reclassification of unrealized gains on equity securities, net of tax, to Retained earnings (1)	—			—			(15,041		)	—
End of period	$	144,998		$	281,465		$	144,998		$	281,465

________________

(1) Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, available for sale equity securities were reclassified to equity securities at fair value and the related unrealized gains were reclassified from AOCI to Retained earnings.

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 have been 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, 2018
Asset derivatives:
Free-standing derivatives	$	9,376	$	—	$	9,376	$	—	$	10,484	$	(1,108	)
December 31, 2017
Asset derivatives:
Free-standing derivatives	$	15,550	$	—	$	15,550	$	—	$	15,584	$	(34	)

Deposits

At June 30, 2018 and December 31, 2017, fixed maturity securities with a fair value of $17,782 thousand and $17,985 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, 2018 and December 31, 2017, fixed maturity securities with a fair value of $625,165 thousand and $686,790 thousand, respectively, were on deposit with the Federal Home Loan Bank of Chicago (FHLB) as collateral for amounts subject to funding agreements, advances and borrowings which were equal to $625,000 thousand at both of the respective dates. The deposited securities are included in Fixed maturity securities on the Company’s Consolidated Balance Sheets.