Investments

9 Months Ended

Sep. 30, 2018

Investments, Debt and Equity Securities [Abstract]

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 nine month periods ended September 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 (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
September 30, 2018 ⁽¹⁾
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:⁽²⁾
Mortgage-backed securities	$	758,301	$	15,744	$	23,209	$	750,836
Other, including U.S. Treasury securities	802,508		12,528		32,436		782,600
Municipal bonds	1,783,711		119,671		19,708		1,883,674
Foreign government bonds	92,860		2,787		644		95,003
Corporate bonds	2,290,452		74,409		29,365		2,335,496
Other mortgage-backed securities	1,691,659		8,073		18,202		1,681,530
Totals	$	7,419,491	$	233,212	$	123,564	$	7,529,139

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

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⁽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 September 30, 2018.


⁽²⁾	Fair value includes securities issued by Federal National Mortgage Association (FNMA) of $408,130 thousand and $361,955 thousand; Federal Home Loan Mortgage Corporation (FHLMC) of $408,858 thousand and $400,001 thousand; and Government National Mortgage Association (GNMA) of $96,018 thousand and $104,168 thousand as of September 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 September 30, 2018 and December 31, 2017, respectively. The Company views the decrease in value of all of the securities with unrealized losses at September 30, 2018 -- which was driven largely by increasing 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 their 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 September 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
September 30, 2018 ⁽¹⁾
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	330,285		$	13,484	$	99,483		$	9,725	$	429,768		$	23,209
Other	450,713			18,510		163,569			13,926		614,282			32,436
Municipal bonds	491,680			13,484		75,678			6,224		567,358			19,708
Foreign government bonds	19,856			644		—			—		19,856			644
Corporate bonds	821,190			20,801		90,998			8,564		912,188			29,365
Other mortgage-backed securities	902,673			10,207		252,739			7,995		1,155,412			18,202
Total	$	3,016,397		$	77,130	$	682,467		$	46,434	$	3,698,864		$	123,564

Number of positions with a gross unrealized loss	1,237					246					1,483
Fair value as a percentage of total fixed maturity securities fair value	39.4		%			8.9		%			48.3		%

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 September 30, 2018.


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

Fixed maturity securities with an investment grade rating represented 97.5% of the gross unrealized losses as of September 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 their amortized cost bases.

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 September 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 their amortized cost bases, for which the non-credit portions of OTTI losses were recognized in OCI:



($ in thousands)	Nine Months Ended September 30,
	2018			2017
Cumulative credit loss⁽¹⁾
Beginning of period	$	3,825		$	13,703
New credit losses	—			—
Increases to previously recognized credit losses	246			1,994
Losses related to securities sold or paid down during the period	(2,542		)	(2		)
End of period	$	1,529		$	15,695

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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 securities before the recovery of their amortized cost bases.

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				September 30, 2018
	September 30, 2018		December 31, 2017		Fair Value		Amortized Cost
Estimated expected maturity:
Due in 1 year or less	4.5	%	3.2	%	$	342,221	$	339,321
Due after 1 year through 5 years	23.7		26.7		1,783,259		1,758,061
Due after 5 years through 10 years	32.8		32.6		2,469,126		2,464,959
Due after 10 years through 20 years	26.1		24.2		1,962,671		1,929,967
Due after 20 years	12.9		13.3		971,862		927,183
Total	100.0	%	100.0	%	$	7,529,139	$	7,419,491

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 September 30,						Nine Months Ended September 30,
	2018			2017			2018			2017
Fixed maturity securities
Proceeds received	$	170,223		$	85,841		$	360,246		$	315,531
Gross gains realized	3,980			2,293			8,002			8,862
Gross losses realized	(5,893		)	(181		)	(7,530		)	(1,558		)

Equity securities
Proceeds received	$	2,710		$	3,514		$	8,493		$	20,510
Gross gains realized	885			477			2,478			3,227
Gross losses realized	(321		)	(293		)	(502		)	(721		)

Net Investment Gains (Losses)

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



($ in thousands)	Three Months Ended September 30,						Nine Months Ended September 30,
	2018			2017			2018				2017

Impairment write-downs	$	—		$	—		$	—			$	(1,777	)
Change in intent write-downs	(70		)	(6,092		)	(1,357		)		(10,675		)
Net OTTI losses recognized in earnings	(70		)	(6,092		)	(1,357		)	—	(12,452		)
Sales and other, net	(1,331		)	2,365			2,661				10,050
Change in fair value - equity securities ⁽¹⁾	2,000			—			(4,342		)		—
Change in fair value and gains (losses) realized on settlements - derivative instruments	2,204			241			4,922				746
Net investment gains (losses)	$	2,803		$	(3,486	)	$	1,884		—	$	(1,656	)

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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 changes 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 (Losses) on Securities

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



($ in thousands)	Three Months Ended September 30,					Nine Months Ended September 30,
	2018			2017		2018			2017
Net unrealized investment gains (losses) on securities, net of tax
Beginning of period	$	144,998		$	281,465	$	286,176		$	202,941
Change in net unrealized investment gains	(57,903		)	12,066		(186,912		)	91,452
Reclassification of net investment (gains) losses to net income	(473		)	2,422		2,399			1,560
Reclassification of net unrealized gains on equity securities, net of tax, to Retained earnings⁽¹⁾	—			—		(15,041		)	—
End of period	$	86,622		$	295,953	$	86,622		$	295,953

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⁽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 net 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
September 30, 2018
Asset derivatives:
Free-standing derivatives	$	10,198	$	—	$	10,198	$	—	$	11,638	$	(1,440	)

December 31, 2017
Asset derivatives:
Free-standing derivatives	$	15,550	$	—	$	15,550	$	—	$	15,584	$	(34	)

Deposits

At September 30, 2018 and December 31, 2017, fixed maturity securities with a fair value of $17,676 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 September 30, 2018 and December 31, 2017, fixed maturity securities with a fair value of $685,886 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.