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Investments
 3 Months Ended
Mar. 31, 2019
Investments [Abstract]  
Investments
Investments
At March 31, 2019 and December 31, 2018, the amortized cost and fair value of fixed maturity securities were as follows:
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
(Dollars in thousands)
March 31, 2019
 
 
 
 
 
 
 
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
11,707

 
$
138

 
$
(144
)
 
$
11,701

United States Government sponsored agencies
1,208,461

 
18,707

 
(39,828
)
 
1,187,340

United States municipalities, states and territories
3,861,080

 
317,345

 
(3,579
)
 
4,174,846

Foreign government obligations
226,233

 
10,960

 
(1,651
)
 
235,542

Corporate securities
29,025,709

 
1,312,764

 
(324,276
)
 
30,014,197

Residential mortgage backed securities
1,116,718

 
86,066

 
(1,452
)
 
1,201,332

Commercial mortgage backed securities
5,493,082

 
90,317

 
(39,887
)
 
5,543,512

Other asset backed securities
5,784,060

 
54,300

 
(169,723
)
 
5,668,637

 
$
46,727,050

 
$
1,890,597

 
$
(580,540
)
 
$
48,037,107

 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
United States Government full faith and credit
$
11,872

 
$
102

 
$
(322
)
 
$
11,652

United States Government sponsored agencies
1,208,468

 
13,095

 
(83,034
)
 
1,138,529

United States municipalities, states and territories
3,880,703

 
261,222

 
(15,658
)
 
4,126,267

Foreign government obligations
226,860

 
7,573

 
(4,159
)
 
230,274

Corporate securities
28,483,138

 
727,105

 
(838,729
)
 
28,371,514

Residential mortgage backed securities
1,134,623

 
71,661

 
(4,125
)
 
1,202,159

Commercial mortgage backed securities
5,492,271

 
21,558

 
(134,826
)
 
5,379,003

Other asset backed securities
5,693,255

 
41,308

 
(270,234
)
 
5,464,329

 
$
46,131,190

 
$
1,143,624

 
$
(1,351,087
)
 
$
45,923,727


The amortized cost and fair value of fixed maturity securities at March 31, 2019, 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
$
372,763

 
$
375,768

Due after one year through five years
5,629,851

 
5,733,881

Due after five years through ten years
10,015,444

 
10,199,974

Due after ten years through twenty years
9,853,081

 
10,534,563

Due after twenty years
8,462,051

 
8,779,440

 
34,333,190

 
35,623,626

Residential mortgage backed securities
1,116,718

 
1,201,332

Commercial mortgage backed securities
5,493,082

 
5,543,512

Other asset backed securities
5,784,060

 
5,668,637

 
$
46,727,050

 
$
48,037,107


Net unrealized gains (losses) on available for sale fixed maturity securities reported as a separate component of stockholders' equity were comprised of the following:
 
March 31, 2019
 
December 31, 2018
 
(Dollars in thousands)
Net unrealized gains (losses) on available for sale fixed maturity securities
$
1,310,057

 
$
(207,463
)
Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements
(688,330
)
 
112,571

Deferred income tax valuation allowance reversal
22,534

 
22,534

Deferred income tax benefit (expense)
(130,564
)
 
19,926

Net unrealized gains (losses) reported as accumulated other comprehensive income (loss)
$
513,697

 
$
(52,432
)

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% of our fixed maturity portfolio rated investment grade at both March 31, 2019 and December 31, 2018, respectively.
The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:
 
 
March 31, 2019
 
December 31, 2018
NAIC
Designation
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
(Dollars in thousands)
1
 
$
26,735,031

 
$
27,929,128

 
$
26,588,352

 
$
26,921,843

2
 
18,402,270

 
18,615,641

 
17,901,161

 
17,528,072

3
 
1,346,654

 
1,275,240

 
1,396,650

 
1,269,242

4
 
172,012

 
147,717

 
173,987

 
137,991

5
 
5,061

 
5,017

 
23,836

 
19,453

6
 
66,022

 
64,364

 
47,204

 
47,126

 
 
$
46,727,050

 
$
48,037,107

 
$
46,131,190

 
$
45,923,727


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 1,471 and 2,715 securities, respectively) have been in a continuous unrealized loss position, at March 31, 2019 and December 31, 2018:
 
Less than 12 months
 
12 months or more
 
Total
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
Fair Value
 
Unrealized
Losses
 
(Dollars in thousands)
March 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
 
 
 
 
United States Government full faith and credit
$
—

 
$
—

 
$
7,794

 
$
(144
)
 
$
7,794

 
$
(144
)
United States Government sponsored agencies
—

 
—

 
1,014,518

 
(39,828
)
 
1,014,518

 
(39,828
)
United States municipalities, states and territories
13,121

 
(48
)
 
130,540

 
(3,531
)
 
143,661

 
(3,579
)
Foreign government obligations
—

 
—

 
37,676

 
(1,651
)
 
37,676

 
(1,651
)
Corporate securities:
 
 
 
 
 
 
 
 
 
 
 
Finance, insurance and real estate
255,189

 
(11,742
)
 
1,304,783

 
(47,440
)
 
1,559,972

 
(59,182
)
Manufacturing, construction and mining
263,649

 
(5,570
)
 
879,477

 
(39,948
)
 
1,143,126

 
(45,518
)
Utilities and related sectors
186,483

 
(5,154
)
 
1,076,726

 
(34,703
)
 
1,263,209

 
(39,857
)
Wholesale/retail trade
117,766

 
(2,227
)
 
468,303

 
(30,444
)
 
586,069

 
(32,671
)
Services, media and other
436,745

 
(15,419
)
 
2,154,502

 
(131,629
)
 
2,591,247

 
(147,048
)
Residential mortgage backed securities
41,759

 
(485
)
 
14,201

 
(967
)
 
55,960

 
(1,452
)
Commercial mortgage backed securities
71,872

 
(514
)
 
1,611,230

 
(39,373
)
 
1,683,102

 
(39,887
)
Other asset backed securities
3,741,572

 
(144,987
)
 
445,355

 
(24,736
)
 
4,186,927

 
(169,723
)
 
$
5,128,156

 
$
(186,146
)
 
$
9,145,105

 
$
(394,394
)
 
$
14,273,261

 
$
(580,540
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
 
 
 
 
United States Government full faith and credit
$
543

 
$
(3
)
 
$
7,785

 
$
(319
)
 
$
8,328

 
$
(322
)
United States Government sponsored agencies
30,089

 
(949
)
 
953,421

 
(82,085
)
 
983,510

 
(83,034
)
United States municipalities, states and territories
340,103

 
(6,816
)
 
162,997

 
(8,842
)
 
503,100

 
(15,658
)
Foreign government obligations
98,511

 
(1,748
)
 
11,859

 
(2,411
)
 
110,370

 
(4,159
)
Corporate securities:
 
 
 
 
 
 
 
 
 
 
 
Finance, insurance and real estate
2,501,640

 
(87,220
)
 
884,870

 
(77,507
)
 
3,386,510

 
(164,727
)
Manufacturing, construction and mining
2,045,859

 
(84,972
)
 
349,738

 
(34,635
)
 
2,395,597

 
(119,607
)
Utilities and related sectors
2,313,271

 
(82,119
)
 
591,482

 
(45,838
)
 
2,904,753

 
(127,957
)
Wholesale/retail trade
1,032,603

 
(51,228
)
 
198,805

 
(26,326
)
 
1,231,408

 
(77,554
)
Services, media and other
4,618,477

 
(196,520
)
 
1,072,722

 
(152,364
)
 
5,691,199

 
(348,884
)
Residential mortgage backed securities
145,613

 
(2,638
)
 
22,689

 
(1,487
)
 
168,302

 
(4,125
)
Commercial mortgage backed securities
2,141,560

 
(37,150
)
 
2,090,835

 
(97,676
)
 
4,232,395

 
(134,826
)
Other asset backed securities
4,073,249

 
(252,265
)
 
271,994

 
(17,969
)
 
4,345,243

 
(270,234
)
 
$
19,341,518

 
$
(803,628
)
 
$
6,619,197

 
$
(547,459
)
 
$
25,960,715

 
$
(1,351,087
)

The unrealized losses at March 31, 2019 are principally related to timing of the purchases of these securities, which carry less yield than those available at March 31, 2019. Approximately 81% and 87% of the unrealized losses on fixed maturity securities shown in the above table for March 31, 2019 and December 31, 2018, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC designations.
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 consider these investments to be other than temporarily impaired as of March 31, 2019 and December 31, 2018.

Changes in net unrealized gains/losses on investments for the three months ended March 31, 2019 and 2018 are as follows:
 
Three Months Ended 
 March 31,
 
2019
 
2018
 
(Dollars in thousands)
Fixed maturity securities held for investment carried at amortized cost
$
—

 
$
(7,021
)
Investments carried at fair value:
 
 
 
Fixed maturity securities, available for sale
$
1,517,520

 
$
(1,215,695
)
 
1,517,520

 
(1,215,695
)
Adjustment for effect on other balance sheet accounts:
 
 
 
Deferred policy acquisition costs and deferred sales inducements
(800,901
)
 
643,323

Deferred income tax asset/liability
(150,490
)
 
120,201

 
(951,391
)
 
763,524

Change in net unrealized gains/losses on investments carried at fair value
$
566,129

 
$
(452,171
)

Proceeds from sales of available for sale securities for the three months ended March 31, 2019 and 2018 were $136.0 million and $85.5 million, respectively. Scheduled principal repayments, calls and tenders for available for sale fixed maturity securities for the three months ended March 31, 2019 and 2018 were $150.9 million and $180.4 million, respectively.
Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Net realized gains (losses) on investments, excluding net OTTI losses for the three months ended March 31, 2019 and 2018, are as follows:
 
Three Months Ended 
 March 31,
 
2019
 
2018
 
(Dollars in thousands)
Available for sale fixed maturity securities:
 
 
 
Gross realized gains
$
1,171

 
$
1,382

Gross realized losses
(1,794
)
 
(2,102
)
 
(623
)
 
(720
)
Mortgage loans on real estate:
 
 
 
Decrease in allowance for credit losses
60

 
300

Recovery of specific allowance
—

 
722

 
60

 
1,022

 
$
(563
)
 
$
302


Losses on available for sale fixed maturity securities in 2019 and 2018 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.
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 other than temporary impairments 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 impairments that are other than temporary. 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 length of time and 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;
•
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 other than temporary impairment losses should be recognized 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 be other than temporarily impaired 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, other than temporary impairment 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, an impairment loss would be recognized in operations in 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 remaining amount of the other than temporary impairment is recognized in other comprehensive income (loss).
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 the 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 the credit loss component of other than temporary impairment.
The cash flow modeling is performed on a security-by-security basis and incorporates actual cash flows on the residential mortgage backed securities through the current period, as well as the projection of remaining cash flows using a number of assumptions including default rates, prepayment rates and loss severity rates. The default curves we use are tailored to the Prime or Alt-A residential mortgage backed securities that we own, which assume lower default rates and loss severity for Prime securities versus Alt-A securities. These default curves are scaled higher or lower depending on factors such as current underlying mortgage loan performance, rating agency loss projections, loan to value ratios, geographic diversity, as well as other appropriate considerations.
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, or the security's price decline is deemed other than temporary, 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.
In addition, for debt securities which we do not intend to sell and it is not more likely than not we will be required to sell, but our intent changes due to changes or events that could not have been reasonably anticipated, an other than temporary impairment charge is recognized. Once an impairment charge has been recorded, we then continue to review the other than temporarily impaired securities for appropriate valuation on an ongoing basis. Unrealized losses may be recognized in future periods through a charge to earnings should we later conclude that the decline in fair value below amortized cost is other than temporary pursuant to our accounting policy described above. The use of different methodologies and assumptions to determine the fair value of investments and the timing and amount of impairments may have a material effect on the amounts presented in our consolidated financial statements.
There were no other than temporary impairments for the three months ended March 31, 2019. The following table summarizes other than temporary impairments for the three months ended March 31, 2018, by asset type:
 
Number
of
Securities
 
Total OTTI
Losses
 
Portion of OTTI
Losses
Recognized
in (from) Other
Comprehensive
Income
 
Net OTTI
Losses
Recognized in
Operations
 
 
 
(Dollars in thousands)
Three months ended March 31, 2018
 
 
 
 
 
 
 
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
Corporate securities:
 
 


 
 
 
 
Consumer discretionary
1

 
$
(907
)
 
$
—

 
$
(907
)

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 
 March 31,
 
2019
 
2018
 
(Dollars in thousands)
Cumulative credit loss at beginning of period
$
(175,398
)
 
$
(157,066
)
Additions for the amount related to credit losses for which OTTI has not previously been recognized
—

 
(907
)
Additional credit losses on securities for which OTTI has previously been recognized
—

 
—

Accumulated losses on securities that were disposed of during the period
—

 
3,900

Cumulative credit loss at end of period
$
(175,398
)
 
$
(154,073
)

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 March 31, 2019 and December 31, 2018:
 
Amortized Cost
 
OTTI
Recognized in
Other
Comprehensive
Income (Loss)
 
Change in Fair
Value Since
OTTI was
Recognized
 
Fair Value
 
(Dollars in thousands)
March 31, 2019
 
 
 
 
 
 
 
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
Corporate securities
$
69,725

 
$
(3,700
)
 
$
11,082

 
$
77,107

Residential mortgage backed securities
236,606

 
(167,846
)
 
199,952

 
268,712

Commercial mortgage backed securities
31,964

 
—

 
800

 
32,764

Other asset backed securities
1,642

 
—

 
(84
)
 
1,558

 
$
339,937

 
$
(171,546
)
 
$
211,750

 
$
380,141

December 31, 2018
 
 
 
 
 
 
 
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
Corporate securities
$
69,580

 
$
(3,700
)
 
$
6,195

 
$
72,075

Residential mortgage backed securities
245,691

 
(167,846
)
 
199,191

 
277,036

Commercial mortgage backed securities
35,244

 
—

 
—

 
35,244

Other asset backed securities
1,692

 
—

 
326

 
2,018

 
$
352,207

 
$
(171,546
)
 
$
205,712

 
$
386,373