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Investments
 6 Months Ended
Jun. 30, 2020
Investments [Abstract]  
Investments Investments
At June 30, 2020 and December 31, 2019, the amortized cost and fair value of fixed maturity securities were as follows:
 
Amortized
Cost (1)
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Allowance for Credit Losses
 
Fair Value
 
(Dollars in thousands)
June 30, 2020
 
 
 
 
 
 
 
 
 
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
 
 
United States Government full faith and credit
$
36,507

 
$
2,835

 
$
—

 
$
—

 
$
39,342

United States Government sponsored agencies
293,731

 
49,656

 
—

 
—

 
343,387

United States municipalities, states and territories
3,283,321

 
497,428

 
(2,039
)
 
—

 
3,778,710

Foreign government obligations
187,021

 
21,616

 
(1,128
)
 
—

 
207,509

Corporate securities
29,734,789

 
3,889,518

 
(246,847
)
 
(46,749
)
 
33,330,711

Residential mortgage backed securities
1,588,760

 
129,579

 
(4,837
)
 
(777
)
 
1,712,725

Commercial mortgage backed securities
5,524,081

 
138,590

 
(266,949
)
 
(2,660
)
 
5,393,062

Other asset backed securities
6,302,833

 
96,404

 
(465,891
)
 
—

 
5,933,346

 
$
46,951,043

 
$
4,825,626

 
$
(987,691
)
 
$
(50,186
)
 
$
50,738,792

 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
 
 
United States Government full faith and credit
$
161,492

 
$
369

 
$
(96
)
 
$
—

 
$
161,765

United States Government sponsored agencies
601,672

 
28,133

 
(4,785
)
 
—

 
625,020

United States municipalities, states and territories
4,147,343

 
388,578

 
(8,250
)
 
—

 
4,527,671

Foreign government obligations
186,993

 
18,103

 
—

 
—

 
205,096

Corporate securities
29,822,172

 
2,796,926

 
(82,259
)
 
—

 
32,536,839

Residential mortgage backed securities
1,477,738

 
101,617

 
(3,691
)
 
—

 
1,575,664

Commercial mortgage backed securities
5,591,167

 
208,895

 
(13,783
)
 
—

 
5,786,279

Other asset backed securities
6,250,369

 
90,978

 
(179,191
)
 
—

 
6,162,156

 
$
48,238,946

 
$
3,633,599

 
$
(292,055
)
 
$
—

 
$
51,580,490


(1) Amortized cost excludes accrued interest receivable of $432.0 million as of June 30, 2020.
The amortized cost and fair value of fixed maturity securities at June 30, 2020, 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
$
425,542

 
$
432,132

Due after one year through five years
6,511,972

 
6,869,898

Due after five years through ten years
9,337,950

 
10,131,288

Due after ten years through twenty years
9,676,298

 
11,429,195

Due after twenty years
7,583,607

 
8,837,146

 
33,535,369

 
37,699,659

Residential mortgage backed securities
1,588,760

 
1,712,725

Commercial mortgage backed securities
5,524,081

 
5,393,062

Other asset backed securities
6,302,833

 
5,933,346

 
$
46,951,043

 
$
50,738,792


Net unrealized gains on available for sale fixed maturity securities reported as a separate component of stockholders' equity were comprised of the following:
 
June 30, 2020
 
December 31, 2019
 
(Dollars in thousands)
Net unrealized gains on available for sale fixed maturity securities
$
3,826,652

 
$
3,341,544

Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements
(1,678,164
)
 
(1,473,966
)
Deferred income tax valuation allowance reversal
22,534

 
22,534

Deferred income tax expense
(451,183
)
 
(392,191
)
Net unrealized gains reported as accumulated other comprehensive income
$
1,719,839

 
$
1,497,921


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% and 98% of our fixed maturity portfolio rated investment grade at June 30, 2020 and December 31, 2019, respectively.
The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:
 
 
June 30, 2020
 
December 31, 2019
NAIC
Designation
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
Fair Value
 
 
(Dollars in thousands)
1
 
$
25,587,355

 
$
28,327,288

 
$
27,781,525

 
$
30,122,657

2
 
19,487,757

 
20,765,334

 
19,278,355

 
20,316,911

3
 
1,577,056

 
1,430,998

 
1,001,087

 
977,191

4
 
185,879

 
156,234

 
114,497

 
112,534

5
 
51,893

 
31,644

 
57,952

 
45,205

6
 
61,103

 
27,294

 
5,530

 
5,992

 
 
$
46,951,043

 
$
50,738,792

 
$
48,238,946

 
$
51,580,490


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 1,613 and 1,033 securities, respectively) have been in a continuous unrealized loss position, at June 30, 2020 and December 31, 2019:
 
Less than 12 months
 
12 months or more
 
Total
 
Fair Value
 
Unrealized
Losses (1)
 
Fair Value
 
Unrealized
Losses (1)
 
Fair Value
 
Unrealized
Losses (1)
 
(Dollars in thousands)
June 30, 2020
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
 
 
 
 
United States municipalities, states and territories
$
51,931

 
$
(2,039
)
 
$
—

 
$
—

 
$
51,931

 
$
(2,039
)
Foreign government obligations
23,057

 
(1,128
)
 
—

 
—

 
23,057

 
(1,128
)
Corporate securities:
 
 
 
 
 
 
 
 
 
 
 
Finance, insurance and real estate
626,564

 
(23,749
)
 
—

 
—

 
626,564

 
(23,749
)
Manufacturing, construction and mining
280,272

 
(12,977
)
 
18,451

 
(2,678
)
 
298,723

 
(15,655
)
Utilities and related sectors
457,237

 
(62,364
)
 
37,346

 
(9,405
)
 
494,583

 
(71,769
)
Wholesale/retail trade
185,882

 
(21,316
)
 
105,576

 
(27,228
)
 
291,458

 
(48,544
)
Services, media and other
570,547

 
(64,840
)
 
234,595

 
(69,039
)
 
805,142

 
(133,879
)
Residential mortgage backed securities
221,327

 
(3,882
)
 
12,675

 
(1,732
)
 
234,002

 
(5,614
)
Commercial mortgage backed securities
2,711,400

 
(249,494
)
 
88,303

 
(20,115
)
 
2,799,703

 
(269,609
)
Other asset backed securities
2,161,262

 
(125,269
)
 
2,677,210

 
(340,622
)
 
4,838,472

 
(465,891
)
 
$
7,289,479

 
$
(567,058
)
 
$
3,174,156

 
$
(470,819
)
 
$
10,463,635

 
$
(1,037,877
)
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
 
 
 
 
United States Government full faith and credit
$
144,582

 
$
(96
)
 
$
—

 
$
—

 
$
144,582

 
$
(96
)
United States Government sponsored agencies
168,732

 
(1,229
)
 
201,444

 
(3,556
)
 
370,176

 
(4,785
)
United States municipalities, states and territories
285,481

 
(8,173
)
 
3,081

 
(77
)
 
288,562

 
(8,250
)
Corporate securities:
 
 
 
 
 
 
 
 
 
 
 
Finance, insurance and real estate
267,521

 
(4,785
)
 
121,993

 
(4,744
)
 
389,514

 
(9,529
)
Manufacturing, construction and mining
161,633

 
(6,039
)
 
44,606

 
(3,951
)
 
206,239

 
(9,990
)
Utilities and related sectors
334,635

 
(7,730
)
 
51,269

 
(3,482
)
 
385,904

 
(11,212
)
Wholesale/retail trade
54,289

 
(1,751
)
 
129,364

 
(9,411
)
 
183,653

 
(11,162
)
Services, media and other
275,135

 
(6,135
)
 
316,086

 
(34,231
)
 
591,221

 
(40,366
)
Residential mortgage backed securities
212,404

 
(2,686
)
 
11,332

 
(1,005
)
 
223,736

 
(3,691
)
Commercial mortgage backed securities
602,394

 
(9,366
)
 
194,328

 
(4,417
)
 
796,722

 
(13,783
)
Other asset backed securities
752,413

 
(11,709
)
 
3,375,016

 
(167,482
)
 
4,127,429

 
(179,191
)
 
$
3,259,219

 
$
(59,699
)
 
$
4,448,519

 
$
(232,356
)
 
$
7,707,738

 
$
(292,055
)

(1) Unrealized losses have not been reduced to reflect the allowance for credit losses of $50.2 million as of June 30, 2020.
The unrealized losses at June 30, 2020 are principally related to the impacts the COVID-19 pandemic had on credit markets. In addition, certain unrealized losses at June 30, 2020 are related to the timing of the purchases of certain securities, which carry less yield than those currently available. Approximately 80% and 79% of the unrealized losses on fixed maturity securities shown in the above table for June 30, 2020 and December 31, 2019, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC designations.
We expect to recover our amortized cost on all securities except for those securities on which we recognized an allowance for credit loss. In addition, 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 write down these investments to fair value through operations.
Changes in net unrealized gains/losses on investments for the three and six months ended June 30, 2020 and 2019 are as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2020
 
2019
 
2020
 
2019
 
(Dollars in thousands)
Fixed maturity securities available for sale carried at fair value
$
3,347,516

 
$
1,383,290

 
$
485,108

 
$
2,900,810

 
 
 
 
 
 
 
 
Adjustment for effect on other balance sheet accounts:
 
 
 
 
 
 
 
Deferred policy acquisition costs and deferred sales inducements
(1,448,951
)
 
(704,445
)
 
(204,198
)
 
(1,505,346
)
Deferred income tax asset/liability
(398,700
)
 
(142,558
)
 
(58,992
)
 
(293,048
)
 
(1,847,651
)
 
(847,003
)
 
(263,190
)
 
(1,798,394
)
Change in net unrealized gains/losses on investments carried at fair value
$
1,499,865

 
$
536,287

 
$
221,918

 
$
1,102,416


Proceeds from sales of available for sale fixed maturity securities for the six months ended June 30, 2020 and 2019 were $973.4 million and $359.3 million, respectively. Scheduled principal repayments, calls and tenders for available for sale fixed maturity securities for the six months ended June 30, 2020 and 2019 were $1.4 billion and $500.5 million, respectively.
Net realized gains (losses) on investments for the three and six months ended June 30, 2020 and 2019, are as follows:
 
Three Months Ended 
 June 30,
 
Six Months Ended 
 June 30,
 
2020
 
2019
 
2020
 
2019
 
(Dollars in thousands)
Available for sale fixed maturity securities:
 
 
 
 
 
 
 
Gross realized gains
$
1,215

 
$
5,255

 
$
15,453

 
$
6,426

Gross realized losses
(264
)
 
(2,287
)
 
(1,470
)
 
(4,081
)
Credit losses (1)
(25,041
)
 
—

 
(56,412
)
 
—

 
(24,090
)
 
2,968

 
(42,429
)
 
2,345

Other investments:
 
 
 
 
 
 
 
Gross realized gains
—

 
7,296

 
—

 
7,296

Gross realized losses
—

 
(14,446
)
 
—

 
(14,446
)
 
—

 
(7,150
)
 
—

 
(7,150
)
Mortgage loans on real estate:
 
 
 
 
 
 
 
Increase (decrease) in allowance for credit losses
(2,510
)
 
350

 
(4,507
)
 
410

Recovery of specific allowance
712

 
—

 
712

 
—

 
(1,798
)
 
350

 
(3,795
)
 
410

 
$
(25,888
)
 
$
(3,832
)
 
$
(46,224
)
 
$
(4,395
)

(1) Prior to adopting authoritative guidance effective January 1, 2020, credit losses on available for sale fixed maturity securities were classified as other than temporary impairments and reported in a separate line item in the Consolidated statements of operations. We recognized $1.2 million of other than temporary impairments during the three and six months ended June 30, 2019.
Losses on available for sale fixed maturity securities in 2020 and 2019 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. Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date.
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 credit loss 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 credit loss. 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 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 an allowance for credit loss should be established 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 have credit loss 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, credit loss 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, a credit loss would be recognized in operations for 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 recognized credit loss is limited to the total unrealized loss on the security (i.e., the fair value floor).
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 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 credit loss.
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, 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.
We do not measure a credit loss allowance on accrued interest receivable as we write off any accrued interest receivable balance to net investment income in a timely manner when we have concerns regarding collectability.
Amounts on available for sale fixed maturities that are deemed to be uncollectible are written off and removed from the allowance for credit loss. A write-off may also occur if we intend to sell a security or when it is more likely than not we will be required to sell the security before the recovery of its amortized cost.
The following table provides a rollforward of the allowance for credit loss:
 
Three Months Ended June 30, 2020
 
Corporate Securities
 
Commercial Mortgage Backed Securities
 
Residential Mortgage Backed Securities
 
Other Asset Backed Securities
 
Total
 
(Dollars in thousands)
Beginning balance (1)
$
28,332

 
$
—

 
$
—

 
$
—

 
$
28,332

Additions for credit losses not previously recorded
18,417

 
5,847

 
777

 
—

 
25,041

Reduction for securities with credit losses due to intent to sell
—

 
(3,187
)
 
—

 
—

 
(3,187
)
Ending balance
$
46,749

 
$
2,660

 
$
777

 
$
—

 
$
50,186

 
 
 
 
 
 
 
 
 
 
 
Six Months Ended June 30, 2020
 
Corporate Securities
 
Commercial Mortgage Backed Securities
 
Residential Mortgage Backed Securities
 
Other Asset Backed Securities
 
Total
 
(Dollars in thousands)
Beginning balance (1)
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Additions for credit losses not previously recorded
46,749

 
8,338

 
777

 
548

 
56,412

Reduction for securities with credit losses due to intent to sell
—

 
(5,678
)
 
—

 
(548
)
 
(6,226
)
Ending balance
$
46,749

 
$
2,660

 
$
777

 
$
—

 
$
50,186

(1) The allowance for credit loss associated with available for sale fixed maturity securities was applied prospectively upon adoption of authoritative guidance effective January 1, 2020. See Note 1 for further details.
Prior to the implementation of authoritative guidance in 2020, we evaluated our investments for other than temporary impairments using a method consistent with our current credit loss evaluation process discussed above. In addition, we also considered length of time the fair value had been less than amortized cost or cost in our evaluation.
If we did not intend to sell and it was not more likely than not we would be required to sell the debt security but also did not expect to recover the entire amortized cost basis of the security, an impairment loss was recognized in operations in the amount of the expected credit loss. The difference between the present value of expected future cash flows and the amortized cost basis of the security was the amount of credit loss recognized in operations. The remaining amount of the other than temporary impairment was recognized in other comprehensive income.
In addition, for debt securities which we did not intend to sell and it was not more likely than not we would be required to sell, but our intent changed due to changes or events that could not have been reasonably anticipated, an other than temporary impairment charge was recognized. Once an impairment charge had been recorded, we then continued to review the other than temporarily impaired securities for appropriate valuation on an ongoing basis. Unrealized losses may have been recognized in future periods through a charge to earnings should we have later concluded that the decline in fair value below amortized cost was other than temporary pursuant to our accounting policy.
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 
 June 30,
 
Six Months Ended 
 June 30,
 
2019
 
2019
 
(Dollars in thousands)
Cumulative credit loss at beginning of period
$
(175,398
)
 
$
(175,398
)
Additions for the amount related to credit losses for which OTTI has not previously been recognized
(998
)
 
(998
)
Additional credit losses on securities for which OTTI has previously been recognized
(215
)
 
(215
)
Accumulated losses on securities that were disposed of during the period
10,960

 
10,960

Cumulative credit loss at end of period
$
(165,651
)
 
$
(165,651
)

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 December 31, 2019:
 
Amortized Cost
 
OTTI
Recognized in
Other
Comprehensive
Income (Loss)
 
Change in Fair
Value Since
OTTI was
Recognized
 
Fair Value
 
(Dollars in thousands)
December 31, 2019
 
 
 
 
 
 
 
Fixed maturity securities, available for sale:
 
 
 
 
 
 
 
Corporate securities
$
50,755

 
$
(3,700
)
 
$
9,268

 
$
56,323

Residential mortgage backed securities
183,948

 
(145,446
)
 
172,577

 
211,079

Commercial mortgage backed securities
12,776

 
—

 
(401
)
 
12,375

Other asset backed securities
977

 
—

 
261

 
1,238

 
$
248,456

 
$
(149,146
)
 
$
181,705

 
$
281,015