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Investments

9 Months Ended

Sep. 30, 2020

At September 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)
September 30, 2020
Fixed maturity securities, available for sale:
United States Government full faith and credit	$	36,251	$	2,488	$	—	$	—	$	38,739
United States Government sponsored agencies	1,024,434		51,216		(672)		—		1,074,978
United States municipalities, states and territories	3,265,276		545,676		(5,866)		—		3,805,086
Foreign government obligations	187,036		22,605		(408)		—		209,233
Corporate securities	29,367,052		4,324,910		(181,627)		(53,045)		33,457,290
Residential mortgage backed securities	1,503,212		124,849		(3,767)		(1,221)		1,623,073
Commercial mortgage backed securities	5,498,757		190,102		(202,723)		(7,353)		5,478,783
Other asset backed securities	6,250,597		111,812		(348,848)		—		6,013,561
	$	47,132,615	$	5,373,658	$	(743,911)	$	(61,619)	$	51,700,743

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 $434.3 million as of September 30, 2020.

The amortized cost and fair value of fixed maturity securities at September 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	$	407,503	$	412,652
Due after one year through five years	7,578,015		8,011,902
Due after five years through ten years	9,199,283		10,132,126
Due after ten years through twenty years	9,565,038		11,525,282
Due after twenty years	7,130,210		8,503,364
	33,880,049		38,585,326
Residential mortgage backed securities	1,503,212		1,623,073
Commercial mortgage backed securities	5,498,757		5,478,783
Other asset backed securities	6,250,597		6,013,561
	$	47,132,615	$	51,700,743

Net unrealized gains on available for sale fixed maturity securities reported as a separate component of stockholders' equity were comprised of the following:


	September 30, 2020		December 31, 2019
	(Dollars in thousands)
Net unrealized gains on available for sale fixed maturity securities	$	4,627,144	$	3,341,544
Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements	(1,982,110)		(1,473,966)
Deferred income tax valuation allowance reversal	22,534		22,534
Deferred income tax expense	(555,457)		(392,191)
Net unrealized gains reported as accumulated other comprehensive income	$	2,112,111	$	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 96% and 98% of our fixed maturity portfolio rated investment grade at September 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:


	September 30, 2020				December 31, 2019
NAIC Designation	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
1	$	25,857,683	$	28,981,733	$	27,781,525	$	30,122,657
2	18,973,077		20,682,645		19,278,355		20,316,911
3	1,844,263		1,684,689		1,001,087		977,191
4	300,794		248,133		114,497		112,534
5	81,869		80,048		57,952		45,205
6	74,929		23,495		5,530		5,992
	$	47,132,615	$	51,700,743	$	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 1,344 and 1,033 securities, respectively) have been in a continuous unrealized loss position, at September 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)
September 30, 2020
Fixed maturity securities, available for sale:

United States Government sponsored agencies	$	800,010	$	(672)	$	—	$	—	$	800,010	$	(672)
United States municipalities, states and territories	39,734		(5,865)		436		(1)		40,170		(5,866)
Foreign government obligations	13,782		(408)		—		—		13,782		(408)
Corporate securities:
Finance, insurance and real estate	325,056		(12,818)		—		—		325,056		(12,818)
Manufacturing, construction and mining	131,180		(8,185)		19,391		(1,734)		150,571		(9,919)
Utilities and related sectors	409,451		(57,131)		38,992		(6,719)		448,443		(63,850)
Wholesale/retail trade	168,634		(16,412)		81,245		(17,821)		249,879		(34,233)
Services, media and other	404,680		(52,252)		230,903		(61,600)		635,583		(113,852)
Residential mortgage backed securities	208,953		(3,200)		11,884		(1,788)		220,837		(4,988)
Commercial mortgage backed securities	1,954,977		(193,626)		67,940		(16,450)		2,022,917		(210,076)
Other asset backed securities	1,646,816		(64,305)		2,775,512		(284,543)		4,422,328		(348,848)
	$	6,103,273	$	(414,874)	$	3,226,303	$	(390,656)	$	9,329,576	$	(805,530)

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 $61.6 million as of September 30, 2020.

The unrealized losses at September 30, 2020 are principally related to the impacts the COVID-19 pandemic had on credit markets. In addition, certain unrealized losses at September 30, 2020 are related to the timing of the purchases of certain securities, which carry less yield than those currently available. Approximately 67% and 79% of the unrealized losses on fixed maturity securities shown in the above table for September 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 nine months ended September 30, 2020 and 2019 are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars in thousands)


Fixed maturity securities available for sale carried at fair value	$	800,492	$	990,481	$	1,285,600	$	3,891,291

Adjustment for effect on other balance sheet accounts:
Deferred policy acquisition costs and deferred sales inducements	(303,946)		(245,044)		(508,144)		(1,750,390)

Deferred income tax asset/liability	(104,274)		(155,992)		(163,266)		(449,040)
	(408,220)		(401,036)		(671,410)		(2,199,430)
Change in net unrealized gains/losses on investments carried at fair value	$	392,272	$	589,445	$	614,190	$	1,691,861

Proceeds from sales of available for sale fixed maturity securities for the nine months ended September 30, 2020 and 2019 were $1.1 billion and $707.5 million, respectively. Scheduled principal repayments, calls and tenders for available for sale fixed maturity securities for the nine months ended September 30, 2020 and 2019 were $2.3 billion and $1.5 billion, respectively.

Net realized gains (losses) on investments for the three and nine months ended September 30, 2020 and 2019, are as follows:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(Dollars in thousands)
Available for sale fixed maturity securities:
Gross realized gains	$	2,843	$	6,164	$	18,296	$	12,590
Gross realized losses	(51)		(1,586)		(1,521)		(5,667)
Credit losses (1)	(25,923)		—		(82,335)		—
	(23,131)		4,578		(65,560)		6,923




Other investments:
Gross realized gains	—		—		—		7,296
Gross realized losses	—		—		—		(14,446)
	—		—		—		(7,150)





Mortgage loans on real estate:
Increase (decrease) in allowance for credit losses	810		(250)		(3,697)		160
Recovery of specific allowance	—		—		712		—

	810		(250)		(2,985)		160
	$	(22,321)	$	4,328	$	(68,545)	$	(67)

(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 $0.1 million and $1.3 million, respectively, of other than temporary impairments during the three and nine months ended September 30, 2019.

Realized 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 September 30, 2020
		Corporate Securities		Commercial Mortgage Backed Securities		Residential Mortgage Backed Securities		Other Asset Backed Securities		Total
		(Dollars in thousands)
Beginning balance		$	46,749	$	2,660	$	777	$	—	$	50,186
Additions for credit losses not previously recorded		6,296		19,183		444		—		25,923
Reduction for securities with credit losses due to intent to sell		—		(14,490)		—		—		(14,490)
Ending balance		$	53,045	$	7,353	$	1,221	$	—	$	61,619

	Nine Months Ended September 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		53,045		27,521		1,221		548		82,335
Reduction for securities with credit losses due to intent to sell		—		(20,168)		—		(548)		(20,716)
Ending balance		$	53,045	$	7,353	$	1,221	$	—	$	61,619

(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 September 30,		Nine Months Ended September 30,
	2019		2019
	(Dollars in thousands)
Cumulative credit loss at beginning of period	$	(165,651)	$	(175,398)
Additions for the amount related to credit losses for which OTTI has not previously been recognized	—		(998)
Additional credit losses on securities for which OTTI has previously been recognized	(101)		(316)
Accumulated losses on securities that were disposed of during the period	10,775		21,735
Cumulative credit loss at end of period	$	(154,977)	$	(154,977)

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