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INVESTMENT OPERATIONS
 3 Months Ended
Mar. 31, 2019
Investments, Debt and Equity Securities [Abstract]  
INVESTMENT OPERATIONS
INVESTMENT OPERATIONS
Net realized gains (losses) are summarized as follows:
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Fixed maturities
$
5,137

 
$
2,783

Equity gains and losses
30,635

 
(8,738
)
Modco trading portfolio
94,902

 
(84,709
)
Other investments
(1,146
)
 
3,113

Realized gains (losses) - all other investments
129,528

 
(87,551
)
Realized gains (losses) - derivatives(1)
(73,308
)
 
46,826

Realized investment gains (losses)
$
56,220

 
$
(40,725
)
 
 
 
 
Net impairments losses recognized in earnings
$
(3,142
)
 
$
(3,645
)
 
 
 
 
(1) See Note 7, Derivative Financial Instruments
 
 
 
Gross realized gains and gross realized losses on investments available-for-sale (fixed maturities and short-term investments) are as follows:
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Gross realized gains
$
7,870

 
$
8,049

Gross realized losses:
 
 
 
Impairment losses
$
(3,142
)
 
$
(3,645
)
Other realized losses
$
(2,733
)
 
$
(5,267
)

The chart below summarizes the fair value (proceeds) and the gains (losses) realized on securities the Company sold that were in an unrealized gain position and an unrealized loss position.
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Securities in an unrealized gain position:
 
 
 
Fair value (proceeds)
$
648,891

 
$
142,133

Gains realized
$
7,870

 
$
8,049

 
 
 
 
Securities in an unrealized loss position(1):
 
 
 
Fair value (proceeds)
$
171,302

 
$
56,984

Losses realized
$
(2,733
)
 
$
(5,267
)
 
 
 
 
(1) The Company made the decision to exit these holdings in conjunction with its overall asset/liability management process.

The chart below summarizes the realized gains (losses) on equity securities sold during the period and equity securities still held at the reporting date.
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Net gains (losses) recognized during the period on equity securities
$
30,635

 
$
(8,738
)
Less: net gains (losses) recognized on equity securities sold during the period
$
60

 
$
(1,702
)
Gains (losses) recognized during the period on equity securities still held
$
30,575

 
$
(7,036
)



The amortized cost and fair value of the Company’s investments classified as available-for-sale are as follows:
As of March 31, 2019
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI(1)
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
 
$
3,871,471

 
$
57,375

 
$
(29,315
)
 
$
3,899,531

 
$
—

Commercial mortgage-backed securities
 
2,334,211

 
17,148

 
(27,261
)
 
2,324,098

 
—

Other asset-backed securities
 
1,359,813

 
18,421

 
(15,623
)
 
1,362,611

 
—

U.S. government-related securities
 
1,439,136

 
2,382

 
(30,412
)
 
1,411,106

 
—

Other government-related securities
 
521,713

 
12,295

 
(11,883
)
 
522,125

 
—

States, municipals, and political subdivisions
 
3,632,880

 
84,040

 
(25,256
)
 
3,691,664

 
1,021

Corporate securities
 
38,424,196

 
573,892

 
(1,211,830
)
 
37,786,258

 
(18,719
)
Redeemable preferred stocks
 
87,579

 
368

 
(4,124
)
 
83,823

 
—

 
 
51,670,999

 
765,921

 
(1,355,704
)
 
51,081,216

 
(17,698
)
Short-term investments
 
607,017

 
—

 
—

 
607,017

 
—

 
 
$
52,278,016

 
$
765,921

 
$
(1,355,704
)
 
$
51,688,233

 
$
(17,698
)
 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2018
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI(1)
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Residential mortgage-backed securities
 
$
3,641,678

 
$
23,248

 
$
(61,935
)
 
$
3,602,991

 
$
(18
)
Commercial mortgage-backed securities
 
2,319,476

 
3,911

 
(57,000
)
 
2,266,387

 
—

Other asset-backed securities
 
1,410,059

 
17,232

 
(35,398
)
 
1,391,893

 
—

U.S. government-related securities
 
1,658,433

 
1,794

 
(45,722
)
 
1,614,505

 
—

Other government-related securities
 
543,534

 
4,292

 
(33,790
)
 
514,036

 
—

States, municipals, and political subdivisions
 
3,682,037

 
25,706

 
(118,902
)
 
3,588,841

 
876

Corporate securities
 
38,467,380

 
112,438

 
(2,378,240
)
 
36,201,578

 
(29,685
)
Redeemable preferred stocks
 
94,362

 
—

 
(11,560
)
 
82,802

 
—

 
 
51,816,959

 
188,621

 
(2,742,547
)
 
49,263,033

 
(28,827
)
Short-term investments
 
635,375

 
—

 
—

 
635,375

 
—

 
 
$
52,452,334

 
$
188,621

 
$
(2,742,547
)
 
$
49,898,408

 
$
(28,827
)
 
 
 
 
 
 
 
 
 
 
 
(1) These amounts are included in the gross unrealized gains and gross unrealized losses columns above.

The Company holds certain investments pursuant to certain modified coinsurance (“Modco”) arrangements. The fixed maturities held as part of these arrangements are classified as trading securities. The fair value of the investments held pursuant to these Modco arrangements are as follows:
 
 
As of
March 31, 2019
 
As of
December 31, 2018
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

Residential mortgage-backed securities
 
$
213,259

 
$
241,836

Commercial mortgage-backed securities
 
209,482

 
188,925

Other asset-backed securities
 
149,541

 
159,907

U.S. government-related securities
 
59,627

 
59,794

Other government-related securities
 
23,640

 
44,207

States, municipals, and political subdivisions
 
292,796

 
286,413

Corporate securities
 
1,533,256

 
1,423,833

Redeemable preferred stocks
 
11,860

 
11,277

 
 
2,493,461

 
2,416,192

Equity securities
 
9,207

 
9,892

Short-term investments
 
34,631

 
30,926

 
 
$
2,537,299

 
$
2,457,010


The amortized cost and fair value of available-for-sale and held-to-maturity fixed maturities as of March 31, 2019, by expected maturity, are shown below. Expected maturities of securities without a single maturity date are allocated based on estimated rates of prepayment that may differ from actual rates of prepayment.
 
Available-for-sale
 
Held-to-maturity
 
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
 
(Dollars In Thousands)
Due in one year or less
$
1,259,571

 
$
1,257,644

 
$
—

 
$
—

Due after one year through five years
8,936,843

 
8,920,426

 
—

 
—

Due after five years through ten years
8,822,759

 
8,877,578

 
—

 
—

Due after ten years
32,651,826

 
32,025,568

 
2,607,356

 
2,594,441

 
$
51,670,999

 
$
51,081,216

 
$
2,607,356

 
$
2,594,441


The charts below summarize the Company’s other-than-temporary impairments of investments. All of the impairments were related to fixed maturities.
 
For The
Three Months Ended
March 31, 2019
 
Fixed
Maturities
 
(Dollars In Thousands)
Other-than-temporary impairments
$
(1,295
)
Non-credit impairment losses recorded in other comprehensive income
(1,847
)
Net impairment losses recognized in earnings
$
(3,142
)

 
For The
Three Months Ended
March 31, 2018
 
Fixed
Maturities
 
(Dollars In Thousands)
Other-than-temporary impairments
$
(691
)
Non-credit impairment losses recorded in other comprehensive income
(2,954
)
Net impairment losses recognized in earnings
$
(3,645
)

There were no other-than-temporary impairments related to fixed maturities or equity securities that the Company intended to sell or expected to be required to sell for the three months ended March 31, 2019 and 2018.
The following chart is a rollforward of available-for-sale credit losses on fixed maturities held by the Company for which a portion of an other-than-temporary impairment was recognized in other comprehensive income (loss):
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Beginning balance
$
24,868

 
$
3,268

Additions for newly impaired securities
751

 
—

Additions for previously impaired securities
2,347

 
—

Reductions for previously impaired securities due to a change in expected cash flows
(632
)
 
(1,033
)
Reductions for previously impaired securities that were sold in the current period
(119
)
 
—

Ending balance
$
27,215

 
$
2,235


The following table includes the gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of March 31, 2019:
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
(Dollars In Thousands)
Residential mortgage-backed securities
$
158,901

 
$
(1,772
)
 
$
1,238,524

 
$
(27,543
)
 
$
1,397,425

 
$
(29,315
)
Commercial mortgage-backed securities
52,747

 
(1,235
)
 
1,454,220

 
(26,026
)
 
1,506,967

 
(27,261
)
Other asset-backed securities
531,548

 
(11,905
)
 
192,201

 
(3,718
)
 
723,749

 
(15,623
)
U.S. government-related securities
43,977

 
(640
)
 
1,045,717

 
(29,772
)
 
1,089,694

 
(30,412
)
Other government-related securities
51,767

 
(1,279
)
 
198,112

 
(10,604
)
 
249,879

 
(11,883
)
States, municipals, and political subdivisions
60,555

 
(369
)
 
911,555

 
(24,887
)
 
972,110

 
(25,256
)
Corporate securities
3,327,367

 
(136,044
)
 
17,570,174

 
(1,075,786
)
 
20,897,541

 
(1,211,830
)
Redeemable preferred stocks
10,154

 
(3
)
 
68,291

 
(4,121
)
 
78,445

 
(4,124
)
 
$
4,237,016

 
$
(153,247
)
 
$
22,678,794

 
$
(1,202,457
)
 
$
26,915,810

 
$
(1,355,704
)

Residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”) had gross unrealized losses greater than twelve months of $27.5 million and $26.0 million, respectively, as of March 31, 2019. Factors such as the credit enhancement within the deal structure, the average life of the securities, and the performance of the underlying collateral support the recoverability of these investments.
The other asset-backed securities had a gross unrealized loss greater than twelve months of $3.7 million as of March 31, 2019. This category predominately includes student loan backed auction rate securities (“ARS”) whose underlying collateral is at least 97% guaranteed by the Federal Family Education Loan Program (“FFELP”). At this time, the Company has no reason to believe that the U.S. Department of Education would not honor the FFELP guarantee, if it were necessary.
The U.S. government-related securities and the other government-related securities had gross unrealized losses greater than twelve months of $29.8 million and $10.6 million as of March 31, 2019, respectively. These declines were related to changes in interest rates.
The states, municipals, and political subdivisions category had gross unrealized losses greater than twelve months of $24.9 million as of March 31, 2019. The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered include credit ratings, the financial health of the issuer, the continued access of the issuer to capital markets, and other pertinent information.
The corporate securities category had gross unrealized losses greater than twelve months of $1.1 billion as of March 31, 2019. The aggregate decline in market value of these securities was deemed temporary due to positive factors supporting the recoverability of the respective investments. Positive factors considered include credit ratings, the financial health of the issuer, the continued access of the issuer to capital markets, and other pertinent information.
As of March 31, 2019, the Company had a total of 2,473 positions that were in an unrealized loss position, but the Company does not consider these unrealized loss positions to be other-than-temporary. This is based on the aggregate factors discussed previously and because the Company has the ability and intent to hold these investments until the fair values recover, and the Company does not intend to sell or expect to be required to sell the securities before recovering the Company’s amortized cost of the securities.
The following table includes the gross unrealized losses and fair value of the Company’s investments that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of December 31, 2018:
 
Less Than 12 Months
 
12 Months or More
 
Total
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
Fair
Value
 
Unrealized
Loss
 
(Dollars In Thousands)
Residential mortgage-backed securities
$
1,485,009

 
$
(31,302
)
 
$
795,765

 
$
(30,633
)
 
$
2,280,774

 
$
(61,935
)
Commercial mortgage-backed securities
419,420

 
(7,398
)
 
1,405,690

 
(49,602
)
 
1,825,110

 
(57,000
)
Other asset-backed securities
687,271

 
(30,963
)
 
148,871

 
(4,435
)
 
836,142

 
(35,398
)
U.S. government-related securities
130,290

 
(4,668
)
 
1,085,654

 
(41,054
)
 
1,215,944

 
(45,722
)
Other government-related securities
224,273

 
(15,207
)
 
131,569

 
(18,583
)
 
355,842

 
(33,790
)
States, municipals, and political subdivisions
1,004,262

 
(27,180
)
 
1,129,152

 
(91,722
)
 
2,133,414

 
(118,902
)
Corporate securities
18,225,656

 
(966,825
)
 
12,824,024

 
(1,411,415
)
 
31,049,680

 
(2,378,240
)
Redeemable preferred stocks
41,147

 
(4,467
)
 
41,655

 
(7,093
)
 
82,802

 
(11,560
)
 
$
22,217,328

 
$
(1,088,010
)
 
$
17,562,380

 
$
(1,654,537
)
 
$
39,779,708

 
$
(2,742,547
)

As of March 31, 2019, the Company had securities in its available-for-sale portfolio which were rated below investment grade of $1.6 billion and had an amortized cost of $1.7 billion. In addition, included in the Company’s trading portfolio, the Company held $120.7 million of securities which were rated below investment grade. Approximately $264.2 million of the available-for-sale and trading securities that were below investment grade were not publicly traded.
The change in unrealized gains (losses), net of income tax, on fixed maturities, classified as available-for-sale is summarized as follows:
 
For The
Three Months Ended
March 31,
 
2019
 
2018
 
(Dollars In Thousands)
Fixed maturities
$
1,551,674

 
$
(915,075
)

The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of March 31, 2019 and December 31, 2018, are as follows:
As of March 31, 2019
 
Amortized
Cost
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Securities issued by affiliates:
 
 
 
 
 
 
 
 
 
 
Red Mountain, LLC
 
$
764,356

 
$
—

 
$
(56,483
)
 
$
707,873

 
$
—

Steel City, LLC
 
1,843,000

 
43,568

 
—

 
1,886,568

 
—

 
 
$
2,607,356

 
$
43,568

 
$
(56,483
)
 
$
2,594,441

 
$
—

 
 
 
 
 
 
 
 
 
 
 
As of December 31, 2018
 
Amortized
Cost
 
Gross
Unrecognized
Holding
Gains
 
Gross
Unrecognized
Holding
Losses
 
Fair
Value
 
Total OTTI
Recognized
in OCI
 
 
(Dollars In Thousands)
Fixed maturities:
 
 

 
 

 
 

 
 

 
 

Securities issued by affiliates:
 
 
 
 
 
 
 
 
 
 
Red Mountain, LLC
 
$
750,474

 
$
—

 
$
(81,657
)
 
$
668,817

 
$
—

Steel City, LLC
 
1,883,000

 
—

 
(4,607
)
 
1,878,393

 
—

 
 
$
2,633,474

 
$
—

 
$
(86,264
)
 
$
2,547,210

 
$
—


During the three months ended March 31, 2019 and 2018, the Company recorded no other-than-temporary impairments on held-to-maturity securities.
The Company’s held-to-maturity securities had $43.6 million of gross unrecognized holding gains and $56.5 million of gross unrecognized holding losses as of March 31, 2019. The Company does not consider these unrecognized holding losses to be other-than-temporary based on certain positive factors associated with the securities which include credit ratings of the guarantor, financial health of the issuer and guarantor, continued access of the issuer to capital markets and other pertinent information. These held-to-maturity securities are issued by affiliates of the Company which are considered variable interest entities (“VIEs”). The Company is not the primary beneficiary of these entities and thus the securities are not eliminated in consolidation. These securities are collateralized by non-recourse funding obligations issued by captive insurance companies that are affiliates of the Company.
The Company’s held-to-maturity securities had $86.3 million of gross unrecognized holding losses as of December 31, 2018. The Company does not consider these unrecognized holding losses to be other-than-temporary based on certain positive factors associated with the securities which include credit ratings of the guarantor, financial health of the issuer and guarantor, continued access of the issuer to capital markets and other pertinent information.
Variable Interest Entity
The Company holds certain investments in an entity in which its ownership interests could possibly be considered variable interests under Topic 810 of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification (“ASC” or “Codification”) (excluding debt and equity securities held as trading, available-for-sale, or held-to-maturity). The Company reviews the characteristics of the applicable entity and compares those characteristics to applicable criteria to determine whether the entity is a VIE. If the entity is determined to be a VIE, the Company then performs a detailed review to determine whether the interest would be considered a variable interest under the guidance. The Company then performs a qualitative review of all variable interests with the entity and determines whether the Company is the primary beneficiary. ASC 810 provides that an entity is the primary beneficiary of a VIE if the entity has 1) the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance, and 2) the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE.
Based on this analysis, the Company had an interest in one wholly owned subsidiary, Red Mountain, LLC (“Red Mountain”) as of March 31, 2019 and December 31, 2018, that was determined to be a VIE.
The activity most significant to Red Mountain is the issuance of a note in connection with a financing transaction involving Golden Gate V Vermont Captive Insurance Company (“Golden Gate V”) and the Company in which Golden Gate V issued non-recourse funding obligations to Red Mountain and Red Mountain issued the note to Golden Gate V. Credit enhancement on the Red Mountain Note is provided by an unrelated third party. The Company had the power, via its 100% ownership through an affiliate, to direct the activities of the VIE, but did not have the obligation to absorb losses related to the primary risks or sources of variability to the VIE. The variability of loss would be borne primarily by the third party in its function as provider of credit enhancement on the Red Mountain Note. Accordingly, it was determined that the Company is not the primary beneficiary of the VIE. The Company’s risk of loss related to the VIE is limited to its investment of $10,000. Additionally, the Company has guaranteed Red Mountain’s payment obligation for the credit enhancement fee to the unrelated third party provider. As of March 31, 2019, no payments have been made or required related to this guarantee.