INVESTMENT OPERATIONS

9 Months Ended

Sep. 30, 2019

Investments, Debt and Equity Securities [Abstract]

Net realized gains (losses) are summarized as follows:


	For The Three Months Ended September 30,						For The Nine Months Ended September 30,
	2019		2018		2019		2018
	(Dollars In Thousands)
Fixed maturities	$	15,686	$	(2,018)	$	21,885	$	6,248
Equity gains and losses	6,117		(6,925)		44,292		(16,693)
Modco trading portfolio	67,674		(10,901)		252,147		(148,427)
Other investments	(1,260)		(312)		(1,070)		1,522
Realized gains (losses) - all other investments	88,217		(20,156)		317,254		(157,350)
Realized gains (losses) - derivatives⁽¹⁾	42,286		(26,710)		(86,288)		37,176
Realized investment gains (losses)	$	130,503	$	(46,866)	$	230,966	$	(120,174)

Net impairments losses recognized in earnings	$	(10,818)	$	(14)	$	(14,658)	$	(3,664)

(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 September 30,						For The Nine Months Ended September 30,
	2019		2018		2019		2018
	(Dollars In Thousands)
Gross realized gains	$	20,155	$	3,410	$	34,801	$	21,540
Gross realized losses:
Impairment losses	$	(10,818)	$	(14)	$	(14,658)	$	(3,664)
Other realized losses	$	(4,469)	$	(5,428)	$	(12,916)	$	(15,292)

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 September 30,						For The Nine Months Ended September 30,
	2019		2018		2019		2018
	(Dollars In Thousands)
Securities in an unrealized gain position:
Fair value (proceeds)	$	679,514	$	306,600	$	1,812,992	$	909,846
Gains realized	$	20,155	$	3,410	$	34,801	$	21,540

Securities in an unrealized loss position⁽¹⁾:
Fair value (proceeds)	$	37,488	$	122,317	$	368,416	$	380,493
Losses realized	$	(4,469)	$	(5,428)	$	(12,916)	$	(15,292)

(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 September 30,						For The Nine Months Ended September 30,
	2019		2018		2019		2018
	(Dollars In Thousands)
Net gains (losses) recognized during the period on equity securities	$	6,117	$	(6,925)	$	44,292	$	(16,693)
Less: net gains (losses) recognized on equity securities sold during the period	$	(648)	$	(1,476)	$	(395)	$	(3,858)
Gains (losses) recognized during the period on equity securities still held	$	6,765	$	(5,449)	$	44,687	$	(12,835)

The amortized cost and fair value of the Company’s investments classified as available-for-sale are as follows:


As of September 30, 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	$	5,151,583	$	194,100	$	(5,020)	$	5,340,663	$	—
Commercial mortgage-backed securities	2,627,310		88,275		(1,119)		2,714,466		—
Other asset-backed securities	1,878,663		32,830		(13,017)		1,898,476		(3)
U.S. government-related securities	1,154,940		9,836		(2,569)		1,162,207		—
Other government-related securities	552,445		52,421		(1,630)		603,236		—
States, municipals, and political subdivisions	4,503,629		331,625		(597)		4,834,657		1,274
Corporate securities	44,960,104		2,648,863		(323,362)		47,285,605		(24,644)
Redeemable preferred stocks	87,348		4,217		(4,003)		87,562		—
	60,916,022		3,362,167		(351,317)		63,926,872		(23,373)
Short-term investments	945,459		—		—		945,459		—
	$	61,861,481	$	3,362,167	$	(351,317)	$	64,872,331	$	(23,373)

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
	September 30, 2019		December 31, 2018
	(Dollars In Thousands)
Fixed maturities:
Residential mortgage-backed securities	$	202,963	$	241,836
Commercial mortgage-backed securities	208,935		188,925
Other asset-backed securities	137,732		159,907
U.S. government-related securities	48,112		59,794
Other government-related securities	26,792		44,207
States, municipals, and political subdivisions	300,332		286,413
Corporate securities	1,599,453		1,423,833
Redeemable preferred stocks	12,195		11,277
	2,536,514		2,416,192
Equity securities	6,647		9,892
Short-term investments	98,983		30,926
	$	2,642,144	$	2,457,010

The amortized cost and fair value of available-for-sale and held-to-maturity fixed maturities as of September 30, 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	$	1,830,025	$	1,828,513	$	—	$	—
Due after one year through five years	9,960,533		10,147,215		—		—
Due after five years through ten years	13,576,841		14,198,510		—		—
Due after ten years	35,548,623		37,752,634		2,544,054		2,685,076
	$	60,916,022	$	63,926,872	$	2,544,054	$	2,685,076

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 September 30,						For The Nine Months Ended September 30,
	2019		2018		2019		2018
	Fixed Maturities		Fixed Maturities		Fixed Maturities		Fixed Maturities
	(Dollars In Thousands)
Other-than-temporary impairments	$	(39,752)	$	(14)	$	(41,245)	$	(715)
Non-credit impairment losses recorded in other comprehensive income (loss)	28,934		—		26,587		(2,949)
Net impairment losses recognized in earnings	$	(10,818)	$	(14)	$	(14,658)	$	(3,664)

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 and nine months ended September 30, 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 September 30,						For The Nine Months Ended September 30,
	2019		2018		2019		2018
	(Dollars In Thousands)
Beginning balance	$	12,498	$	2	$	24,868	$	3,268
Additions for newly impaired securities	10,805		—		11,556		—
Additions for previously impaired securities	—		—		3,007		2
Reductions for previously impaired securities due to a change in expected cash flows	(12,498)		—		(21,332)		—
Reductions for previously impaired securities that were sold in the current period	—		(2)		(7,294)		(3,270)
Ending balance	$	10,805	$	—	$	10,805	$	—

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 September 30, 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	$	484,979	$	(2,069)	$	287,356	$	(2,951)	$	772,335	$	(5,020)
Commercial mortgage-backed securities	67,255		(78)		117,799		(1,041)		185,054		(1,119)
Other asset-backed securities	453,923		(7,510)		162,369		(5,507)		616,292		(13,017)
U.S. government-related securities	265,257		(844)		335,336		(1,725)		600,593		(2,569)
Other government-related securities	57,008		(488)		10,427		(1,142)		67,435		(1,630)
States, municipals, and political subdivisions	35,092		(297)		15,215		(300)		50,307		(597)
Corporate securities	2,133,888		(43,884)		3,624,679		(279,478)		5,758,567		(323,362)
Redeemable preferred stocks	—		—		16,935		(4,003)		16,935		(4,003)
	$	3,497,402	$	(55,170)	$	4,570,116	$	(296,147)	$	8,067,518	$	(351,317)

Residential mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities (“CMBS”) had gross unrealized losses greater than twelve months of $3.0 million and $1.0 million, respectively, as of September 30, 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 $5.5 million as of September 30, 2019. This category predominately includes student loan backed auction rate securities (“ARS”) whose underlying collateral is at least 1% 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 $1.7 million and $1.1 million as of September 30, 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 $0.3 million as of September 30, 2019. The aggregate decline in fair 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 $279.5 million as of September 30, 2019. The aggregate decline in fair 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, interest rate movement, and other pertinent information.

As of September 30, 2019, the Company had a total of 809 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.


	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 September 30, 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 $113.5 million of securities which were rated below investment grade. Approximately $235.2 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 September 30,						For The Nine Months Ended September 30,
	2019		2018		2019		2018
	(Dollars In Thousands)
Fixed maturities	$	1,308,054	$	(229,609)	$	4,396,173	$	(1,727,358)

The amortized cost and fair value of the Company’s investments classified as held-to-maturity as of September 30, 2019 and December 31, 2018, are as follows:


As of September 30, 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	$	782,054	$	10,406	$	—	$	792,460	$	—
Steel City, LLC	1,762,000		130,616		—		1,892,616		—
	$	2,544,054	$	141,022	$	—	$	2,685,076	$	—

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 and nine months ended September 30, 2019 and 2018, the Company recorded no other-than-temporary impairments on held-to-maturity securities.

The Company’s held-to-maturity securities had $141.0 million of gross unrecognized holding gains as of September 30, 2019. 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”) 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 September 30, 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 September 30, 2019, no payments have been made or required related to this guarantee.