| Investments |
NOTE 2 - Investments The Company's investment portfolio includes free-standing derivative financial instruments (currently over the counter index call option contracts) used to economically hedge risk associated with its FIA and IUL products' contingent liabilities. The Company's FIA and IUL products include embedded derivative features that are discussed in Note 1 — Summary of Significant Accounting Policies — Investment Contract and Life Policy Reserves — Reserves for Fixed Indexed Annuities and Indexed Universal Life Policies. The Company's investment portfolio included no other free-standing derivative financial instruments (futures, forwards, swaps, option contracts or other financial instruments with similar characteristics), and there were no other embedded derivative features related to the Company's investment or insurance products during the three years ended December 31, 2017. Net Investment Income The components of net investment income for the following periods were: | | | | | | | | | | | | | | ($ in thousands) | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | | | | | | | Fixed maturity securities | | $ | 354,290 |
| | $ | 342,773 |
| | $ | 326,207 |
| Equity securities | | 6,411 |
| | 4,703 |
| | 4,355 |
| Short-term and other investments | | 10,214 |
| | 9,668 |
| | 9,187 |
| Other invested assets (equity method investments) | | 12,555 |
| | 13,609 |
| | 1,984 |
| Total investment income | | 383,470 |
| | 370,753 |
| | 341,733 |
| Investment expenses | | (9,840 | ) | | (9,567 | ) | | (9,133 | ) | Net investment income | | $ | 373,630 |
| | $ | 361,186 |
| | $ | 332,600 |
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Net Realized Investment Gains (Losses) Net realized investment gains (losses) for the following periods were: | | | | | | | | | | | | | | ($ in thousands) | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | | | | | | | | Fixed maturity securities | | $ | (8,867 | ) | | $ | 5,784 |
| | $ | 10,289 |
| Equity securities | | 4,003 |
| | (608 | ) | | 1,378 |
| Short-term investments and other | | 1,458 |
| | (1,053 | ) | | 1,046 |
| Net realized investment gains (losses) | | $ | (3,406 | ) | | $ | 4,123 |
| | $ | 12,713 |
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The Company, from time to time, sells invested assets subsequent to the reporting date that were considered temporarily impaired at the reporting date. Such sales are due to issuer specific events occurring subsequent to the reporting date that result in a change in the Company's intent or ability to hold an invested asset. The types of events that may result in a sale include significant changes in the economic facts and circumstances related to the invested asset, significant unforeseen changes in liquidity needs, or changes in the Company's investment strategy. Fixed Maturity and Equity Securities The Company's investment portfolio is comprised primarily of fixed maturity securities and also includes equity securities. The amortized cost or cost, net unrealized investment gains and losses, fair values and OTTI included in accumulated other comprehensive income (loss) (AOCI) of all fixed maturity and equity securities in the portfolio were as follows: | | | | | | | | | | | | | | | | | | | | | | ($ in thousands) | | Amortized Cost/Cost | | Unrealized Gains | | Unrealized Losses | | Fair Value | | OTTI in AOCI (1) | December 31, 2017 | | | | | | | | | | | Fixed maturity securities | | | | | | | | | | | U.S. Government and federally sponsored agency obligations (2): | | | | | | | | | | | Mortgage-backed securities | | $ | 669,297 |
| | $ | 30,460 |
| | $ | 3,032 |
| | $ | 696,725 |
| | $ | — |
| Other, including U.S. Treasury securities | | 714,613 |
| | 26,311 |
| | 5,516 |
| | 735,408 |
| | — |
| Municipal bonds | | 1,711,581 |
| | 184,107 |
| | 2,435 |
| | 1,893,253 |
| | — |
| Foreign government bonds | | 96,780 |
| | 5,958 |
| | — |
| | 102,738 |
| | — |
| Corporate bonds | | 2,409,426 |
| | 173,862 |
| | 4,334 |
| | 2,578,954 |
| | — |
| Other mortgage-backed securities | | 1,701,253 |
| | 22,935 |
| | 7,191 |
| | 1,716,997 |
| | — |
| Totals | | $ | 7,302,950 |
| | $ | 443,633 |
| | $ | 22,508 |
| | $ | 7,724,075 |
| | $ | — |
| | | | | | | | | | | | Equity securities (3) | | $ | 116,320 |
| | $ | 19,425 |
| | $ | 279 |
| | $ | 135,466 |
| | $ | — |
| | | | | | | | | | | | December 31, 2016 | | | | | | | | | | | Fixed maturity securities | | | | | | | | | | | U.S. Government and federally sponsored agency obligations (2): | | | | | | | | | | | Mortgage-backed securities | | $ | 412,891 |
| | $ | 33,168 |
| | $ | 3,640 |
| | $ | 442,419 |
| | $ | — |
| Other, including U.S. Treasury securities | | 458,745 |
| | 18,518 |
| | 10,120 |
| | 467,143 |
| | — |
| Municipal bonds | | 1,648,252 |
| | 143,733 |
| | 22,588 |
| | 1,769,397 |
| | — |
| Foreign government bonds | | 93,864 |
| | 5,102 |
| | 297 |
| | 98,669 |
| | — |
| Corporate bonds | | 2,672,818 |
| | 152,229 |
| | 14,826 |
| | 2,810,221 |
| | — |
| Other mortgage-backed securities | | 1,865,557 |
| | 22,241 |
| | 18,939 |
| | 1,868,859 |
| | 1,618 |
| Totals | | $ | 7,152,127 |
| | $ | 374,991 |
| | $ | 70,410 |
| | $ | 7,456,708 |
| | $ | 1,618 |
| | | | | | | | | | | | Equity securities (3) | | $ | 134,013 |
| | $ | 13,210 |
| | $ | 5,574 |
| | $ | 141,649 |
| | $ | — |
|
| | (1) | Related to securities for which an unrealized loss was bifurcated to distinguish the credit-related portion and the portion driven by other market factors. Represents the amount of OTTI losses in AOCI which was not included in earnings; amounts also include net unrealized investment gains and losses on such impaired securities relating to changes in the fair value of those securities subsequent to the impairment measurement date. |
| | (2) | Fair value includes securities issued by Federal National Mortgage Association (FNMA) of $361,955 thousand and $196,468 thousand; Federal Home Loan Mortgage Corporation (FHLMC) of $400,001 thousand and $284,050 thousand; and Government National Mortgage Association (GNMA) of $104,168 thousand and $115,627 thousand as of December 31, 2017 and 2016, respectively. |
| | (3) | Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds. |
The following table presents the fair value and gross unrealized losses of fixed maturity and equity securities in an unrealized loss position at December 31, 2017 and 2016, respectively. The Company views the decrease in value of all of the securities with unrealized losses at December 31, 2017 — which was driven largely by changes in interest rates, spread widening, financial market illiquidity and/or market volatility from the date of acquisition — as temporary. For fixed maturity securities, management does not have the intent to sell the securities and it is not more likely than not the Company will be required to sell the securities before the anticipated recovery of the amortized cost bases, and management expects to recover the entire amortized cost bases of the fixed maturity securities. For equity securities, the Company has the ability and intent to hold the securities for the recovery of cost and recovery of cost is expected within a reasonable period of time. Therefore, no impairment of these securities was recorded at December 31, 2017. | | | | | | | | | | | | | | | | | | | | | | | | | | ($ in thousands) | | 12 months or less | | More than 12 months | | Total | | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | December 31, 2017 | | |
| | |
| | |
| | |
| | |
| | |
| Fixed maturity securities | | |
| | |
| | |
| | |
| | |
| | |
| U.S. Government and federally sponsored agency obligations: | | |
| | |
| | |
| | |
| | |
| | |
| Mortgage-backed securities | | $ | 134,032 |
| | $ | 1,053 |
| | $ | 40,606 |
| | $ | 1,979 |
| | $ | 174,638 |
| | $ | 3,032 |
| Other | | 168,634 |
| | 1,849 |
| | 122,753 |
| | 3,667 |
| | 291,387 |
| | 5,516 |
| Municipal bonds | | 29,437 |
| | 100 |
| | 79,140 |
| | 2,335 |
| | 108,577 |
| | 2,435 |
| Foreign government bonds | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Corporate bonds | | 115,113 |
| | 2,701 |
| | 36,081 |
| | 1,633 |
| | 151,194 |
| | 4,334 |
| Other mortgage-backed securities | | 457,166 |
| | 2,791 |
| | 168,972 |
| | 4,400 |
| | 626,138 |
| | 7,191 |
| Total fixed maturity securities | | 904,382 |
| | 8,494 |
| | 447,552 |
| | 14,014 |
| | 1,351,934 |
| | 22,508 |
| Equity securities (1) | | 6,027 |
| | 249 |
| | 1,277 |
| | 30 |
| | 7,304 |
| | 279 |
| Combined totals | | $ | 910,409 |
| | $ | 8,743 |
| | $ | 448,829 |
| | $ | 14,044 |
| | $ | 1,359,238 |
| | $ | 22,787 |
| Number of positions with a gross unrealized loss | | 354 |
| | |
| | 158 |
| | |
| | 512 |
| | |
| Fair value as a percentage of total fixed maturities and equity securities fair value | | 11.6 | % | | |
| | 5.7 | % | | |
| | 17.3 | % | | |
| | | | | | | | | | | | | | December 31, 2016 | | |
| | |
| | |
| | |
| | |
| | |
| Fixed maturity securities | | |
| | |
| | |
| | |
| | |
| | |
| U.S. Government and federally sponsored agency obligations: | | |
| | |
| | |
| | |
| | |
| | |
| Mortgage-backed securities | | $ | 76,573 |
| | $ | 3,096 |
| | $ | 3,235 |
| | $ | 544 |
| | $ | 79,808 |
| | $ | 3,640 |
| Other | | 219,372 |
| | 10,120 |
| | — |
| | — |
| | 219,372 |
| | 10,120 |
| Municipal bonds | | 408,163 |
| | 19,006 |
| | 9,928 |
| | 3,582 |
| | 418,091 |
| | 22,588 |
| Foreign government bonds | | 24,182 |
| | 297 |
| | — |
| | — |
| | 24,182 |
| | 297 |
| Corporate bonds | | 459,402 |
| | 11,056 |
| | 57,261 |
| | 3,770 |
| | 516,663 |
| | 14,826 |
| Other mortgage-backed securities | | 750,557 |
| | 13,550 |
| | 229,106 |
| | 5,389 |
| | 979,663 |
| | 18,939 |
| Total fixed maturity securities | | 1,938,249 |
| | 57,125 |
| | 299,530 |
| | 13,285 |
| | 2,237,779 |
| | 70,410 |
| Equity securities (1) | | 56,676 |
| | 4,567 |
| | 7,956 |
| | 1,007 |
| | 64,632 |
| | 5,574 |
| Combined totals | | $ | 1,994,925 |
| | $ | 61,692 |
| | $ | 307,486 |
| | $ | 14,292 |
| | $ | 2,302,411 |
| | $ | 75,984 |
| | | | | | | | | | | | | | Number of positions with a gross unrealized loss | | 629 |
| | |
| | 102 |
| | |
| | 731 |
| | |
| Fair value as a percentage of total fixed maturities and equity securities fair value | | 26.3 | % | | |
| | 4.0 | % | | |
| | 30.3 | % | | |
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____________________ | | (1) | Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds. |
Fixed maturity and equity securities with an investment grade rating represented 90.3% of the gross unrealized loss as of December 31, 2017. With respect to fixed maturity securities involving securitized financial assets, the underlying collateral cash flows were stress tested to determine there was no adverse change in the present value of cash flows below the amortized cost basis. Credit Losses The following table summarizes the cumulative amounts related to the Company's credit loss component of OTTI losses on fixed maturity securities held as of December 31, 2017 and 2016 that the Company did not intend to sell as of those dates, and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of the amortized cost bases, for which the non-credit portions of OTTI losses were recognized in other comprehensive income (loss): | | | | | | | | | | ($ in thousands) | | Year Ended December 31, | | | 2017 | | 2016 | Cumulative credit loss (1) | | |
| | |
| Beginning of period | | $ | 13,703 |
| | $ | 7,844 |
| New credit losses | | — |
| | 300 |
| Increases to previously recognized credit losses | | 1,995 |
| | 5,859 |
| Losses related to securities sold or paid down during the period | | (11,873 | ) | | (300 | ) | End of period | | $ | 3,825 |
| | $ | 13,703 |
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____________________ | | (1) | The cumulative credit loss amounts exclude OTTI losses on securities held as of the periods indicated that the Company intended to sell or it was more likely than not that the Company would be required to sell the security before the recovery of the amortized cost basis. |
Maturities/Sales of Fixed Maturity and Equity Securities The following table presents the distribution of the Company's fixed maturity securities portfolio by estimated expected maturity. Estimated expected maturities differ from contractual maturities, reflecting assumptions regarding borrowers' utilization of the right to call or prepay obligations with or without call or prepayment penalties. For structured securities, including mortgage-backed securities and other asset-backed securities, estimated expected maturities consider broker-dealer survey prepayment assumptions and are verified for consistency with the interest rate and economic environments. | | | | | | | | | | | | | ($ in thousands) | | December 31, 2017 | | | Amortized Cost | | Fair Value | | Percent of Total Fair Value | Estimated expected maturity: | | |
| | |
| | |
| Due in 1 year or less | | $ | 243,998 |
| | $ | 248,959 |
| | 3.2 | % | Due after 1 year through 5 years | | 1,985,554 |
| | 2,059,625 |
| | 26.7 | % | Due after 5 years through 10 years | | 2,428,868 |
| | 2,522,414 |
| | 32.6 | % | Due after 10 years through 20 years | | 1,731,226 |
| | 1,867,055 |
| | 24.2 | % | Due after 20 years | | 913,304 |
| | 1,026,022 |
| | 13.3 | % | Total | | $ | 7,302,950 |
| | $ | 7,724,075 |
| | 100.0 | % | | | | | | | | Average option-adjusted duration, in years | | 5.9 |
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Sales of Fixed Maturity and Equity Securities
Proceeds received from sales of fixed maturity and equity securities, each determined using the specific identification method, and gross gains and gross losses realized as a result of those sales for each year were: | | | | | | | | | | | | | | ($ in thousands) | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | Fixed maturity securities | | |
| | |
| | |
| Proceeds received | | $ | 500,760 |
| | $ | 429,251 |
| | $ | 445,100 |
| Gross gains realized | | 13,570 |
| | 15,915 |
| | 22,476 |
| Gross losses realized | | (11,842 | ) | | (4,163 | ) | | (5,487 | ) | | | | | | | | Equity securities | | | | | | | Proceeds received | | $ | 50,113 |
| | $ | 21,210 |
| | $ | 31,621 |
| Gross gains realized | | 7,753 |
| | 2,869 |
| | 6,604 |
| Gross losses realized | | (1,972 | ) | | (935 | ) | | (672 | ) |
Net Unrealized Investment Gains and Losses on Fixed Maturity and Equity Securities Net unrealized investment gains and losses are computed as the difference between fair value and amortized cost for fixed maturity securities or cost for equity securities. The following table reconciles the net unrealized investment gains and losses, net of tax, included in accumulated other comprehensive income (loss), before the impact on DAC: | | | | | | | | | | | | | | ($ in thousands) | | Year Ended December 31, | | | 2017 | | 2016 | | 2015 | Net unrealized investment gains and losses on fixed maturity securities, net of tax | | |
| | |
| | |
| Beginning of period | | $ | 197,978 |
| | $ | 198,714 |
| | $ | 336,604 |
| Change in unrealized investment gains and losses | | 69,989 |
| | 3,024 |
| | (131,202 | ) | Reclassification of net realized investment (gains) losses to net income | | 5,764 |
| | (3,760 | ) | | (6,688 | ) | End of period | | $ | 273,731 |
| | $ | 197,978 |
| | $ | 198,714 |
| | | | | | | | Net unrealized investment gains and losses on equity securities, net of tax | | |
| | |
| | |
| Beginning of period | | $ | 4,963 |
| | $ | 2,649 |
| | $ | 6,988 |
| Change in unrealized investment gains and losses | | 10,084 |
| | 1,919 |
| | (3,443 | ) | Reclassification of net realized investment (gains) losses to net income | | (2,602 | ) | | 395 |
| | (896 | ) | End of period | | $ | 12,445 |
| | $ | 4,963 |
| | $ | 2,649 |
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Investment in Entities Exceeding 10% of Shareholders' Equity At December 31, 2017 and 2016, there were no investments which exceeded 10% of total shareholders' equity in entities other than obligations of the U.S. Government and federally sponsored government agencies and authorities.
Offsetting of Assets and Liabilities The Company's derivative instruments (call options) are subject to enforceable master netting arrangements. Collateral support agreements associated with each master netting arrangement provide that the Company will receive or pledge financial collateral in the event minimum thresholds have been reached. The following table presents the instruments that were subject to a master netting arrangement for the Company. | | | | | | | | | | | | | | | | | | | | | | | | | | ($ in thousands) | | | | Gross Amounts Offset in the | | Net Amounts of Assets/ Liabilities Presented in the | | Gross Amounts Not Offset in the Consolidated Balance Sheets | | | | | Gross Amounts | | Consolidated Balance Sheets | | Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral Received | | Net Amount | December 31, 2017 | | |
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| Asset derivatives | | |
| | |
| | |
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| | |
| Free-standing derivatives | | $ | 15,550 |
| | $ | — |
| | $ | 15,550 |
| | $ | — |
| | $ | 15,584 |
| | $ | (34 | ) | | | | | | | | | | | | | | December 31, 2016 | | | | | | | | | | | | | Asset derivatives | | | | | | | | | | | | | Free-standing derivatives | | 8,694 |
| | — |
| | 8,694 |
| | — |
| | 8,824 |
| | (130 | ) |
Deposits At December 31, 2017 and 2016, fixed maturity securities with a fair value of $17,985 thousand and $18,119 thousand, respectively, were on deposit with governmental agencies as required by law in various states in which the insurance subsidiaries of HMEC conduct business. In addition, at December 31, 2017 and 2016, fixed maturity securities with a fair value of $686,790 thousand and $620,489 thousand, respectively, were on deposit with FHLB as collateral for amounts subject to funding agreements, advances and borrowings which were equal to $625,000 thousand and $575,000 thousand at the respective dates. The deposited securities are included in Fixed maturity securities on the Company's Consolidated Balance Sheets.
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