Investments

12 Months Ended

Dec. 31, 2017

Investments, Debt and Equity Securities [Abstract]

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

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

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		%

____________________

(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

____________________

(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

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

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
Asset derivatives
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.