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Investments
 3 Months Ended
Mar. 31, 2018
Investments, Debt and Equity Securities [Abstract]  
Investments The Company’s investment portfolio includes free-standing derivative financial instruments (currently over the counter index call option contracts) to economically hedge risk associated with its fixed indexed annuity (FIA) and indexed universal life (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 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. 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 month periods ended March 31, 2018 and 2017.

Fixed Maturity Securities

The Company’s investment portfolio is comprised primarily of fixed maturity securities. The amortized cost, net unrealized investment gains and losses, fair values and other-than-temporary impairment (OTTI) included in AOCI of all fixed maturity securities in the portfolio were as follows:
($ in thousands)
 
Amortized
Cost/Cost
 
Unrealized
Investment
Gains
 
Unrealized
Investment
Losses
 
Fair
Value
 
OTTI in
AOCI (2)
March 31, 2018 (1)
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
 
 
 
 
 
 
 
 
 
 
U.S. Government and federally
sponsored agency obligations (3):
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
699,629

 
$
22,930

 
$
11,601

 
$
710,958

 
$
—

Other, including U.S. Treasury securities
 
760,390

 
18,797

 
17,220

 
761,967

 
—

Municipal bonds
 
1,721,046

 
149,774

 
9,516

 
1,861,304

 
—

Foreign government bonds
 
94,870

 
4,307

 
136

 
99,041

 
—

Corporate bonds
 
2,383,394

 
112,451

 
14,575

 
2,481,270

 
—

Other mortgage-backed securities
 
1,714,223

 
16,621

 
10,702

 
1,720,142

 
—

Totals
 
$
7,373,552

 
$
324,880

 
$
63,750

 
$
7,634,682

 
$
—

 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
 
 
 
 
 
 
 
 
 
 
U.S. Government and federally
sponsored agency obligations (3):
 
 
 
 
 
 
 
 
 
 
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 (4)
 
$
116,320

 
$
19,425

 
$
279

 
$
135,466

 
$
—

________________
(1)
Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, available for sale equity securities were reclassified to equity securities at fair value and are excluded from the table above as of March 31, 2018.
(2)
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.
(3)
Fair value includes securities issued by Federal National Mortgage Association (FNMA) of $386,398 thousand and $361,955 thousand; Federal Home Loan Mortgage Corporation (FHLMC) of $396,957 thousand and $400,001 thousand; and Government National Mortgage Association (GNMA) of $98,056 thousand and $104,168 thousand as of March 31, 2018 and December 31, 2017, respectively.
(4)
Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.

The following table presents the fair value and gross unrealized losses of securities in an unrealized loss position at March 31, 2018 and December 31, 2017, respectively. The Company views the decrease in value of all of the securities with unrealized losses at March 31, 2018 -- 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. Therefore, no impairment of fixed maturity securities was recorded at March 31, 2018.
($ 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
March 31, 2018 (1)
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and federally sponsored agency obligations:
 
 
 
 
 
 
 
 
 
 
 
 
Mortgage-backed securities
 
$
301,927

 
$
8,346

 
$
39,339

 
$
3,255

 
$
341,266

 
$
11,601

Other
 
393,555

 
9,415

 
118,166

 
7,805

 
511,721

 
17,220

Municipal bonds
 
224,400

 
4,614

 
76,577

 
4,902

 
300,977

 
9,516

Foreign government bonds
 
6,390

 
136

 
—

 
—

 
6,390

 
136

Corporate bonds
 
450,467

 
11,923

 
37,572

 
2,652

 
488,039

 
14,575

Other mortgage-backed securities
 
607,571

 
6,298

 
146,659

 
4,404

 
754,230

 
10,702

Total
 
$
1,984,310

 
$
40,732

 
$
418,313

 
$
23,018

 
$
2,402,623

 
$
63,750

 
 
 
 
 
 
 
 
 
 
 
 
 
Number of positions with a
gross unrealized loss
 
837

 
 
 
153

 
 
 
990

 
 
Fair value as a percentage of total fixed
maturity securities fair value
 
25.6
%
 
 
 
5.4
%
 
 
 
31.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 (2)
 
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
maturity and equity securities fair value
 
11.6
%
 
 
 
5.7
%
 
 
 
17.3
%
 
 
________________
(1)
Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, available for sale equity securities were reclassified to equity securities at fair value and are excluded from the table above as of March 31, 2018.
(2)
Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.

Fixed maturity securities with an investment grade rating represented 95.3% of the gross unrealized losses as of March 31, 2018. 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 March 31, 2018 and 2017 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 OCI:
($ in thousands)
 
Three Months Ended March 31,
 
 
2018
 
2017
Cumulative credit loss (1)
 
 
 
 
Beginning of period
 
$
3,825

 
$
13,703

New credit losses
 
—

 
—

Increases to previously recognized credit losses
 
—

 
726

Gains (losses) related to securities sold or paid down during the period
 
—

 
(2
)
End of period
 
$
3,825

 
$
14,427

________________
(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 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)
 
Percent of Total Fair Value
 
March 31, 2018
 
 
March 31, 2018
 
December 31, 2017
 
Fair
Value
 
Amortized
Cost
Estimated expected maturity:
 
 
 
 
 
 
 
 
Due in 1 year or less
 
4.0
%
 
3.2
%
 
$
303,914

 
$
299,275

Due after 1 year through 5 years
 
25.4

 
26.7

 
1,936,362

 
1,887,648

Due after 5 years through 10 years
 
32.7

 
32.6

 
2,498,529

 
2,457,018

Due after 10 years through 20 years
 
24.7

 
24.2

 
1,884,116

 
1,800,969

Due after 20 years
 
13.2

 
13.3

 
1,011,761

 
928,642

Total
 
100.0
%
 
100.0
%
 
$
7,634,682

 
$
7,373,552

 
 
 
 
 
 
 
 
 
Average option-adjusted duration, in years
 
6.0

 
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 period were:
($ in thousands)
 
Three Months Ended March 31,
 
 
2018
 
2017
Fixed maturity securities
 
 
 
 
Proceeds received
 
$
89,894

 
$
110,872

Gross gains realized
 
1,670

 
2,489

Gross losses realized
 
(53
)
 
(881
)
 
 
 
 
 
Equity securities
 
 
 
 
Proceeds received
 
$
2,048

 
$
5,489

Gross gains realized
 
616

 
1,048

Gross losses realized
 
(34
)
 
(192
)


Net Investment Gains (Losses)

The following table reconciles the net investment gains and losses (pretax) by transaction type:
($ in thousands)
 
Three Months Ended March 31,
 
 
2018
 
2017
 
 
 
 
 
Impairment write-downs
 
$
—

 
$
(1,777
)
Change in intent write-downs
 
(110
)
 
(1,020
)
Net other-than-temporary impairment losses
recognized in earnings
 
(110
)
—

(2,797
)
Sales and other
 
2,203

 
2,484

Change in fair value - equity securities (1)
 
(5,186
)
 
—

Change in fair value and gains (losses) realized on settlements -
derivative instruments
 
1,439

 
71

Net investment gains (losses)
 
$
(1,654
)
—

$
(242
)
________________
(1)
Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, equity securities are reported at fair value with change in fair value recognized in Net investment gains (losses) and are no longer included in impairment write-downs or change in intent write-downs.

Net Unrealized Investment Gains and Losses on Securities

The following table reconciles the net unrealized investment gains and losses, net of tax, included in AOCI, before the impact of deferred policy acquisition costs (DAC):
($ in thousands)
 
 
Three Months Ended March 31,
 
 
 
2018
 
2017
Net unrealized investment gains and losses on securities, net of tax
 
 
 
 
 
Beginning of period
 
 
$
286,176

 
$
202,941

Change in net unrealized investment gains and losses
 
 
(67,285
)
 
25,193

Reclassification of net investments (gains) losses to net income
 
 
2,443

 
203

Reclassification of unrealized gains on equity securities,
net of tax, to Retained earnings (1)
 
 
(15,041
)
 
—

End of period
 
 
$
206,293

 
$
228,337


________________
(1)
Effective January 1, 2018, with the adoption of new accounting guidance for recognition and measurement of financial instruments, available for sale equity securities were reclassified to equity securities at fair value and the related unrealized gains were reclassified from AOCI to Retained earnings.

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
March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
 
Asset derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
Free-standing derivatives
 
$
12,630

 
$
—

 
$
12,630

 
$
—

 
$
13,174

 
$
(544
)
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
 
Asset derivatives:
 
 
 
 
 
 
 
 
 
 
 
 
Free-standing derivatives
 
$
15,550

 
$
—

 
$
15,550

 
$
—

 
$
15,584

 
$
(34
)


Deposits

At March 31, 2018 and December 31, 2017, fixed maturity securities with a fair value of $17,848 thousand and $17,985 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 March 31, 2018 and December 31, 2017, fixed maturity securities with a fair value of $686,387 thousand and $686,790 thousand, respectively, were on deposit with the Federal Home Loan Bank of Chicago (FHLB) as collateral for amounts subject to funding agreements, advances and borrowings which were equal to $625,000 thousand at both of the respective dates. The deposited securities are included in Fixed maturity securities on the Company’s Consolidated Balance Sheets.