Investments

12 Months Ended

Dec. 31, 2018

Investments, Debt and Equity Securities [Abstract]

Net Investment Income

The components of net investment income for the following periods were:



($ in thousands)	Year Ended December 31,
	2018			2017			2016

Fixed maturity securities	$	353,303		$	354,290		$	342,773
Equity securities	6,017			6,411			4,703
Limited partnership interests	15,406			12,555			13,609
Short-term and other investments	11,981			10,214			9,668
Total investment income	386,707			383,470			370,753
Investment expenses	(10,200		)	(9,840		)	(9,567		)
Net investment income	$	376,507		$	373,630		$	361,186

Net Investment Gains (Losses)

Net investment gains (losses) for the following periods were:



($ in thousands)	Year Ended December 31,
	2018			2017			2016

Fixed maturity securities	$	(5,713	)	$	(8,867	)	$	5,784
Equity securities	(10,649		)	4,003			(608		)
Short-term investments and other	3,819			1,458			(1,053		)
Net investment gains (losses)	$	(12,543	)	$	(3,406	)	$	4,123

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 (losses), fair values and OTTI included in 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
December 31, 2018 ⁽¹⁾
Fixed maturity securities
U.S. Government and federally sponsored agency obligations ⁽²⁾:
Mortgage-backed securities	$	778,038	$	22,724	$	13,321	$	787,441	$	—
Other, including U.S. Treasury securities	835,096		16,127		17,681		833,542		—
Municipal bonds	1,884,313		133,150		13,494		2,003,969		—
Foreign government bonds	83,343		2,321		760		84,904		—
Corporate bonds	2,054,105		64,296		38,891		2,079,510		—
Other mortgage-backed securities	1,739,016		10,467		23,531		1,725,952		—
Totals	$	7,373,911	$	249,085	$	107,678	$	7,515,318	$	—

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	$	—

____________________


⁽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 December 31, 2018.


⁽²⁾	Fair value includes securities issued by Federal National Mortgage Association (FNMA) of $441,308 thousand and $361,955 thousand; Federal Home Loan Mortgage Corporation (FHLMC) of $417,308 thousand and $400,001 thousand; and Government National Mortgage Association (GNMA) of $96,466 thousand and $104,168 thousand as of December 31, 2018 and 2017, 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, 2018 and 2017, respectively. The Company views the decrease in fair value of all of the securities with unrealized losses at December 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 their amortized cost bases, and management expects to recover the entire amortized cost bases of the fixed maturity securities. Therefore, no impairment of these securities was recognized at December 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
December 31, 2018 ⁽¹⁾
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	193,447		$	5,026	$	157,295		$	8,295	$	350,742		$	13,321
Other	263,497			6,746		246,213			10,935		509,710			17,681
Municipal bonds	291,869			7,603		95,297			5,891		387,166			13,494
Foreign government bonds	16,250			760		—			—		16,250			760
Corporate bonds	818,519			27,429		99,171			11,462		917,690			38,891
Other mortgage-backed securities	913,858			16,076		291,442			7,455		1,205,300			23,531
Total	2,497,440			63,640		889,418			44,038		3,386,858			107,678

Number of positions with a gross unrealized loss	1,052					359					1,411
Fair value as a percentage of total fixed maturities and equity securities fair value	32.7		%			11.7		%			44.4		%

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 maturities 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 December 31, 2018.


⁽²⁾	Includes nonredeemable (perpetual) preferred stocks, common stocks and closed-end funds.

Fixed maturity securities with an investment grade rating represented 95.5% of the gross unrealized losses as of December 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.

Limited Partnership Interests

As of December 31, 2018 and 2017, the carrying value of equity method limited partnerships totaled $328,516 thousand and $247,266 thousand, respectively. Principal factors influencing carrying value appreciation or decline include operating performance, comparable public company earnings multiples, capitalization rates and the economic environment. The Company recognizes an impairment loss for equity method limited partnerships when evidence demonstrates that the loss is other than temporary. Evidence of a loss in value that is other than temporary may include the absence of an ability to recover the carrying amount of the investment or the inability of the investee to sustain a level of earnings that would justify the carrying amount of the investment.

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, 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)	Year Ended December 31,
	2018			2017
Cumulative credit loss ⁽¹⁾
Beginning of period	$	3,825		$	13,703
New credit losses	—			—
Increases to previously recognized credit losses	246			1,995
Losses related to securities sold or paid down during the period	(2,542		)	(11,873		)
End of period	$	1,529		$	3,825

____________________


⁽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 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)	December 31, 2018
	Amortized Cost		Fair Value		Percent of Total Fair Value
Estimated expected maturity:
Due in 1 year or less	$	358,797	$	363,049	4.8	%
Due after 1 year through 5 years	1,690,400		1,713,593		22.8	%
Due after 5 years through 10 years	2,453,572		2,465,337		32.8	%
Due after 10 years through 20 years	1,931,599		1,991,726		26.5	%
Due after 20 years	939,543		981,613		13.1	%
Total	$	7,373,911	$	7,515,318	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,
	2018			2017			2016
Fixed maturity securities
Proceeds received	$	625,527		$	500,760		$	429,251
Gross gains realized	10,536			13,570			15,915
Gross losses realized	(14,932		)	(11,842		)	(4,163		)

Equity securities
Proceeds received	$	25,498		$	50,113		$	21,210
Gross gains realized	8,592			7,753			2,869
Gross losses realized	(917		)	(1,972		)	(935		)

Net Investment Gains (Losses)

The following table reconciles the net investment gains (losses) by transaction type:



($ in thousands)	Year Ended December 31,
	2018			2017			2016

Impairment write-downs	$	—		$	(1,778	)	$	(6,268	)
Change in intent write-downs	(1,530		)	(10,842		)	(4,843		)
Net OTTI losses recognized in earnings	(1,530		)	(12,620		)	(11,111		)
Sales and other, net	3,491			7,756			16,286
Change in fair value - equity securities ⁽¹⁾	(18,323		)	—			—
Change in fair value and gains (losses) realized on settlements - derivative instruments	3,819			1,458			(1,052		)
Net investment gains (losses)	$	(12,543	)	$	(3,406	)	$	4,123

____________________


⁽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 changes 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 (Losses) on Securities

Net unrealized investment gains (losses) on securities 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 (losses) on securities, net of tax, included in AOCI, before the impact on DAC:



($ in thousands)	Year Ended December 31,
	2018			2017		2016
Net unrealized investment gains (losses) on securities, net of tax
Beginning of period	$	286,176		$	202,941	$	201,363
Change in unrealized investment gains (losses) on securities	(172,350		)	80,073		4,943
Reclassification of net investment (gains) losses on securities to net income	12,927			3,162		(3,365		)
Cumulative effect of change in accounting principle ⁽¹⁾	(15,041		)	—		—
End of period	$	111,712		$	286,176	$	202,941

________________


⁽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 net unrealized gains were reclassified from AOCI to Retained earnings.

Investment in Entities Exceeding 10% of Shareholders' Equity

At December 31, 2018 and 2017, 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 cash 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, 2018
Asset derivatives
Free-standing derivatives	$	2,647	$	—	$	2,647	$	—	$	1,868	$	779

December 31, 2017
Asset derivatives
Free-standing derivatives	15,550		—		15,550		—		15,584		(34		)

Deposits

At December 31, 2018 and 2017, fixed maturity securities with a fair value of $17,695 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 December 31, 2018 and 2017, fixed maturity securities with a fair value of $740,016 thousand and $686,790 thousand, respectively, were on deposit with FHLB as collateral for amounts subject to funding agreements, advances and borrowings which were equal to $675,000 thousand and $625,000 thousand at the respective dates. The deposited securities are included in Fixed maturity securities on the Company's Consolidated Balance Sheets.