Investments

3 Months Ended

Mar. 31, 2020

Investments, Debt and Equity Securities [Abstract]

Net Investment Income

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



($ in thousands)	Three Months Ended March 31,
	2020			2019
Fixed maturity securities	$	59,446		$	84,316
Equity securities	1,208			1,198
Limited partnership interests	(2,699		)	6,451
Short-term and other investments	2,857			3,388
Investment expenses	(2,225		)	(2,553		)
Net investment income - investment portfolio	58,587			92,800
Investment income - deposit asset on reinsurance	23,688			—
Total net investment income	$	82,275		$	92,800

Net Investment Gains (Losses)

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



($ in thousands)	Three Months Ended March 31,
	2020			2019
Fixed maturity securities	$	1,102		$	201
Equity securities	(14,723		)	7,907
Short-term investments and other	(4,843		)	(691		)
Net investment gains (losses)	$	(18,464	)	$	7,417

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.

Net Investment Gains (Losses) by Transaction Type

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



($ in thousands)	Three Months Ended March 31,
	2020			2019
Impairment write-downs	$	—		$	—
Change in intent write-downs	(3,692		)	(236		)
Net OTTI losses recognized in earnings	(3,692		)	(236		)
Sales and other, net	4,557			4,838
Change in fair value - equity securities	(14,486		)	3,506
Change in fair value and gains (losses) realized on settlements - derivatives	(4,843		)	(691		)
Net investment gains (losses)	$	(18,464	)	$	7,417

Fixed Maturity Securities

The Company's investment portfolio is comprised primarily of fixed maturity securities. Amortized cost, net unrealized investment gains (losses) and fair values of all fixed maturity securities in the portfolio were as follows:



($ in thousands)	Amortized Cost		Unrealized Gains		Unrealized Losses		Fair Value
March 31, 2020
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:⁽¹⁾
Mortgage-backed securities	$	676,322	$	75,985	$	392	$	751,915
Other, including U.S. Treasury securities	430,193		38,540		60		468,673
Municipal bonds	1,626,005		151,302		7,376		1,769,931
Foreign government bonds	42,802		1,804		754		43,852
Corporate bonds	1,649,405		77,572		41,204		1,685,773
Other mortgage-backed securities	1,228,739		6,068		111,768		1,123,039
Totals	$	5,653,466	$	351,271	$	161,554	$	5,843,183

December 31, 2019
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:⁽¹⁾
Mortgage-backed securities	$	684,543	$	41,263	$	1,487	$	724,319
Other, including U.S. Treasury securities	436,665		22,824		621		458,868
Municipal bonds	1,545,787		141,996		1,580		1,686,203
Foreign government bonds	42,801		2,569		—		45,370
Corporate bonds	1,464,444		118,775		1,795		1,581,424
Other mortgage-backed securities	1,282,740		20,883		8,131		1,295,492
Totals	$	5,456,980	$	348,310	$	13,614	$	5,791,676


⁽¹⁾	Fair value includes securities issued by Federal National Mortgage Association (FNMA) of $413.3 million and $405.1 million; Federal Home Loan Mortgage Corporation (FHLMC) of $308.4 million and $283.1 million; and Government National Mortgage Association (GNMA) of $151.1 million and $147.4 million as of March 31, 2020 and December 31, 2019, respectively.

The following table presents the fair value and gross unrealized losses for fixed maturity securities in an unrealized loss position at March 31, 2020 and December 31, 2019, respectively. The Company views the decrease in fair value of all of the fixed maturity securities with unrealized losses at March 31, 2020 — which was driven largely by increasing interest rates, spread widening, financial market illiquidity and/or market volatility from the date of acquisition — as temporary. As of March 31, 2020, the Company has not made the decision to sell and it is not more likely than not the Company will be required to sell fixed maturity securities with unrealized losses before an anticipated recovery in value. Therefore, it was determined that the unrealized losses on the securities presented in the table below were not other-than-temporarily impaired as of March 31, 2020.



($ 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, 2020
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	23,168		$	302	$	1,003		$	90	$	24,171		$	392
Other	15,736			60		—			—		15,736			60
Municipal bonds	191,688			7,376		—			—		191,688			7,376
Foreign government bonds	13,225			754		—			—		13,225			754
Corporate bonds	549,628			39,268		5,761			1,936		555,389			41,204
Other mortgage-backed securities	651,595			71,055		329,304			40,713		980,899			111,768
Total	$	1,445,040		$	118,815	$	336,068		$	42,739	$	1,781,108		$	161,554

Number of positions with a gross unrealized loss	1,080					104					1,184
Fair value as a percentage of total fixed maturity securities fair value	24.7		%			5.8		%			30.5		%

December 31, 2019
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	72,422		$	1,282	$	2,620		$	205	$	75,042		$	1,487
Other	38,341			619		1,527			2		39,868			621
Municipal bonds	91,195			977		9,160			603		100,355			1,580
Foreign government bonds	—			—		—			—		—			—
Corporate bonds	58,198			886		16,622			909		74,820			1,795
Other mortgage-backed securities	218,710			1,970		442,791			6,161		661,501			8,131
Total	$	478,866		$	5,734	$	472,720		$	7,880	$	951,586		$	13,614

Number of positions with a gross unrealized loss	330					137					467
Fair value as a percentage of total fixed maturity securities fair value	8.3		%			8.2		%			16.5		%

Fixed maturity securities with an investment grade rating represented 89.0% of the gross unrealized losses as of March 31, 2020. 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 other-than-temporary impairment (OTTI) losses on fixed maturity securities held as of March 31, 2020 and 2019 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 an anticipated recovery in value, for which the non-credit portions of OTTI losses were recognized in OCI:



($ in thousands)	Three Months Ended March 31,
	2020		2019
Cumulative credit loss⁽¹⁾
Beginning of period	$	1,529	$	1,529
New credit losses	185		—
Increases to previously recognized credit losses	—		—
Losses related to securities sold or paid down during the period	—		—
	$	1,714	$	1,529


⁽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 an anticipated recovery of value.

For the three months ended March 31, 2020, there was no allowance recognized for current expected credit losses with respect to fixed maturity securities classified as available for sale.

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 mortgage-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, 2020
	March 31, 2020		December 31, 2019		Fair Value		Amortized Cost
Estimated expected maturity:
Due in 1 year or less	4.0	%	3.6	%	$	230,397	$	233,386
Due after 1 year through 5 years	26.3	%	27.4	%	1,535,965		1,572,373
Due after 5 years through 10 years	29.4	%	29.6	%	1,719,303		1,661,161
Due after 10 years through 20 years	26.5	%	26.1	%	1,550,562		1,435,920
Due after 20 years	13.8	%	13.3	%	806,956		750,626
Total	100.0	%	100.0	%	$	5,843,183	$	5,653,466

Average option-adjusted duration, in years	6.1		6.0

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,
	2020			2019
Fixed maturity securities
Proceeds received	$	98,158		$	59,724
Gross gains realized	4,779			542
Gross losses realized	(268		)	(105		)

Equity securities
Proceeds received	$	1,457		$	15,489
Gross gains realized	319			4,745
Gross losses realized	(556		)	(344		)

Net Unrealized Investment Gains (Losses) on Fixed Maturity Securities

The following table reconciles net unrealized investment gains (losses) on fixed maturity securities, net of tax, included in AOCI, before the impact of DAC:



($ in thousands)	Three Months Ended March 31,
	2020			2019
Net unrealized investment gains (losses) on fixed maturity securities, net of tax
Beginning of period	$	264,410		$	111,712
Change in net unrealized investment gains (losses) on fixed maturity securities	(103,773		)	140,012
Reclassification of net investment (gains) losses on securities to net income	(10,761		)	(6,405		)
End of period	$	149,876		$	245,319

Limited Partnership Interests

As of March 31, 2020 and December 31, 2019, the carrying value of equity method limited partnership interests totaled $389.3 million and $383.7 million, 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 partnership interests 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.

Offsetting of Assets and Liabilities

The Company's derivatives (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 instruments that were subject to a master netting arrangement for the Company.



($ in thousands)			Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets/ Liabilities Presented in the Consolidated Balance Sheets		Gross Amounts Not Offset in the Consolidated Balance Sheets
	Gross Amounts		Gross Amounts Offset in the Consolidated Balance Sheets				Financial Instruments		Cash Collateral Received		Net Amount
March 31, 2020
Asset derivatives:
Free-standing derivatives	$	2,622	$	—	$	2,622	$	1,688	$	1,060	$	(126	)

December 31, 2019
Asset derivatives:
Free-standing derivatives	13,239		—		13,239		7,687		6,640		(1,088		)

Deposits

At March 31, 2020 and December 31, 2019, fixed maturity securities with a fair value of $27.0 million and $26.0 million, 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, 2020 and December 31, 2019, fixed maturity securities with a fair value of $679.7 million and $594.2 million, 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 $620.0 million at March 31, 2020 and $545.0 million at December 31, 2019. The deposited securities are included in Fixed maturity securities on the Company’s Consolidated Balance Sheets.