Investments

6 Months Ended

Jun. 30, 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 June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Fixed maturity securities	$	58,861		$	83,561		$	118,307		$	167,877
Equity securities	1,182			1,392			2,390			2,590
Limited partnership interests	(3,485		)	9,449			(6,184		)	15,900
Short-term and other investments	2,784			(21,451		)	5,641			(18,063		)
Investment expenses	(2,886		)	(2,688		)	(5,111		)	(5,241		)
Net investment income - investment portfolio	56,456			70,263			115,043			163,063
Investment income - deposit asset on reinsurance	23,954			23,195			47,642			23,195
Total net investment income	$	80,410		$	93,458		$	162,685		$	186,258

Net Investment Gains (Losses)

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



($ in thousands)	Three Months Ended June 30,					Six Months Ended June 30,
	2020			2019		2020			2019
Fixed maturity securities	$	(642	)	$	141,548	$	460		$	141,749
Equity securities	7,071			3,926		(7,652		)	11,833
Short-term investments and other	(3,267		)	859		(8,110		)	168
Net investment gains (losses)	$	3,162		$	146,333	$	(15,302	)	$	153,750

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 June 30,						Six Months Ended June 30,
	2020			2019			2020			2019
Credit impairment write-downs	$	—		$	—		$	—		$	—
Change in intent write-downs	(523		)	(34		)	(4,215		)	(271		)
Net other-than-temporary impairment losses on securities recognized in earnings	(523		)	(34		)	(4,215		)	(271		)
Sales and other, net	352			142,067			4,909			146,905
Change in fair value - equity securities	6,600			3,441			(7,886		)	6,948
Change in fair value and gains (losses) realized on settlements - derivatives	(3,267		)	859			(8,110		)	168
Net investment gains (losses)	$	3,162		$	146,333		$	(15,302	)	$	153,750

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
June 30, 2020
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:⁽¹⁾
Mortgage-backed securities	$	635,342	$	83,843	$	211	$	718,974
Other, including U.S. Treasury securities	333,428		41,453		—		374,881
Municipal bonds	1,633,297		174,211		1,958		1,805,550
Foreign government bonds	39,643		3,907		—		43,550
Corporate bonds	1,705,963		169,498		13,021		1,862,440
Other asset-backed securities	1,256,732		16,978		57,122		1,216,588
Totals	$	5,604,405	$	489,890	$	72,312	$	6,021,983

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 asset-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 $392.6 million and $405.1 million; Federal Home Loan Mortgage Corporation (FHLMC) of $312.9 million and $283.1 million; and Government National Mortgage Association (GNMA) of $145.6 million and $147.4 million as of June 30, 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 June 30, 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 June 30, 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 June 30, 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 June 30, 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
June 30, 2020
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	8,344		$	130	$	933		$	81	$	9,277		$	211
Other	37			—		—			—		37			—
Municipal bonds	81,279			1,958		—			—		81,279			1,958
Foreign government bonds	—			—		—			—		—			—
Corporate bonds	209,868			12,127		6,060			894		215,928			13,021
Other asset-backed securities	448,358			38,339		387,453			18,783		835,811			57,122
Total	$	747,886		$	52,554	$	394,446		$	19,758	$	1,142,332		$	72,312

Number of positions with a gross unrealized loss	594					109					703
Fair value as a percentage of total fixed maturity securities at fair value	12.4		%			6.6		%			19.0		%

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 asset-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 at fair value	8.3		%			8.2		%			16.5		%

Fixed maturity securities with an investment grade rating represented 84.5% of the gross unrealized losses as of June 30, 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 June 30, 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)	Six Months Ended June 30,
	2020			2019
Cumulative credit loss⁽¹⁾
Beginning of period	$	1,529		$	1,529
New credit losses	184			—
Increases to previously recognized credit losses	—			—
Losses related to securities sold or paid down during the period	(103		)	—
	$	1,610		$	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 and six months ended June 30, 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				June 30, 2020
	June 30, 2020		December 31, 2019		Fair Value		Amortized Cost
Estimated expected maturity:
Due in 1 year or less	4.0	%	3.6	%	$	240,942	$	240,701
Due after 1 year through 5 years	27.9	%	27.4	%	1,680,037		1,650,193
Due after 5 years through 10 years	30.1	%	29.6	%	1,814,204		1,680,118
Due after 10 years through 20 years	24.7	%	26.1	%	1,487,294		1,314,841
Due after 20 years	13.3	%	13.3	%	799,506		718,552
Total	100.0	%	100.0	%	$	6,021,983	$	5,604,405

Average option-adjusted duration, in years	6.2		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 June 30,						Six Months Ended June 30,
	2020			2019 ⁽¹⁾			2020			2019 ⁽¹⁾
Fixed maturity securities
Proceeds received	$	196,004		$	442,015		$	294,162		$	501,739
Gross gains realized	5,506			147,774			10,285			148,316
Gross losses realized	(5,625		)	(5,976		)	(5,893		)	(6,081		)

Equity securities
Proceeds received	$	10,602		$	1,633		$	12,059		$	17,122
Gross gains realized	1,721			389			2,040			5,134
Gross losses realized	(1,249		)	(166		)	(1,805		)	(510		)


⁽¹⁾	Gross gains realized presented above include a $135.3 million realized investment gain associated with a transfer of investments to a reinsurer as consideration paid during the second quarter of 2019 in connection with the reinsurance of a $2.9 billion block of in force fixed and variable annuity business. See Note 5 for further information.

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 accumulated other comprehensive income (AOCI), before the impact of DAC:



($ in thousands)	Three Months Ended June 30,					Six Months Ended June 30,
	2020		2019			2020			2019
Net unrealized investment gains (losses) on fixed maturity securities, net of tax
Beginning of period	$	149,876	$	245,319		$	264,410		$	111,712
Change in net unrealized investment gains (losses) on fixed maturity securities	174,932		100,693			71,159			240,705
Reclassification of net investment (gains) losses on securities to net income	5,079		(114,925		)	(5,682		)	(121,330		)
End of period	$	329,887	$	231,087		$	329,887		$	231,087

Limited Partnership Interests

As of June 30, 2020 and December 31, 2019, the carrying value of equity method limited partnership interests totaled $392.2 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 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
June 30, 2020
Asset derivatives:
Free-standing derivatives	$	7,276	$	—	$	7,276	$	4,340	$	2,600	$	336

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

Deposits

At June 30, 2020 and December 31, 2019, fixed maturity securities with a fair value of $26.9 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 June 30, 2020 and December 31, 2019, fixed maturity securities with a fair value of $701.9 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 $644.5 million at June 30, 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.