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Investments

12 Months Ended

Dec. 31, 2019

(a) Net unrealized gains on investments included in OCI by asset class were as follows for the years ended December 31, 2019, 2018, and 2017:



($ in thousands)	2019			2018		2017
AFS securities:
Fixed income securities	$	215,634		2,302		85,806
Equity securities	—			—		38,894
Total AFS securities	215,634			2,302		124,700

HTM securities:
Fixed income securities	31			89		(21	)
Total HTM securities	31			89		(21	)

Short-term securities	23			—		—

Total net unrealized gains	215,688			2,391		124,679
Deferred income tax	(45,294		)	(502	)	(44,103	)
Net unrealized gains, net of deferred income tax	170,394			1,889		80,576

Cumulative effect adjustment due to accounting change for equity unrealized¹	—			30,726		—
Cumulative effect adjustment due to accounting changes due to accounting change for stranded tax assets¹	—			(17,920	)	—
Increase (decrease) in net unrealized gains in OCI, net of deferred income tax	$	168,505		(65,881	)	38,453

¹Upon adoption of ASU 2016-01, we recognized a $30.7 million cumulative-effect adjustment to the opening balance of AOCI, which represents the after-tax net unrealized gain on our equity portfolio as of December 31, 2017. Additionally, upon adoption of ASU 2018-02, we recognized a one-time reclassification from AOCI to retained earnings for $17.9 million representing the stranded tax assets related to our investment portfolio that were created in AOCI from the enactment of the Tax Cuts and Jobs Act of 2017 ("Tax Reform").

(b) Information regarding our HTM fixed income securities as of December 31, 2019 and December 31, 2018 was as follows:



December 31, 2019			Net
			Unrealized		Unrecognized	Unrecognized
	Amortized		Gains	Carrying	Holding	Holding		Fair
($ in thousands)	Cost		(Losses)	Value	Gains	Losses		Value
Obligations of state and political subdivisions	$	4,573	7	4,580	342	(1	)	4,921
Corporate securities	16,196		24	16,220	834	—		17,054
Total HTM fixed income securities	$	20,769	31	20,800	1,176	(1	)	21,975



December 31, 2018			Net
			Unrealized		Unrecognized	Unrecognized
	Amortized		Gains	Carrying	Holding	Holding		Fair
($ in thousands)	Cost		(Losses)	Value	Gains	Losses		Value
Obligations of state and political subdivisions	17,431		39	17,470	504	(5	)	17,969
Corporate securities	19,590		50	19,640	855	(147	)	20,348
Total HTM fixed income securities	$	37,021	89	37,110	1,359	(152	)	38,317

Unrecognized holding gains and losses of HTM securities are not reflected in the Financial Statements, as they represent fair value fluctuations from the date a security is designated as HTM through the date of the balance sheet.



December 31, 2019
	Cost/
	Amortized		Unrealized	Unrealized		Fair
($ in thousands)	Cost		Gains	Losses		Value
AFS fixed income securities:
U.S. government and government agencies	$	112,680	3,506	—		116,186
Foreign government	18,011		533	(2	)	18,542
Obligations of states and political subdivisions	1,168,185		62,175	(270	)	1,230,090
Corporate securities	1,866,881		81,906	(1,310	)	1,947,477
CLO and other ABS	790,517		7,929	(5,434	)	793,012
CMBS	514,709		23,902	(267	)	538,344
RMBS	1,409,003		43,421	(455	)	1,451,969
Total AFS fixed income securities	$	5,879,986	223,372	(7,738	)	6,095,620



December 31, 2018
	Cost/
	Amortized		Unrealized	Unrealized		Fair
($ in thousands)	Cost		Gains	Losses		Value
AFS fixed income securities:
U.S. government and government agencies	$	120,092	1,810	(592	)	121,310
Foreign government	23,202		36	(107	)	23,131
Obligations of states and political subdivisions	1,121,615		19,485	(2,631	)	1,138,469
Corporate securities	1,639,852		5,521	(27,965	)	1,617,408
CLO and other ABS	720,193		4,112	(6,943	)	717,362
CMBS	527,409		3,417	(3,748	)	527,078
RMBS	1,118,435		12,988	(3,081	)	1,128,342
Total AFS fixed income securities	$	5,270,798	47,369	(45,067	)	5,273,100

Unrealized gains and losses of AFS securities represent fair value fluctuations from the later of: (i) the date a security is designated as AFS; or (ii) the date that an OTTI charge is recognized on an AFS security, through the date of the balance sheet. These unrealized gains and losses are recorded in AOCI on the Consolidated Balance Sheets.

(d) The severity of impairment on the securities in an unrealized/unrecognized loss position averaged approximately 1% of amortized cost at December 31, 2019 and approximately 2% at December 31, 2018. Quantitative information regarding unrealized losses on our AFS portfolio is provided below. Our HTM portfolio had less than $0.1 million in unrealized/unrecognized losses at December 31, 2019 and $0.2 million in unrealized/unrecognized losses at December 31, 2018.



December 31, 2019	Less than 12 months				12 months or longer			Total
($ in thousands)	Fair Value		Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
AFS fixed income securities:
Foreign government	1,416		(2	)	—	—		1,416	(2	)
Obligations of states and political subdivisions	35,838		(270	)	—	—		35,838	(270	)
Corporate securities	84,832		(480	)	20,182	(830	)	105,014	(1,310	)
CLO and other ABS	205,191		(1,938	)	204,385	(3,496	)	409,576	(5,434	)
CMBS	62,893		(264	)	828	(3	)	63,721	(267	)
RMBS	126,089		(425	)	5,375	(30	)	131,464	(455	)
Total AFS fixed income securities	$	516,259	(3,379	)	230,770	(4,359	)	747,029	(7,738	)



December 31, 2018	Less than 12 months				12 months or longer			Total
($ in thousands)	Fair Value		Unrealized Losses		Fair Value	Unrealized Losses		Fair Value	Unrealized Losses
AFS fixed income securities:
U.S. government and government agencies	$	6,693	(174	)	23,163	(418	)	29,856	(592	)
Foreign government	12,208		(93	)	1,482	(14	)	13,690	(107	)
Obligations of states and political subdivisions	196,798		(2,074	)	42,821	(557	)	239,619	(2,631	)
Corporate securities	1,041,952		(23,649	)	78,953	(4,316	)	1,120,905	(27,965	)
CLO and other ABS	516,106		(6,750	)	16,800	(193	)	532,906	(6,943	)
CMBS	229,338		(2,548	)	66,294	(1,200	)	295,632	(3,748	)
RMBS	139,338		(1,660	)	45,661	(1,421	)	184,999	(3,081	)
Total AFS fixed income securities	$	2,142,433	(36,948	)	275,174	(8,119	)	2,417,607	(45,067	)

The $37.3 million decrease in the unrealized loss position reflected: (i) lower interest rates, with a 90-basis point decrease in the 2-year U.S. Treasury Note yields and a 77-basis point decrease in 10-year U.S. Treasury Note yields during 2019; and (ii) tightening option adjusted corporate credit spreads with a 60-basis point decrease in the Bloomberg Barclays U.S. Aggregate Corporate Bond Index during 2019. We do not currently intend to sell any of the securities in the tables above, nor will we be required to sell any of these securities. Considering these factors and our review of these securities under our OTTI policy as described in Note 2. “Summary of Significant Accounting Policies” of this Form 10-K, we have concluded that they are temporarily impaired as we believe: (i) they will mature at par value; (ii) they have not incurred a credit impairment; and (iii) future values of these securities will fluctuate with changes in interest rates. This conclusion reflects our current judgment as to the financial position and future prospects of the entity that issued the investment security and underlying collateral.

(e) Fixed income securities at December 31, 2019, by contractual maturity are shown below. Mortgage-backed securities are included in the maturity tables using the estimated average life of each security. Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Listed below are the contractual maturities of fixed income securities at December 31, 2019:



	AFS		HTM
($ in thousands)	Fair Value		Carrying Value	Fair Value
Due in one year or less	$	394,027	1,211	1,229
Due after one year through five years	3,001,602		13,856	14,820
Due after five years through 10 years	2,531,172		5,733	5,926
Due after 10 years	168,819		—	—
Total fixed income securities	$	6,095,620	20,800	21,975

(f) The following table summarizes our other investment portfolio by strategy:



Other Investments	December 31, 2019				December 31, 2018
($ in thousands)	Carrying Value		Remaining Commitment	Maximum Exposure to Loss¹	Carrying Value	Remaining Commitment	Maximum Exposure to Loss¹
Alternative Investments
Private equity	$	118,352	93,138	211,490	84,352	93,688	178,040
Private credit	42,532		105,340	147,872	41,682	81,453	123,135
Real assets	23,256		20,741	43,997	27,862	27,129	54,991
Total alternative investments	184,140		219,219	403,359	153,896	202,270	356,166
Other securities²	32,667		—	32,667	25,042	—	25,042
Total other investments	$	216,807	219,219	436,026	178,938	202,270	381,208

¹The maximum exposure to loss includes both the carrying value of these investments and the related unfunded commitments. In addition, tax credits that have been previously recognized in Other securities are subject to the risk of recapture, which we do not consider significant.

²Other securities primarily consists of tax credit investments.

We have reviewed various investments included in the table above and have concluded that they are VIEs, but that we are not the primary beneficiary and therefore, consolidation is not required. We do not have a future obligation to fund losses or debts

on behalf of these investments; however, we are contractually committed to make additional investments up to the remaining commitment outlined above. We have not provided any non-contractual financial support at any time during 2019 or 2018.

The following is a description of our alternative investment strategies:

Our private equity strategy includes the following:


•	Primary Private Equity: This strategy makes private equity investments, primarily in established large and middle market companies across diverse industries globally, with an emphasis on North America.


•	Secondary Private Equity: This strategy purchases seasoned private equity funds from investors desiring liquidity prior to normal fund termination. Investments are made across all sectors of the private equity market, including leveraged buyouts ("LBO"), venture capital, distressed securities, mezzanine financing, real estate, and infrastructure.


•	Venture Capital: In general, these investments are made principally by investing in equity securities of privately-held corporations, for long-term capital appreciation. This strategy makes private equity investments in growth equity and buyout partnerships.

Our private credit strategy includes the following:


•	Direct Lending: This strategy provides privately negotiated loans to U.S. middle market companies. Typically, these are floating rate, senior secured loans diversified across industries. Loans are made to companies that may or may not have private equity sponsors to finance LBOs, recapitalizations, and acquisitions.


•	Mezzanine Financing: This strategy provides privately-negotiated fixed income securities, generally with an equity component, to LBO firms and private and publicly-traded large, mid, and small-cap companies to finance LBOs, recapitalizations, and acquisitions.

•

Opportunistic and Distressed Debt: This strategy makes investments in debt and equity securities of companies that are experiencing financial distress, operational issues, or dislocated pricing of publicly-traded securities. Investments include buying indebtedness of bankrupt or financially-troubled companies, small balance loan portfolios, special situations and capital structure arbitrage trades, commercial real estate mortgages, and similar non-U.S. securities and debt obligations.

Our real assets strategy includes the following:


•	Infrastructure: This strategy invests in the equity or debt of cash flow generating assets, diversified across a variety of industries, including transportation, energy infrastructure, renewable power, such as wind and solar, social infrastructure, power generation, water, telecom, and other regulated entities principally located in North America and Western Europe.


•	Real Estate: This strategy invests in real estate in North America, Europe, and Asia via direct property ownership, joint ventures, mortgages, and investments in equity and debt instruments.

Our alternative investment strategies may employ leverage and may use hedging to reduce foreign exchange or interest rate volatility. At this time, our alternative investment strategies do not include hedge funds. We typically cannot redeem our investments with the general partners of these investments; however, occasionally these partnerships can be traded on the secondary market. Once liquidation is triggered by clauses within the limited partnership agreements or at the funds’ stated end date, we will receive our final allocation of capital and any earned appreciation of the underlying investments, assuming we have not divested ourselves of our partnership interests prior to that time. We currently receive distributions from these alternative investments through the realization of the underlying investments or income generated in the limited partnerships.

The following tables set forth summarized financial information for our other investments portfolio, including the portion not owned by us. The investments are recorded under the equity method of accounting. The last line in the income statement information table below reflects our share of the aggregate income, which is the portion included in our Financial Statements. As the majority of these investments report results to us on a one quarter lag, the summarized financial statement information is as of, and for the 12-month period ended, September 30:



Balance Sheet Information
December 31,
($ in millions)	2019		2018
Investments	$	43,857	28,292
Total assets	45,432		30,377
Total liabilities	5,670		4,532
Total partners’ capital	39,762		25,845



Income Statement Information
12 months ended September 30,
($ in millions)	2019			2018	2017
Net investment (loss) income	$	(8	)	134	(143	)
Realized gains	695			1,981	325
Net change in unrealized appreciation	5,543			1,303	2,894
Net income before tax	$	6,230		3,418	3,076

Insurance Subsidiaries' alternative investments income before tax	17.9			17.6	12.7

(g) We did not have exposure to any credit concentration risk of a single issuer greater than 10% of our stockholders' equity, other than certain U.S. government agencies, as of December 31, 2019 or December 31, 2018.

(h) We have pledged certain AFS fixed income securities as collateral related to our relationships with the Federal Home Loan Bank of Indianapolis ("FHLBI") and the Federal Home Loan Bank of New York ("FHLBNY"). In addition, certain securities were on deposit with various state and regulatory agencies at December 31, 2019 to comply with insurance laws. We retain all rights regarding all securities pledged as collateral.

The following table summarizes the market value of these securities at December 31, 2019:



($ in millions)	FHLBI Collateral		FHLBNY Collateral	State and Regulatory Deposits	Total
U.S. government and government agencies	$	—	—	22.8	22.8
Obligations of states and political subdivisions	—		—	4.0	4.0
Corporate securities	—		—	0.3	0.3
CMBS	7.2		17.9	—	25.1
RMBS	59.0		77.6	—	136.6
Total pledged as collateral	$	66.2	95.5	27.1	188.8

(i) The components of pre-tax net investment income earned were as follows:



($ in thousands)	2019			2018		2017
Fixed income securities	$	203,255		178,104		153,230
Equity securities	6,996			7,764		6,442
Short-term investments	6,653			3,472		1,526
Other investments	18,778			17,799		12,871
Investment expenses	(13,139		)	(11,803	)	(12,187	)
Net investment income earned	$	222,543		195,336		161,882

(j) The following tables summarize OTTI by asset type for the periods indicated:



2019				Recognized in Earnings
($ in thousands)	Gross		Included in OCI	Recognized in Earnings
AFS fixed income securities:
Obligations of states and political subdivisions	66		—	66
Corporate securities	$	2,529	—	2,529
Total AFS fixed income securities	2,595		—	2,595
Other investments	1,049		—	1,049
Total OTTI losses	$	3,644	—	3,644



2018				Recognized in Earnings
($ in thousands)	Gross		Included in OCI	Recognized in Earnings
AFS fixed income securities:
Corporate securities	$	1,783	—	1,783
RMBS	2,903		—	2,903
Total AFS fixed income securities	4,686		—	4,686
Other investments	1,893		—	1,893
Total OTTI losses	$	6,579	—	6,579



2017					Recognized in Earnings
($ in thousands)	Gross		Included in OCI		Recognized in Earnings
AFS fixed income securities:
U.S. government and government agencies	$	36	—		36
Obligations of states and political subdivisons	612		—		612
Corporate securities	587		—		587
CLO and other ABS	96		—		96
CMBS	670		—		670
RMBS	1,183		(36	)	1,219
Total AFS fixed income securities	3,184		(36	)	3,220
AFS equity securities:
Common stock	1,435		—		1,435
Total AFS equity securities	1,435		—		1,435
Other investments	190		—		190
Total OTTI losses	$	4,809	(36	)	4,845

(k) Net realized and unrealized gains and losses included the following:



($ in thousands)	2019			2018		2017
Net realized gains (losses) on the disposals of securities:
Fixed income securities	$	1,910		(34,953	)	6,944
Equity securities	24,844			18,695		4,629
Short-term investments	(16		)	(3	)	(4	)
Other investments	(23		)	(2,714	)	(365	)
Net realized gains (losses) on the disposal of securities	26,715			(18,975	)	11,204
OTTI charges	(3,644		)	(6,579	)	(4,845	)
Net realized gains (losses)	23,071			(25,554	)	6,359
Unrealized (losses) recognized in income on equity securities	(8,649		)	(29,369	)	—
Total net realized and unrealized investment gains (losses)	$	14,422		(54,923	)	6,359

Unrealized (losses) recognized in income on equity securities, as reflected in the table above, include the following:



($ in thousands)	2019			2018
Unrealized gains (losses) recognized in income on equity securities:
On securities remaining in our portfolio at December 31, 2019	1,219			(3,098	)
On securities sold in each respective period	(9,868		)	(26,271	)
Total unrealized (losses) recognized in income on equity securities	$	(8,649	)	(29,369	)

The components of net realized gains (losses) on disposals were as follows:



($ in thousands)	2019			2018		2017
HTM fixed income securities
Gains	$	1		2		44
Losses	(15		)	—		(1	)
AFS fixed income securities
Gains	6,899			5,460		10,193
Losses	(4,975		)	(40,415	)	(3,292	)
Equity securities
Gains	24,980			23,203		5,829
Losses	(136		)	(4,508	)	(1,200	)
Short-term investments
Gains	24			7		2
Losses	(40		)	(10	)	(6	)
Other investments
Gains	6			—		494
Losses	(29		)	(2,714	)	(859	)
Total net realized investment gains (losses)	$	26,715		(18,975	)	11,204

Realized gains and losses on the sale of investments are determined on the basis of the cost of the specific investments sold. Proceeds from the sale of AFS fixed income securities were $594.7 million, $2,030.7 million, and $1,197.9 million in 2019, 2018, and 2017, respectively. Proceeds from sale of equity securities were $137.3 million, $113.3 million, and $38.0 million in 2019, 2018, and 2017, respectively.

Net realized gains (losses) in the table above were driven by the following:


•	2019: Opportunistic sales in our equity portfolio.


•	2018: Higher trading volume driven by opportunistic sales in both our fixed income securities and equity portfolios.

•

2017: Higher trading volume in our fixed income securities portfolio related to a more active external investment management approach and opportunistic sales in our equity portfolio.