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Investments | 6 Months Ended
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Jun. 30, 2020
Investments, Debt and Equity Securities [Abstract] |
Investments | 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 |  |  |  | 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.

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