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Investments
 9 Months Ended
Sep. 30, 2018
Investments, Debt and Equity Securities [Abstract]  
Investments
5. Investments

Fixed Maturity Securities

The following tables provide information relating to investments in fixed maturity securities (in thousands):
September 30, 2018
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair
Value
Fixed maturity securities
 
 
 
 
 
 
 
 
U.S. Government and government agencies
 
$
28,491

 
$
225

 
$
(158
)
 
$
28,558

States, municipalities and political subdivisions
 
413,554

 
5,678

 
(2,842
)
 
416,390

Residential mortgage-backed securities
 
98,420

 
3,229

 
(972
)
 
100,677

Commercial mortgage-backed securities
 
60,735

 
144

 
(509
)
 
60,370

Asset-backed securities
 
287,497

 
1,078

 
(2,776
)
 
285,799

Corporate and other
 
2,096,940

 
20,277

 
(23,568
)
 
2,093,649

Total fixed maturity securities
 
$
2,985,637

 
$
30,631

 
$
(30,825
)
 
$
2,985,443

December 31, 2017
 
Amortized Cost
 
Unrealized Gains
 
Unrealized Losses
 
Fair
Value
Fixed maturity securities
 
 
 
 
 
 
 
 
U.S. Government and government agencies
 
$
15,283

 
$
470

 
$
(31
)
 
$
15,722

States, municipalities and political subdivisions
 
377,549

 
18,953

 
(1,052
)
 
395,450

Foreign government
 
6,331

 
—

 
(333
)
 
5,998

Residential mortgage-backed securities
 
101,974

 
4,185

 
(1,264
)
 
104,895

Commercial mortgage-backed securities
 
30,152

 
269

 
(16
)
 
30,405

Asset-backed securities
 
145,479

 
2,610

 
(163
)
 
147,926

Corporate and other
 
589,803

 
51,891

 
(1,464
)
 
640,230

Total fixed maturity securities
 
$
1,266,571

 
$
78,378

 
$
(4,323
)
 
$
1,340,626



The Company has investments in mortgage-backed securities ("MBS") that contain embedded derivatives (primarily interest-only MBS) that do not qualify for hedge accounting. The Company recorded the change in the fair value of these securities within Net realized and unrealized gains (losses) on investments. These investments had a fair value of $10.7 million and $12.3 million as of September 30, 2018 and December 31, 2017, respectively. The change in fair value related to these securities resulted in a loss of $0.2 million and a gain of $0.6 million for the three months ended September 30, 2018 and 2017, respectively and gains of $0.5 million and zero gain for the nine months ended September 30, 2018 and 2017, respectively.

The amortized cost and fair value of fixed maturity securities available-for-sale as of September 30, 2018 are shown by contractual maturity in the table below (in thousands). Actual maturities can differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Asset and mortgage-backed securities are shown separately in the table below, as they are not due at a single maturity date:
 
 
Amortized Cost
 
Fair
 Value
Corporate, Municipal, U.S. Government and Other securities
 
 
 
 
Due in one year or less
 
$
23,754

 
$
23,612

Due after one year through five years
 
200,595

 
200,684

Due after five years through ten years
 
276,546

 
276,146

Due after ten years
 
2,038,090

 
2,038,155

Subtotal
 
2,538,985

 
2,538,597

Mortgage-backed securities
 
159,155

 
161,047

Asset-backed securities
 
287,497

 
285,799

Total
 
$
2,985,637

 
$
2,985,443



The tables below show the major industry types of the Company’s corporate and other fixed maturity securities (in thousands):
 
 
September 30, 2018
 
December 31, 2017
 
 
Amortized Cost
 
Fair
Value
 
% of
Total
 
Amortized Cost
 
Fair
Value
 
% of
Total
Finance, insurance, and real estate
 
$
385,333

 
$
384,306

 
18.4
%
 
$
191,234

 
$
203,735

 
31.8
%
Transportation, communication and other services
 
626,457

 
631,183

 
30.1
%
 
186,114

 
201,802

 
31.5
%
Manufacturing
 
715,322

 
708,375

 
33.8
%
 
100,942

 
111,391

 
17.4
%
Other
 
369,828

 
369,785

 
17.7
%
 
111,513

 
123,302

 
19.3
%
Total
 
$
2,096,940

 
$
2,093,649

 
100.0
%
 
$
589,803

 
$
640,230

 
100.0
%


A portion of certain other-than-temporary impairment ("OTTI") losses on fixed maturity securities is recognized in Accumulated Other Comprehensive Income ("AOCI"). For these securities the net amount, which is recognized in the Condensed Consolidated Statements of Operations in the below line items, represents the difference between the amortized cost of the security and the net present value of its projected future cash flows discounted at the effective interest rate implicit in the debt security prior to impairment. Any remaining difference between the fair value and amortized cost is recognized in AOCI. The Company recorded the following (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Net realized and unrealized gains (losses) on investments
 
$
623

 
$
—

 
$
623

 
$
—

Other income (expenses), net
 
—

 
—

 
—

 
6,112

Total other-than-temporary impairments
 
$
623

 
$
—

 
$
623

 
$
6,112



The following table presents the total unrealized losses for the 738 and 126 fixed maturity securities held by the Company as of September 30, 2018 and December 31, 2017, respectively, where the estimated fair value had declined and remained below amortized cost by the indicated amount (in thousands):
 
 
September 30, 2018
 
December 31, 2017
 
 
Unrealized Losses
 
% of
Total
 
Unrealized Losses
 
% of
Total
Fixed maturity securities
 
 
 
 
 
 
 
 
Less than 20%
 
$
(30,817
)
 
100.0
%
 
$
(4,230
)
 
93.7
%
20% or more for less than six months
 
—

 
—
%
 
(174
)
 
3.9
%
20% or more for six months or greater
 
(8
)
 
—
%
 
(110
)
 
2.4
%
Total
 
$
(30,825
)
 
100.0
%
 
$
(4,514
)
 
100.0
%


The determination of whether unrealized losses are "other-than-temporary" requires judgment based on subjective as well as objective factors. Factors considered and resources used by management include (i) whether the unrealized loss is credit-driven or a result of changes in market interest rates, (ii) the extent to which fair value is less than cost basis, (iii) cash flow projections received from independent sources, (iv) historical operating, balance sheet and cash flow data contained in issuer SEC filings and news releases, (v) near-term prospects for improvement in the issuer and/or its industry, (vi) third party research and communications with industry specialists, (vii) financial models and forecasts, (viii) the continuity of dividend payments, maintenance of investment grade ratings and hybrid nature of certain investments, (ix) discussions with issuer management, and (x) ability and intent to hold the investment for a period of time sufficient to allow for anticipated recovery in fair value.

The Company analyzes its MBS for OTTI each quarter based upon expected future cash flows. Management estimates expected future cash flows based upon its knowledge of the MBS market, cash flow projections (which reflect loan-to-collateral values, subordination, vintage and geographic concentration) received from independent sources, implied cash flows inherent in security ratings and analysis of historical payment data.

The Company believes it will recover its cost basis in the non-impaired securities with unrealized losses and that the Company has the ability to hold the securities until they recover in value. The Company neither intends to sell nor does it expect to be required to sell the securities with unrealized losses as of September 30, 2018. However, unforeseen facts and circumstances may cause the Company to sell fixed maturity and equity securities in the ordinary course of managing its portfolio to meet certain diversification, credit quality and liquidity guidelines.

The following tables present the estimated fair values and gross unrealized losses for the 738 and 126 fixed maturity and equity securities held by the Company that have estimated fair values below amortized cost as of each of September 30, 2018 and December 31, 2017, respectively. The Company does not have any OTTI losses reported in AOCI. These investments are presented by investment category and the length of time the related fair value has remained below amortized cost (in thousands):
September 30, 2018
 
Less than 12 months
 
12 months of greater
 
Total
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
Fixed maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
 
$
26,378

 
$
(158
)
 
$
—

 
$
—

 
$
26,378

 
$
(158
)
States, municipalities and political subdivisions
 
204,991

 
(2,583
)
 
7,051

 
(259
)
 
212,042

 
(2,842
)
Residential mortgage-backed securities
 
53,126

 
(850
)
 
2,260

 
(122
)
 
55,386

 
(972
)
Commercial mortgage-backed securities
 
40,963

 
(509
)
 
—

 
—

 
40,963

 
(509
)
Asset-backed securities
 
164,675

 
(2,637
)
 
2,250

 
(139
)
 
166,925

 
(2,776
)
Corporate and other
 
1,438,360

 
(20,842
)
 
25,854

 
(2,726
)
 
1,464,214

 
(23,568
)
Total fixed maturity securities
 
$
1,928,493

 
$
(27,579
)
 
$
37,415

 
$
(3,246
)
 
$
1,965,908

 
$
(30,825
)
December 31, 2017
 
Less than 12 months
 
12 months of greater
 
Total
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
Fixed maturity securities
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Government and government agencies
 
$
5,044

 
$
(17
)
 
$
2,199

 
$
(14
)
 
$
7,243

 
$
(31
)
States, municipalities and political subdivisions
 
32,939

 
(834
)
 
10,757

 
(218
)
 
43,696

 
(1,052
)
Foreign government
 
—

 
—

 
5,999

 
(333
)
 
5,999

 
(333
)
Residential mortgage-backed securities
 
5,139

 
(546
)
 
16,150

 
(718
)
 
21,289

 
(1,264
)
Commercial mortgage-backed securities
 
5,053

 
(12
)
 
1,003

 
(4
)
 
6,056

 
(16
)
Asset-backed securities
 
19,771

 
(64
)
 
3,963

 
(99
)
 
23,734

 
(163
)
Corporate and other
 
18,478

 
(824
)
 
19,433

 
(640
)
 
37,911

 
(1,464
)
Total fixed maturity securities
 
$
86,424

 
$
(2,297
)
 
$
59,504

 
$
(2,026
)
 
$
145,928

 
$
(4,323
)


As of September 30, 2018, investment grade fixed maturity securities (as determined by nationally recognized rating agencies) represented approximately 85.3% of the gross unrealized loss and 94.0% of the fair value. As of December 31, 2017, investment grade fixed maturity securities represented approximately 7.3% of the gross unrealized loss and 10.4% of the fair value. Certain risks are inherent in connection with fixed maturity securities, including loss upon default, price volatility in reaction to changes in interest rates, and general market factors and risks associated with reinvestment of proceeds due to prepayments or redemptions in a period of declining interest rates.

Equity Securities

Beginning in 2018 upon adopting ASU 2016-01, changes in fair value of equity securities are reported in earnings. The following tables provide information relating to investments in equity securities measured at fair value (in thousands):
 
 
September 30, 2018
 
December 31, 2017
Equity securities
 
 
 
 
Common stocks
 
$
63,298

 
$
4,928

Perpetual preferred stocks
 
153,855

 
42,572

Total equity securities
 
$
217,153

 
$
47,500



On August 4, 2018, HC2 Chairman and Chief Executive Officer Philip Falcone informed Inseego Corp’s (“INSG”) Board of Directors (the “Board”) of his resignation from his position as a Director and Chairman of the Board of INSG effective upon consummation of a private placement at INSG. The INSG private placement consisted of an issuance of an aggregate of 12.0 million shares of its common stock to two investors for a purchase price of $1.63 per share, resulting in aggregate gross proceeds to INSG of approximately $19.7 million. Concurrently, INSG amended HC2's Investors’ Rights Agreement where HC2 agreed to eliminate its board observation and nomination rights. As a result, HC2 lost its ability to exercise significant influence. HC2's equity investment in INSG security no longer qualifies to be accounted for under the equity method. Beginning in the third quarter of 2018, the investment will be recorded at fair value. The investment basis in INSG under the equity method had been reduced to zero as a result of losses incurred for the duration of the investment. The change in the accounting method resulted in a gain of $44.2 million for the three months ended September 30, 2018 and recorded in Other income (expenses), net.

Other Invested Assets

Beginning in 2018 upon adopting ASU 2016-01, certain investments in equity securities that do not have a readily determinable fair value are carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes or at fair value. Carrying values of other invested assets were as follows (in thousands):
 
 
September 30, 2018
 
December 31, 2017
 
 
Measurement Alternative
 
Equity Method
 
Fair Value
 
Cost Method
 
Equity Method
 
Fair Value
Common Equity
 
$
—

 
$
1,914

 
$
—

 
$
—

 
$
1,484

 
$
—

Preferred Equity
 
1,600

 
10,757

 
—

 
2,484

 
14,197

 
—

Derivatives
 
—

 
—

 
290

 
422

 
—

 
260

Other
 
—

 
56,404

 
—

 
—

 
66,572

 
—

Total
 
$
1,600

 
$
69,075

 
$
290

 
$
2,906

 
$
82,253

 
$
260



Summarized financial information for subsidiaries not consolidated as of and for the nine months ended September 30, 2018 and 2017 were as follows (information for two of the investees is reported on a one month lag, in thousands):
 
 
2018
 
2017
Net revenue
 
$
220,694

 
$
369,336

Gross profit
 
$
71,365

 
$
109,543

Income (loss) from continuing operations
 
$
34,805

 
$
(10,118
)
Net income (loss)
 
$
27,799

 
$
(31,453
)
 
 
 
 
 
Current assets
 
$
312,252

 
$
317,786

Noncurrent assets
 
$
93,099

 
$
189,278

Current liabilities
 
$
210,510

 
$
197,855

Noncurrent liabilities
 
$
18,507

 
$
152,879



Net Investment Income

The major sources of net investment income were as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Fixed maturity securities, available-for-sale at fair value
 
$
26,687

 
$
14,951

 
$
58,574

 
$
44,426

Equity securities
 
1,501

 
578

 
2,763

 
1,827

Mortgage loans
 
1,971

 
447

 
4,824

 
1,475

Policy loans
 
316

 
289

 
873

 
878

Other invested assets
 
1,410

 
68

 
2,007

 
75

Gross investment income
 
31,885

 
16,333

 
69,041

 
48,681

External investment expense
 
(175
)
 
(46
)
 
(265
)
 
(151
)
Net investment income
 
$
31,710

 
$
16,287

 
$
68,776

 
$
48,530



Net Realized and Unrealized Gains (Losses) on Investments

The major sources of net realized and unrealized gains and losses on investments were as follows (in thousands):
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2018
 
2017
 
2018
 
2017
Realized gains on fixed maturity securities
 
$
1,013

 
$
125

 
$
4,733

 
$
3,510

Realized losses on fixed maturity securities
 
(90
)
 
(42
)
 
(1,355
)
 
(959
)
Realized gains on equity securities
 
350

 
265

 
350

 
375

Realized losses on equity securities
 
—

 
—

 
(26
)
 
(31
)
Net unrealized gains (losses) on equity securities
 
(934
)
 
—

 
(1,125
)
 
—

Net unrealized gains (losses) on derivative instruments
 
(212
)
 
630

 
493

 
(41
)
Impairment loss
 
(623
)
 
—

 
(623
)
 
—

Net realized and unrealized gains (losses)
 
$
(496
)
 
$
978

 
$
2,447

 
$
2,854