Investments

At March 31, 2017 and December 31, 2016, the amortized cost and fair value of fixed maturity securities were as follows:



	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(Dollars in thousands)
March 31, 2017
Fixed maturity securities:
Available for sale:
United States Government full faith and credit	$	11,699	$	225	$	(252	)	$	11,672
United States Government sponsored agencies	1,368,361		25,803		(53,376		)	1,340,788
United States municipalities, states and territories	3,673,722		334,483		(18,903		)	3,989,302
Foreign government obligations	228,998		12,047		(2,647		)	238,398
Corporate securities	27,149,697		1,289,415		(278,492		)	28,160,620
Residential mortgage backed securities	1,119,318		84,885		(4,163		)	1,200,040
Commercial mortgage backed securities	5,406,475		65,691		(88,224		)	5,383,942
Other asset backed securities	1,759,463		35,537		(14,396		)	1,780,604
	$	40,717,733	$	1,848,086	$	(460,453	)	$	42,105,366
Held for investment:
Corporate security	$	76,878	$	—	$	(6,083	)	$	70,795

Other investments: equity securities, available for sale:
Finance, insurance, and real estate	$	7,524	$	466	$	—		$	7,990

December 31, 2016
Fixed maturity securities:
Available for sale:
United States Government full faith and credit	$	11,864	$	229	$	(288	)	$	11,805
United States Government sponsored agencies	1,368,340		23,360		(46,913		)	1,344,787
United States municipalities, states and territories	3,626,395		322,948		(22,393		)	3,926,950
Foreign government obligations	229,589		11,832		(5,080		)	236,341
Corporate securities	26,333,213		1,149,978		(368,773		)	27,114,418
Residential mortgage backed securities	1,166,944		91,445		(3,554		)	1,254,835
Commercial mortgage backed securities	5,422,255		59,994		(117,014		)	5,365,235
Other asset backed securities	1,795,355		31,471		(20,703		)	1,806,123
	$	39,953,955	$	1,691,257	$	(584,718	)	$	41,060,494
Held for investment:
Corporate security	$	76,825	$	—	$	(8,059	)	$	68,766

Other investments: equity securities, available for sale:
Finance, insurance, and real estate	$	7,521	$	479	$	—		$	8,000

At March 31, 2017, 36% of our fixed income securities have call features, of which 1.4% ($584.9 million) were subject to call redemption and another 1.8% ($744.5 million) will become subject to call redemption during the next twelve months. Approximately 71% of our fixed income securities that have call features are not callable until within six months of their stated maturities.

The amortized cost and fair value of fixed maturity securities at March 31, 2017, by contractual maturity, are shown below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. All of our mortgage and other asset backed securities provide for periodic payments throughout their lives and are shown below as separate lines.



	Available for sale				Held for investment
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	250,055	$	255,489	$	—	$	—
Due after one year through five years	3,018,037		3,173,708		—		—
Due after five years through ten years	11,869,326		12,056,727		—		—
Due after ten years through twenty years	8,834,516		9,391,491		—		—
Due after twenty years	8,460,543		8,863,365		76,878		70,795
	32,432,477		33,740,780		76,878		70,795
Residential mortgage backed securities	1,119,318		1,200,040		—		—
Commercial mortgage backed securities	5,406,475		5,383,942		—		—
Other asset backed securities	1,759,463		1,780,604		—		—
	$	40,717,733	$	42,105,366	$	76,878	$	70,795

Net unrealized gains on available for sale fixed maturity securities and equity securities reported as a separate component of stockholders' equity were comprised of the following:



	March 31, 2017			December 31, 2016
	(Dollars in thousands)
Net unrealized gains on available for sale fixed maturity securities and equity securities	$	1,388,099		$	1,107,018
Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements	(769,623		)	(618,661		)
Deferred income tax valuation allowance reversal	22,534			22,534
Deferred income tax expense	(216,467		)	(170,925		)
Net unrealized gains reported as accumulated other comprehensive income	$	424,543		$	339,966

The National Association of Insurance Commissioners (“NAIC”) assigns designations to fixed maturity securities. These designations range from Class 1 (highest quality) to Class 6 (lowest quality). In general, securities are assigned a designation based upon the ratings they are given by the Nationally Recognized Statistical Rating Organizations (“NRSRO’s”). The NAIC designations are utilized by insurers in preparing their annual statutory statements. NAIC Class 1 and 2 designations are considered “investment grade” while NAIC Class 3 through 6 designations are considered “non-investment grade.” Based on the NAIC designations, we had 97% of our fixed maturity portfolio rated investment grade at both March 31, 2017 and December 31, 2016, respectively.

The following table summarizes the credit quality, as determined by NAIC designation, of our fixed maturity portfolio as of the dates indicated:



	March 31, 2017				December 31, 2016
NAIC Designation	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
1	$	25,850,507	$	26,875,133	$	25,607,268	$	26,507,798
2	13,612,067		14,013,896		13,037,592		13,295,648
3	1,187,828		1,151,654		1,201,059		1,155,702
4	111,827		104,462		154,226		137,188
5	19,537		21,840		17,475		24,664
6	12,845		9,176		13,160		8,260
	$	40,794,611	$	42,176,161	$	40,030,780	$	41,129,260

The following table shows our investments' gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities (consisting of 1,233 and 1,514 securities, respectively) have been in a continuous unrealized loss position, at March 31, 2017 and December 31, 2016:



	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
March 31, 2017
Fixed maturity securities:
Available for sale:
United States Government full faith and credit	$	7,275	$	(252	)	$	—	$	—		$	7,275	$	(252	)
United States Government sponsored agencies	989,089		(53,376		)	—		—			989,089		(53,376		)
United States municipalities, states and territories	367,378		(18,903		)	—		—			367,378		(18,903		)
Foreign government obligations	24,941		(147		)	11,844		(2,500		)	36,785		(2,647		)
Corporate securities:
Finance, insurance and real estate	1,443,090		(52,452		)	109,375		(8,578		)	1,552,465		(61,030		)
Manufacturing, construction and mining	721,674		(20,261		)	210,686		(15,139		)	932,360		(35,400		)
Utilities and related sectors	1,342,397		(33,268		)	53,702		(4,018		)	1,396,099		(37,286		)
Wholesale/retail trade	596,682		(21,288		)	29,917		(1,691		)	626,599		(22,979		)
Services, media and other	1,874,016		(61,940		)	640,141		(59,857		)	2,514,157		(121,797		)
Residential mortgage backed securities	81,636		(3,406		)	8,197		(757		)	89,833		(4,163		)
Commercial mortgage backed securities	2,732,202		(88,183		)	931		(41		)	2,733,133		(88,224		)
Other asset backed securities	555,010		(6,660		)	108,450		(7,736		)	663,460		(14,396		)
	$	10,735,390	$	(360,136	)	$	1,173,243	$	(100,317	)	$	11,908,633	$	(460,453	)
Held for investment:
Corporate security:
Insurance	$	—	$	—		$	70,795	$	(6,083	)	$	70,795	$	(6,083	)

December 31, 2016
Fixed maturity securities:
Available for sale:
United States Government full faith and credit	$	7,405	$	(288	)	$	—	$	—		$	7,405	$	(288	)
United States Government sponsored agencies	995,548		(46,913		)	—		—			995,548		(46,913		)
United States municipalities, states and territories	463,409		(22,393		)	—		—			463,409		(22,393		)
Foreign government obligations	29,158		(913		)	20,388		(4,167		)	49,546		(5,080		)
Corporate securities:
Finance, insurance and real estate	1,940,107		(70,421		)	82,907		(7,723		)	2,023,014		(78,144		)
Manufacturing, construction and mining	1,199,420		(34,304		)	311,591		(23,273		)	1,511,011		(57,577		)
Utilities and related sectors	1,401,650		(45,015		)	58,597		(5,820		)	1,460,247		(50,835		)
Wholesale/retail trade	637,121		(18,880		)	29,719		(1,930		)	666,840		(20,810		)
Services, media and other	2,539,519		(82,196		)	716,857		(79,211		)	3,256,376		(161,407		)
Residential mortgage backed securities	81,762		(3,463		)	1,853		(91		)	83,615		(3,554		)
Commercial mortgage backed securities	3,148,395		(116,938		)	895		(76		)	3,149,290		(117,014		)
Other asset backed securities	751,533		(12,289		)	146,167		(8,414		)	897,700		(20,703		)
	$	13,195,027	$	(454,013	)	$	1,368,974	$	(130,705	)	$	14,564,001	$	(584,718	)
Held for investment:
Corporate security:
Insurance	$	—	$	—		$	68,766	$	(8,059	)	$	68,766	$	(8,059	)

Based on the results of our process for evaluating available for sale securities in unrealized loss positions for other than temporary impairments, which is discussed in detail later in this footnote, we have determined that the unrealized losses on the securities in the preceding table are temporary. The unrealized losses at March 31, 2017 are principally related to timing of the purchases of these securities, which carry less yield than those available at March 31, 2017.

The commodity related sectors had most of the gross unrealized losses in our corporate fixed income securities portfolio as of March 31, 2017 and December 31, 2016. Commodity prices, specifically oil, gas and base metals, declined significantly in late 2015 and early 2016, but prices have risen in the latter part of 2016 and 2017 to levels that appear sustainable and should support prices and NRSRO ratings longer term. The value of oil has been significantly depressed as the amount of supply from new production has exceeded demand. In addition, iron ore and other key industrial metals have depressed prices as investors perceive the economic slowdown in Asia Pacific will curb demand as supply remains high. The companies in the metal and mining sectors experienced the largest decline in values of their debt in late 2015. In the above table, oil and metals and mining exposure is reflected within the foreign government; manufacturing, construction and mining; utilities and related sectors and services, media and other categories. Within these sectors, we continue to monitor the impact to our investment portfolio for those companies that may be adversely affected, both directly and indirectly. Even though the energy holdings and a majority of the metals and mining holdings have seen significant improvements in values as oil and iron ore prices have increased, they could continue to see price volatility and possible downgrades in credit ratings. If oil and commodity prices fall lower and remain at depressed levels for an extended period of time or decline further, certain issuers and investments may come under further stress. At this time, we believe the unrealized losses are temporary due to the fact that the price decline is driven by an over-supply of oil in the energy sector, which we feel is unsustainable long term. Our exposure is in companies that we believe have more financial flexibility and significant operational scale to manage through the downturn. In addition, price declines in the metal and mining sector have been heavily influenced by excess production and softer demand. Companies in the mining sector are more susceptible to rating downgrades and we believe companies will be under continued financial strain at the current commodity price structure. We believe company issuers in our portfolio will be able to meet their debt service obligations.

Approximately 86% of the unrealized losses on fixed maturity securities shown in the above table for both March 31, 2017 and December 31, 2016, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC designations. All of the fixed maturity securities with unrealized losses are current with respect to the payment of principal and interest.

Changes in net unrealized gains on investments for the three months ended March 31, 2017 and 2016 are as follows:



	Three Months Ended March 31,
	2017			2016
	(Dollars in thousands)
Fixed maturity securities held for investment carried at amortized cost	$	(1,976	)	$	2,245
Investments carried at fair value:
Fixed maturity securities, available for sale	$	281,094		$	1,115,085
Equity securities, available for sale	(13		)	(17		)
	281,081			1,115,068
Adjustment for effect on other balance sheet accounts:
Deferred policy acquisition costs and deferred sales inducements	(150,962		)	(609,751		)
Deferred income tax asset/liability	(45,542		)	(176,861		)
	(196,504		)	(786,612		)
Change in net unrealized gains on investments carried at fair value	$	84,577		$	328,456

Proceeds from sales of available for sale securities for the three months ended March 31, 2017 and 2016 were $186.5 million and $59.4 million, respectively. Scheduled principal repayments, calls and tenders for available for sale securities for the three months ended March 31, 2017 and 2016 were $330.8 million and $522.3 million, respectively.

Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date. Net realized gains on investments, excluding net OTTI losses for the three months ended March 31, 2017 and 2016, are as follows:



	Three Months Ended March 31,
	2017			2016
	(Dollars in thousands)
Available for sale fixed maturity securities:
Gross realized gains	$	5,572		$	1,487
Gross realized losses	(3,563		)	(1,231		)
	2,009			256
Other investments:
Gain on sale of real estate	29			131
Loss on sale of real estate	—			(92		)
	29			39
Mortgage loans on real estate:
Decrease (increase) in allowance for credit losses	300			(948		)
Recovery of specific allowance	—			3,340
	300			2,392
	$	2,338		$	2,687

Losses on available for sale fixed maturity securities were realized primarily due to strategies to reposition the fixed maturity security portfolio that result in improved net investment income, credit risk or duration profiles as they pertain to our asset liability management. Securities were sold at losses in 2017 and 2016 due to our long-term fundamental concern with the issuers' ability to meet their future financial obligations.

We review and analyze all investments on an ongoing basis for changes in market interest rates and credit deterioration. This review process includes analyzing our ability to recover the amortized cost basis of each investment that has a fair value that is materially lower than its amortized cost and requires a high degree of management judgment and involves uncertainty. The evaluation of securities for other than temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties.

We have a policy and process to identify securities that could potentially have impairments that are other than temporary. This process involves monitoring market events and other items that could impact issuers. The evaluation includes but is not limited to such factors as:


•	the length of time and the extent to which the fair value has been less than amortized cost or cost;


•	whether the issuer is current on all payments and all contractual payments have been made as agreed;


•	the remaining payment terms and the financial condition and near-term prospects of the issuer;


•	the lack of ability to refinance due to liquidity problems in the credit market;


•	the fair value of any underlying collateral;


•	the existence of any credit protection available;


•	our intent to sell and whether it is more likely than not we would be required to sell prior to recovery for debt securities;


•	our assessment in the case of equity securities including perpetual preferred stocks with credit deterioration that the security cannot recover to cost in a reasonable period of time;


•	our intent and ability to retain equity securities for a period of time sufficient to allow for recovery;


•	consideration of rating agency actions; and


•	changes in estimated cash flows of mortgage and asset backed securities.

We determine whether other than temporary impairment losses should be recognized for debt and equity securities by assessing all facts and circumstances surrounding each security. Where the decline in fair value of debt securities is attributable to changes in market interest rates or to factors such as market volatility, liquidity and spread widening, and we anticipate recovery of all contractual or expected cash flows, we do not consider these investments to be other than temporarily impaired because we do not intend to sell these investments and it is not more likely than not we will be required to sell these investments before a recovery of amortized cost, which may be maturity. For equity securities, we recognize an impairment charge in the period in which we do not have the intent and ability to hold the securities until recovery of cost or we determine that the security will not recover to book value within a reasonable period of time. We determine what constitutes a reasonable period of time on a security-by-security basis by considering all the evidence available to us, including the magnitude of any unrealized loss and its duration.

Other than temporary impairment losses on equity securities are recognized in operations. If we intend to sell a debt security or if it is more likely than not that we will be required to sell a debt security before recovery of its amortized cost basis, other than temporary impairment has occurred and the difference between amortized cost and fair value will be recognized as a loss in operations.

If we do not intend to sell and it is not more likely than not we will be required to sell the debt security but also do not expect to recover the entire amortized cost basis of the security, an impairment loss would be recognized in operations in the amount of the expected credit loss. We determine the amount of expected credit loss by calculating the present value of the cash flows expected to be collected discounted at each security's acquisition yield based on our consideration of whether the security was of high credit quality at the time of acquisition. The difference between the present value of expected future cash flows and the amortized cost basis of the security is the amount of credit loss recognized in operations. The remaining amount of the other than temporary impairment is recognized in other comprehensive income (loss).

The determination of the credit loss component of a mortgage backed security is based on a number of factors. The primary consideration in this evaluation process is the issuer's ability to meet current and future interest and principal payments as contractually stated at time of purchase. Our review of these securities includes an analysis of the cash flow modeling under various default scenarios considering independent third party benchmarks, the seniority of the specific tranche within the structure of the security, the composition of the collateral and the actual default, loss severity and prepayment experience exhibited. With the input of third party assumptions for default projections, loss severity and prepayment expectations, we evaluate the cash flow projections to determine whether the security is performing in accordance with its contractual obligation.

We utilize the models from a leading structured product software specialist serving institutional investors. These models incorporate each security's seniority and cash flow structure. In circumstances where the analysis implies a potential for principal loss at some point in the future, we use the "best estimate" cash flow projection discounted at the security's effective yield at acquisition to determine the amount of our potential credit loss associated with this security. The discounted expected future cash flows equates to our expected recovery value. Any shortfall of the expected recovery when compared to the amortized cost of the security will be recorded as the credit loss component of other than temporary impairment.

The cash flow modeling is performed on a security-by-security basis and incorporates actual cash flows on the residential mortgage backed securities through the current period, as well as the projection of remaining cash flows using a number of assumptions including default rates, prepayment rates and loss severity rates. The default curves we use are tailored to the Prime or Alt-A residential mortgage backed securities that we own, which assume lower default rates and loss severity for Prime securities versus Alt-A securities. These default curves are scaled higher or lower depending on factors such as current underlying mortgage loan performance, rating agency loss projections, loan to value ratios, geographic diversity, as well as other appropriate considerations.

The following table presents the range of significant assumptions used to determine the credit loss component of other than temporary impairments we have recognized on residential mortgage backed securities for the three months ended March 31, 2017 and 2016, which are all senior level tranches within the structure of the securities:



		Discount Rate				Default Rate				Loss Severity
Sector	Vintage	Min		Max		Min		Max		Min		Max
Three months ended March 31, 2017
Prime	2005	7.7	%	7.7	%	8	%	8	%	50	%	50	%
	2007	6.2	%	6.3	%	15	%	18	%	50	%	60	%

Three months ended March 31, 2016
Prime	2006	7.3	%	7.3	%	13	%	13	%	50	%	50	%
	2007	6.2	%	6.4	%	18	%	31	%	50	%	55	%

The determination of the credit loss component of a corporate bond (including redeemable preferred stocks) is based on the underlying financial performance of the issuer and their ability to meet their contractual obligations. Considerations in our evaluation include, but are not limited to, credit rating changes, financial statement and ratio analysis, changes in management, significant changes in credit spreads, breaches of financial covenants and a review of the economic outlook for the industry and markets in which they trade. In circumstances where an issuer appears unlikely to meet its future obligation, or the security's price decline is deemed other than temporary, an estimate of credit loss is determined. Credit loss is calculated using default probabilities as derived from the credit default swaps markets in conjunction with recovery rates derived from independent third party analysis or a best estimate of credit loss. This credit loss rate is then incorporated into a present value calculation based on an expected principal loss in the future discounted at the yield at the date of purchase and compared to amortized cost to determine the amount of credit loss associated with the security.

In addition, for debt securities which we do not intend to sell and it is not more likely than not we will be required to sell, but our intent changes due to changes or events that could not have been reasonably anticipated, an other than temporary impairment charge is recognized. Once an impairment charge has been recorded, we then continue to review the other than temporarily impaired securities for appropriate valuation on an ongoing basis. Unrealized losses may be recognized in future periods through a charge to earnings should we later conclude that the decline in fair value below amortized cost is other than temporary pursuant to our accounting policy described above. The use of different methodologies and assumptions to determine the fair value of investments and the timing and amount of impairments may have a material effect on the amounts presented in our consolidated financial statements.

The following table summarizes other than temporary impairments for the three months ended March 31, 2017 and 2016, by asset type:



	Number of Securities	Total OTTI Losses			Portion of OTTI Losses Recognized in (from) Other Comprehensive Income			Net OTTI Losses Recognized in Operations
		(Dollars in thousands)
Three months ended March 31, 2017
Fixed maturity securities, available for sale:
Residential mortgage backed securities	3	$	—		$	(141	)	$	(141	)

Three months ended March 31, 2016
Fixed maturity securities, available for sale:
Corporate securities:
Energy	2	$	(642	)	$	—		$	(642	)
Telecommunications	1	(4,462		)	562			(3,900		)
Utilities	1	(136		)	—			(136		)
Residential mortgage backed securities	4	—			(238		)	(238		)
Commercial mortgage backed securities	3	(778		)	—			(778		)
	11	$	(6,018	)	$	324		$	(5,694	)

The cumulative portion of other than temporary impairments determined to be credit losses which have been recognized in operations for debt securities are summarized as follows:



	Three Months Ended March 31,
	2017			2016
	(Dollars in thousands)
Cumulative credit loss at beginning of period	$	(166,375	)	$	(145,824	)
Credit losses on securities for which OTTI has not previously been recognized	—			(5,456		)
Additional credit losses on securities for which OTTI has previously been recognized	(141		)	(238		)
Accumulated losses on securities that were disposed of during the period	13,939			—
Cumulative credit loss at end of period	$	(152,577	)	$	(151,518	)

The following table summarizes the cumulative noncredit portion of OTTI and the change in fair value since recognition of OTTI, both of which were recognized in other comprehensive income, by major type of security, for securities that are part of our investment portfolio at March 31, 2017 and December 31, 2016:



	Amortized Cost		OTTI Recognized in Other Comprehensive Income			Change in Fair Value Since OTTI was Recognized			Fair Value
	(Dollars in thousands)
March 31, 2017
Fixed maturity securities, available for sale:
Corporate securities	$	10,496	$	(4,263	)	$	10,356		$	16,589
Residential mortgage backed securities	347,911		(169,799		)	198,785			376,897
Other asset backed securities	4,854		(1,643		)	(1,859		)	1,352
	$	363,261	$	(175,705	)	$	207,282		$	394,838
December 31, 2016
Fixed maturity securities, available for sale:
Corporate securities	$	17,549	$	(5,910	)	$	13,566		$	25,205
Residential mortgage backed securities	368,862		(169,941		)	205,854			404,775
Commercial mortgage backed securities	6,596		—			(107		)	6,489
Other asset backed securities	6,683		(1,643		)	(1,566		)	3,474
	$	399,690	$	(177,494	)	$	217,747		$	439,943