Investments

12 Months Ended

Dec. 31, 2019

At December 31, 2019 and 2018, 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)
December 31, 2019
Fixed maturity securities, available for sale:
United States Government full faith and credit	$	161,492	$	369	$	(96	)	$	161,765
United States Government sponsored agencies	601,672		28,133		(4,785		)	625,020
United States municipalities, states and territories	4,147,343		388,578		(8,250		)	4,527,671
Foreign government obligations	186,993		18,103		—			205,096
Corporate securities	29,822,172		2,796,926		(82,259		)	32,536,839
Residential mortgage backed securities	1,477,738		101,617		(3,691		)	1,575,664
Commercial mortgage backed securities	5,591,167		208,895		(13,783		)	5,786,279
Other asset backed securities	6,250,369		90,978		(179,191		)	6,162,156
	$	48,238,946	$	3,633,599	$	(292,055	)	$	51,580,490

December 31, 2018
Fixed maturity securities, available for sale:
United States Government full faith and credit	$	11,872	$	102	$	(322	)	$	11,652
United States Government sponsored agencies	1,208,468		13,095		(83,034		)	1,138,529
United States municipalities, states and territories	3,880,703		261,222		(15,658		)	4,126,267
Foreign government obligations	226,860		7,573		(4,159		)	230,274
Corporate securities	28,483,138		727,105		(838,729		)	28,371,514
Residential mortgage backed securities	1,134,623		71,661		(4,125		)	1,202,159
Commercial mortgage backed securities	5,492,271		21,558		(134,826		)	5,379,003
Other asset backed securities	5,693,255		41,308		(270,234		)	5,464,329
	$	46,131,190	$	1,143,624	$	(1,351,087	)	$	45,923,727

The amortized cost and fair value of fixed maturity securities at December 31, 2019, 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
	Amortized Cost		Fair Value
	(Dollars in thousands)
Due in one year or less	$	290,310	$	294,212
Due after one year through five years	5,831,134		6,061,370
Due after five years through ten years	10,199,288		10,829,871
Due after ten years through twenty years	10,519,078		11,812,300
Due after twenty years	8,079,862		9,058,638
	34,919,672		38,056,391
Residential mortgage backed securities	1,477,738		1,575,664
Commercial mortgage backed securities	5,591,167		5,786,279
Other asset backed securities	6,250,369		6,162,156
	$	48,238,946	$	51,580,490

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



	December 31,
	2019			2018
	(Dollars in thousands)
Net unrealized gains (losses) on available for sale fixed maturity securities	$	3,341,544		$	(207,463	)
Adjustments for assumed changes in amortization of deferred policy acquisition costs and deferred sales inducements	(1,473,966		)	112,571
Deferred income tax valuation allowance reversal	22,534			22,534
Deferred income tax benefit (expense)	(392,191		)	19,926
Net unrealized gains (losses) reported as accumulated other comprehensive income (loss)	$	1,497,921		$	(52,432	)

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 98% and 97% of our fixed maturity portfolio rated investment grade at December 31, 2019 and 2018, respectively.

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



	December 31,
	2019				2018
NAIC Designation	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
1	$	27,781,525	$	30,122,657	$	26,588,352	$	26,921,843
2	19,278,355		20,316,911		17,901,161		17,528,072
3	1,001,087		977,191		1,396,650		1,269,242
4	114,497		112,534		173,987		137,991
5	57,952		45,205		23,836		19,453
6	5,530		5,992		47,204		47,126
	$	48,238,946	$	51,580,490	$	46,131,190	$	45,923,727

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 1,033 and 2,715 securities, respectively) have been in a continuous unrealized loss position, at December 31, 2019 and 2018:



	Less than 12 months					12 months or more					Total
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
	(Dollars in thousands)
December 31, 2019
Fixed maturity securities, available for sale:
United States Government full faith and credit	$	144,582	$	(96	)	$	—	$	—		$	144,582	$	(96	)
United States Government sponsored agencies	168,732		(1,229		)	201,444		(3,556		)	370,176		(4,785		)
United States municipalities, states and territories	285,481		(8,173		)	3,081		(77		)	288,562		(8,250		)
Corporate securities:
Finance, insurance and real estate	267,521		(4,785		)	121,993		(4,744		)	389,514		(9,529		)
Manufacturing, construction and mining	161,633		(6,039		)	44,606		(3,951		)	206,239		(9,990		)
Utilities and related sectors	334,635		(7,730		)	51,269		(3,482		)	385,904		(11,212		)
Wholesale/retail trade	54,289		(1,751		)	129,364		(9,411		)	183,653		(11,162		)
Services, media and other	275,135		(6,135		)	316,086		(34,231		)	591,221		(40,366		)
Residential mortgage backed securities	212,404		(2,686		)	11,332		(1,005		)	223,736		(3,691		)
Commercial mortgage backed securities	602,394		(9,366		)	194,328		(4,417		)	796,722		(13,783		)
Other asset backed securities	752,413		(11,709		)	3,375,016		(167,482		)	4,127,429		(179,191		)
	$	3,259,219	$	(59,699	)	$	4,448,519	$	(232,356	)	$	7,707,738	$	(292,055	)

December 31, 2018
Fixed maturity securities, available for sale:
United States Government full faith and credit	$	543	$	(3	)	$	7,785	$	(319	)	$	8,328	$	(322	)
United States Government sponsored agencies	30,089		(949		)	953,421		(82,085		)	983,510		(83,034		)
United States municipalities, states and territories	340,103		(6,816		)	162,997		(8,842		)	503,100		(15,658		)
Foreign government obligations	98,511		(1,748		)	11,859		(2,411		)	110,370		(4,159		)
Corporate securities:
Finance, insurance and real estate	2,501,640		(87,220		)	884,870		(77,507		)	3,386,510		(164,727		)
Manufacturing, construction and mining	2,045,859		(84,972		)	349,738		(34,635		)	2,395,597		(119,607		)
Utilities and related sectors	2,313,271		(82,119		)	591,482		(45,838		)	2,904,753		(127,957		)
Wholesale/retail trade	1,032,603		(51,228		)	198,805		(26,326		)	1,231,408		(77,554		)
Services, media and other	4,618,477		(196,520		)	1,072,722		(152,364		)	5,691,199		(348,884		)
Residential mortgage backed securities	145,613		(2,638		)	22,689		(1,487		)	168,302		(4,125		)
Commercial mortgage backed securities	2,141,560		(37,150		)	2,090,835		(97,676		)	4,232,395		(134,826		)
Other asset backed securities	4,073,249		(252,265		)	271,994		(17,969		)	4,345,243		(270,234		)
	$	19,341,518	$	(803,628	)	$	6,619,197	$	(547,459	)	$	25,960,715	$	(1,351,087	)

The unrealized losses at December 31, 2019 are principally related to timing of the purchases of these securities, which carry less yield than those available at December 31, 2019. Approximately 79% and 87% of the unrealized losses on fixed maturity securities shown in the above table for December 31, 2019 and 2018, respectively, are on securities that are rated investment grade, defined as being the highest two NAIC designations.

Because we did not have the intent to sell fixed maturity securities with unrealized losses and it was not more likely than not that we would be required to sell these securities prior to recovery of the amortized cost, which may be maturity, we did not consider these investments to be other than temporarily impaired as of December 31, 2019 and 2018.

Changes in net unrealized gains/losses on investments for the years ended December 31, 2019, 2018 and 2017 are as follows:



	Year Ended December 31,
	2019			2018			2017
	(Dollars in thousands)
Fixed maturity securities held for investment carried at amortized cost	$	—		$	581		$	7,478
Investments carried at fair value:
Fixed maturity securities, available for sale	$	3,549,007		$	(2,463,693	)	$	1,149,691
Equity securities	—			—			(479		)
	3,549,007			(2,463,693		)	1,149,212
Adjustment for effect on other balance sheet accounts:
Deferred policy acquisition costs and deferred sales inducements	(1,586,537		)	1,318,649			(587,417		)
Deferred income tax asset/liability	(412,117		)	240,459			(177,162		)
	(1,998,654		)	1,559,108			(764,579		)
Change in net unrealized gains/losses on investments carried at fair value	$	1,550,353		$	(904,585	)	$	384,633

Components of net investment income are as follows:



	Year Ended December 31,
	2019			2018			2017
	(Dollars in thousands)
Fixed maturity securities	$	2,171,768		$	2,027,599		$	1,876,542
Equity securities	4,083			4,735			764
Mortgage loans on real estate	145,344			131,259			122,680
Cash and cash equivalents	5,164			2,320			2,562
Other	3,119			1,548			4,073
	2,329,478			2,167,461			2,006,621
Less investment expenses	(21,843		)	(19,649		)	(14,624		)
Net investment income	$	2,307,635		$	2,147,812		$	1,991,997

Proceeds from sales of available for sale fixed maturity securities for the years ended December 31, 2019, 2018 and 2017 were $1.0 billion, $2.5 billion and $0.7 billion, respectively. Scheduled principal repayments, calls and tenders for available for sale fixed maturity securities for the years ended December 31, 2019, 2018 and 2017 were $2.3 billion, $1.4 billion and $1.2 billion, 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 (losses) on investments, excluding net OTTI losses are as follows:



	Year Ended December 31,
	2019			2018			2017
	(Dollars in thousands)
Available for sale fixed maturity securities:
Gross realized gains	$	21,449		$	12,245		$	18,254
Gross realized losses	(6,397		)	(47,974		)	(9,058		)
	15,052			(35,729		)	9,196
Equity securities:
Gross realized gains	—			—			348

Other investments:
Gross realized gains	7,296			—			—
Gross realized losses	(14,446		)	—			—
Gain on sale of real estate	—			—			56
	(7,150		)	—			56

Mortgage loans on real estate:
Decrease (increase) in allowance for credit losses	(940		)	(3,165		)	278
Recovery of specific allowance	—			1,592			631
Gain on sale of mortgage loans	—			124			—
	(940		)	(1,449		)	909
	$	6,962		$	(37,178	)	$	10,509

Losses on available for sale fixed maturity securities in 2019, 2018 and 2017 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.

The following table summarizes the carrying value of our investments that have been non-income producing for 12 consecutive months:



	December 31,
	2019		2018
	(Dollars in thousands)
Fixed maturity securities, available for sale	$	5,792	$	6,717

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;


•	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 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.

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 determination of the credit loss component of a corporate bond 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 by asset type:



	Number of Securities	Total OTTI Losses			Portion of OTTI Losses Recognized from Other Comprehensive Income			Net OTTI Losses Recognized in Operations
		(Dollars in thousands)
Year ended December 31, 2019
Fixed maturity securities, available for sale:
Corporate securities:
Energy	3	$	(17,273	)	$	—		$	(17,273	)
Residential mortgage backed securities	3	(101		)	(215		)	(316		)
Commercial mortgage backed securities	2	(488		)	—			(488		)
Other asset backed securities	1	(649		)	—			(649		)
	9	$	(18,511	)	$	(215	)	$	(18,726	)

Year ended December 31, 2018
Fixed maturity securities, available for sale:
Corporate securities:
Capital goods	1	$	(719	)	$	—		$	(719	)
Consumer discretionary	8	(9,533		)	—			(9,533		)
Energy	4	(4,793		)	—			(4,793		)
Financials	5	(3,495		)	—			(3,495		)
Information technology	1	(550		)	—			(550		)
Industrials	1	(2,299		)	—			(2,299		)
Telecommunications	2	(249		)	—			(249		)
Transportation	1	(178		)	—			(178		)
Utilities	2	(5,518		)	—			(5,518		)
Residential mortgage backed securities	3	(63		)	(295		)	(358		)
Commercial mortgage backed securities	5	(4,859		)	—			(4,859		)
Other asset backed securities	2	(2,749		)	(1,356		)	(4,105		)
	35	$	(35,005	)	$	(1,651	)	$	(36,656	)

Year ended December 31, 2017
Fixed maturity securities, available for sale:
Corporate securities:
Industrials	1	$	(2,485	)	$	—		$	(2,485	)
Residential mortgage backed securities	8	(273		)	(1,585		)	(1,858		)
Other asset backed securities	1	—			(287		)	(287		)
	10	$	(2,758	)	$	(1,872	)	$	(4,630	)

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:



	Year Ended December 31,
	2019			2018
	(Dollars in thousands)
Cumulative credit loss at beginning of year	$	(175,398	)	$	(157,066	)
Additions for the amount related to credit losses for which OTTI has not previously been recognized	(18,271		)	(35,005		)
Additional credit losses on securities for which OTTI has previously been recognized	(455		)	(1,651		)
Accumulated losses on securities that were disposed of during the period	24,422			18,324
Cumulative credit loss at end of year	$	(169,702	)	$	(175,398	)

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 December 31, 2019 and 2018:



	Amortized Cost		OTTI Recognized in Other Comprehensive Income (Loss)			Change in Fair Value Since OTTI was Recognized			Fair Value
	(Dollars in thousands)
December 31, 2019
Fixed maturity securities, available for sale:
Corporate securities	$	50,755	$	(3,700	)	$	9,268		$	56,323
Residential mortgage backed securities	183,948		(145,446		)	172,577			211,079
Commercial mortgage backed securities	12,776		—			(401		)	12,375
Other asset backed securities	977		—			261			1,238
	$	248,456	$	(149,146	)	$	181,705		$	281,015
December 31, 2018
Fixed maturity securities, available for sale:
Corporate securities	$	69,580	$	(3,700	)	$	6,195		$	72,075
Residential mortgage backed securities	245,691		(167,846		)	199,191			277,036
Commercial mortgage backed securities	35,244		—			—			35,244
Other asset backed securities	1,692		—			326			2,018
	$	352,207	$	(171,546	)	$	205,712		$	386,373

At December 31, 2019 and 2018, fixed maturity securities and short-term investments with an amortized cost of $51.6 billion and $49.2 billion, respectively, were on deposit with state agencies to meet regulatory requirements. There are no restrictions on these assets.

At December 31, 2019 and 2018, we had no investment in any person or its affiliates (other than bonds issued by agencies of the United States Government) that exceeded 10% of stockholders' equity.