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Investments

6 Months Ended

Jun. 30, 2023

At June 30, 2023 and December 31, 2022, the amortized cost and fair value of fixed maturity securities were as follows:


	Amortized Cost (1)		Gross Unrealized Gains		Gross Unrealized Losses (2)		Allowance for Credit Losses		Fair Value
	(Dollars in thousands)
June 30, 2023
Fixed maturity securities, available for sale:
U.S. Government and agencies	$	179,087	$	66	$	(3,691)	$	—	$	175,462
States, municipalities and territories	3,706,837		25,316		(470,794)		—		3,261,359
Foreign corporate securities and foreign governments	649,101		3,491		(78,675)		—		573,917
Corporate securities	25,268,072		123,687		(3,319,418)		(3,132)		22,069,209
Residential mortgage backed securities	1,593,824		7,650		(128,110)		(67)		1,473,297
Commercial mortgage backed securities	4,041,901		609		(488,892)		—		3,553,618
Other asset backed securities	7,884,193		13,330		(322,981)		(947)		7,573,595
	$	43,323,015	$	174,149	$	(4,812,561)	$	(4,146)	$	38,680,457

December 31, 2022
Fixed maturity securities, available for sale:
U.S. Government and agencies	$	173,638	$	70	$	(4,637)	$	—	$	169,071
States, municipalities and territories	4,356,251		41,565		(574,834)		—		3,822,982
Foreign corporate securities and foreign governments	748,770		11,661		(83,579)		—		676,852
Corporate securities	27,706,440		146,065		(3,687,370)		(3,214)		24,161,921
Residential mortgage backed securities	1,492,242		11,870		(126,368)		(133)		1,377,611
Commercial mortgage backed securities	4,098,755		493		(411,770)		—		3,687,478
Other asset backed securities	6,289,923		14,068		(395,289)		—		5,908,702
	$	44,866,019	$	225,792	$	(5,283,847)	$	(3,347)	$	39,804,617

(1)Amortized cost excludes accrued interest receivable of $416.5 million and $425.4 million as of June 30, 2023 and December 31, 2022, respectively.

(2)Gross unrealized losses are net of allowance for credit losses.

The amortized cost and fair value of fixed maturity securities at June 30, 2023, 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	$	681,287	$	668,827
Due after one year through five years	6,111,532		5,857,320
Due after five years through ten years	5,588,456		5,069,920
Due after ten years through twenty years	8,060,065		7,137,892
Due after twenty years	9,361,757		7,345,988
	29,803,097		26,079,947
Residential mortgage backed securities	1,593,824		1,473,297
Commercial mortgage backed securities	4,041,901		3,553,618
Other asset backed securities	7,884,193		7,573,595
	$	43,323,015	$	38,680,457

Net unrealized losses on investments reported as a separate component of stockholders' equity were comprised of the following:


	June 30, 2023		December 31, 2022
	(Dollars in thousands)
Net unrealized losses on investments	$	(4,630,762)	$	(5,065,422)
Deferred income tax valuation allowance reversal	22,534		22,534
Deferred income tax expense	972,162		1,063,441
Net unrealized losses reported as accumulated other comprehensive loss	$	(3,636,066)	$	(3,979,447)

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% of our fixed maturity portfolio rated investment grade at both June 30, 2023 and December 31, 2022, respectively.

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


	June 30, 2023				December 31, 2022
NAIC Designation	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
1	$	26,852,711	$	24,130,363	$	27,061,903	$	24,211,086
2	15,733,173		13,925,216		17,023,157		14,944,131
3	616,104		518,089		595,193		510,392
4	102,614		92,058		109,409		91,495
5	6,765		6,917		61,721		36,738
6	11,648		7,814		14,636		10,775
	$	43,323,015	$	38,680,457	$	44,866,019	$	39,804,617

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 4,300 and 4,510 securities, respectively) have been in a continuous unrealized loss position, at June 30, 2023 and December 31, 2022:


	Less than 12 months				12 months or more				Total
	Fair Value		Unrealized Losses (1)		Fair Value		Unrealized Losses (1)		Fair Value		Unrealized Losses (1)
	(Dollars in thousands)
June 30, 2023
Fixed maturity securities, available for sale:
U.S. Government and agencies	$	120,241	$	(2,104)	$	24,084	$	(1,587)	$	144,325	$	(3,691)
States, municipalities and territories	545,909		(38,329)		2,077,644		(432,465)		2,623,553		(470,794)
Foreign corporate securities and foreign governments	86,734		(4,892)		404,826		(73,783)		491,560		(78,675)
Corporate securities	4,341,434		(232,048)		14,300,847		(3,087,370)		18,642,281		(3,319,418)
Residential mortgage backed securities	845,456		(50,133)		463,440		(77,977)		1,308,896		(128,110)
Commercial mortgage backed securities	573,518		(18,089)		2,888,442		(470,803)		3,461,960		(488,892)
Other asset backed securities	2,010,044		(48,514)		3,641,288		(274,467)		5,651,332		(322,981)
	$	8,523,336	$	(394,109)	$	23,800,571	$	(4,418,452)	$	32,323,907	$	(4,812,561)

December 31, 2022
Fixed maturity securities, available for sale:
U.S. Government and agencies	$	160,201	$	(4,512)	$	908	$	(125)	$	161,109	$	(4,637)
States, municipalities and territories	2,595,122		(537,313)		95,184		(37,521)		2,690,306		(574,834)
Foreign corporate securities and foreign governments	522,826		(76,957)		21,816		(6,622)		544,642		(83,579)
Corporate securities	18,784,181		(3,218,323)		1,411,177		(469,047)		20,195,358		(3,687,370)
Residential mortgage backed securities	992,783		(101,100)		116,388		(25,268)		1,109,171		(126,368)
Commercial mortgage backed securities	2,941,293		(302,513)		651,923		(109,257)		3,593,216		(411,770)
Other asset backed securities	2,561,390		(162,821)		1,924,026		(232,468)		4,485,416		(395,289)
	$	28,557,796	$	(4,403,539)	$	4,221,422	$	(880,308)	$	32,779,218	$	(5,283,847)

(1)Unrealized losses have not been reduced to reflect the allowance for credit losses of $4.1 million and $3.3 million as of June 30, 2023 and December 31, 2022, respectively.

The unrealized losses at June 30, 2023 are principally related to the timing of the purchases of certain securities, which carry less yield than those available at June 30, 2023. Approximately 98% of the unrealized losses on fixed maturity securities shown in the above table for both June 30, 2023 and December 31, 2022 are on securities that are rated investment grade, defined as being the highest two NAIC designations.

We expect to recover our amortized cost on all securities except for those securities on which we recognized an allowance for credit loss. In addition, 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 write down these investments to fair value through the consolidated statements of operations.

Changes in net unrealized gains/losses on investments for the three and six months ended June 30, 2023 and 2022 are as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
	(Dollars in thousands)
Fixed maturity securities available for sale carried at fair value	$	(398,608)	$	(3,443,391)	$	434,660	$	(7,457,762)

Adjustment for effect on other balance sheet accounts:
Deferred income tax asset/liability	83,707		723,065		(91,279)		1,565,847
	83,707		723,065		(91,279)		1,565,847
Change in net unrealized gains/losses on investments carried at fair value	$	(314,901)	$	(2,720,326)	$	343,381	$	(5,891,915)

Proceeds from sales of available for sale fixed maturity securities for the six months ended June 30, 2023 and 2022 were $3.7 billion and $2.1 billion, respectively. Scheduled principal repayments, calls and tenders for available for sale fixed maturity securities for the six months ended June 30, 2023 and 2022 were $1.4 billion and $1.3 billion, respectively.

Net realized losses on investments for the three and six months ended June 30, 2023 and 2022, are as follows:


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
	(Dollars in thousands)
Available for sale fixed maturity securities:
Gross realized gains	$	59,056	$	507	$	85,044	$	3,972
Gross realized losses	(36,335)		(24,053)		(80,786)		(26,059)
Net credit loss (provision) release	(46,273)		(5,498)		(47,102)		(12,854)
	(23,552)		(29,044)		(42,844)		(34,941)




Other investments:
Gross realized gains	433		—		2,210		—
Gross realized losses	(4,629)		—		(5,061)		—
	(4,196)		—		(2,851)		—
Mortgage loans on real estate:
Decrease (increase) in allowance for credit losses	5,231		(3,348)		(3,423)		(8,593)
Recovery of specific allowance	—		229		—		229
Loss on sale of mortgage loans	(2,162)		(1,109)		(3,348)		(3,094)
	3,069		(4,228)		(6,771)		(11,458)
	$	(24,679)	$	(33,272)	$	(52,466)	$	(46,399)

Realized losses on available for sale fixed maturity securities in 2023 and 2022 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. Realized gains and losses on sales are determined on the basis of specific identification of investments based on the trade date.

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 credit loss 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 credit loss. 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 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 an allowance for credit loss should be established for debt securities by assessing pertinent 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 have credit loss 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, credit loss 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, a credit loss would be recognized in operations for 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 recognized credit loss is limited to the total unrealized loss on the security (i.e., the fair value floor).

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 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 credit loss.

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, 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.

We do not measure a credit loss allowance on accrued interest receivable as we write off any accrued interest receivable balance to net investment income in a timely manner when we have concerns regarding collectability.

Amounts on available for sale fixed maturities that are deemed to be uncollectible are written off and removed from the allowance for credit loss. A write-off may also occur if we intend to sell a security or when it is more likely than not we will be required to sell the security before the recovery of its amortized cost.

The following table provides a rollforward of the allowance for credit loss:


	Three Months Ended June 30, 2023
	States, Municipalities and Territories		Corporate Securities		Commercial Mortgage Backed Securities		Residential Mortgage Backed Securities		Other Asset Backed Securities		Total
	(Dollars in thousands)
Beginning balance	$	—	$	1,914	$	—	$	133	$	—	$	2,047
Additions for credit losses not previously recorded	—		—		—		—		947		947
Change in allowance on securities with previous allowance	—		1,218		—		(66)		—		1,152

Reduction for securities sold during the period	—		—		—		—		—		—


Ending balance	$	—	$	3,132	$	—	$	67	$	947	$	4,146

	Three Months Ended June 30, 2022
	States, Municipalities and Territories		Corporate Securities		Commercial Mortgage Backed Securities		Residential Mortgage Backed Securities		Other Asset Backed Securities		Total
	(Dollars in thousands)
Beginning balance	$	2,009	$	3,825	$	—	$	743	$	—	$	6,577
Additions for credit losses not previously recorded	—		—		—		295		—		295
Change in allowance on securities with previous allowance	(175)		(82)		—		—		—		(257)

Reduction for securities sold during the period	—		—		—		(428)		—		(428)


Ending balance	$	1,834	$	3,743	$	—	$	610	$	—	$	6,187


	Six Months Ended June 30, 2023
	States, Municipalities and Territories		Corporate Securities		Commercial Mortgage Backed Securities		Residential Mortgage Backed Securities		Other Asset Backed Securities		Total
	(Dollars in thousands)
Beginning balance	$	—	$	3,214	$	—	$	133	$	—	$	3,347
Additions for credit losses not previously recorded	—		—		—		—		947		947
Change in allowance on securities with previous allowance	—		(82)		—		(66)		—		(148)

Reduction for securities sold during the period	—		—		—		—		—		—


Ending balance	$	—	$	3,132	$	—	$	67	$	947	$	4,146

	Six Months Ended June 30, 2022
	States, Municipalities and Territories		Corporate Securities		Commercial Mortgage Backed Securities		Residential Mortgage Backed Securities		Other Asset Backed Securities		Total
	(Dollars in thousands)
Beginning balance	$	2,776	$	—	$	—	$	70	$	—	$	2,846
Additions for credit losses not previously recorded	—		3,825		—		631		—		4,456
Change in allowance on securities with previous allowance	(942)		(82)		—		337		—		(687)

Reduction for securities sold during the period	—		—		—		(428)		—		(428)


Ending balance	$	1,834	$	3,743	$	—	$	610	$	—	$	6,187