Investment Operations | Investment Operations Fixed Maturity and Equity Securities Available-For-Sale Fixed Maturity and Equity Securities by Investment Category September 30, 2016 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Non-credit losses on other-than-temporary impairments (1) (Dollars in thousands) Fixed maturities: Corporate (2) $ 3,489,801 $ 372,926 $ (28,920 ) $ 3,833,807 $ 285 Residential mortgage-backed 400,918 38,737 (2,428 ) 437,227 (876 ) Commercial mortgage-backed 545,186 73,194 (240 ) 618,140 — Other asset-backed 725,289 13,822 (4,460 ) 734,651 4,044 United States Government and agencies 38,632 4,243 — 42,875 — State, municipal and other governments 1,359,666 191,677 (448 ) 1,550,895 — Total fixed maturities $ 6,559,492 $ 694,599 $ (36,496 ) $ 7,217,595 $ 3,453 Equity securities: Non-redeemable preferred stocks $ 100,041 $ 8,644 $ (1,100 ) $ 107,585 Common stocks 29,280 112 — 29,392 Total equity securities $ 129,321 $ 8,756 $ (1,100 ) $ 136,977 Available-For-Sale Fixed Maturity and Equity Securities by Investment Category December 31, 2015 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value Non-credit losses on other-than-temporary impairments (1) (Dollars in thousands) Fixed maturities: Corporate (2) $ 3,464,402 $ 192,149 $ (137,844 ) $ 3,518,707 $ 351 Residential mortgage-backed 436,969 33,880 (5,343 ) 465,506 (3,584 ) Commercial mortgage-backed 514,195 42,284 (2,487 ) 553,992 — Other asset-backed 578,692 11,554 (7,124 ) 583,122 3,058 United States Government and agencies 41,050 3,129 (81 ) 44,098 — State, municipal and other governments 1,344,611 129,923 (2,183 ) 1,472,351 — Total fixed maturities $ 6,379,919 $ 412,919 $ (155,062 ) $ 6,637,776 $ (175 ) Equity securities: Non-redeemable preferred stocks $ 87,029 $ 6,095 $ (1,173 ) $ 91,951 Common stocks 29,307 450 (41 ) 29,716 Total equity securities $ 116,336 $ 6,545 $ (1,214 ) $ 121,667 (1) Non-credit losses, subsequent to the initial impairment measurement date, on other-than-temporary impairment (OTTI) losses are included in the gross unrealized gains and gross unrealized losses columns above. The non-credit loss component of OTTI losses for corporate and other asset-backed securities were in an unrealized gain position at September 30, 2016 and December 31, 2015 due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities. (2) Corporate securities include hybrid preferred securities with a carrying value of $26.9 million at September 30, 2016 and $43.5 million at December 31, 2015 . Corporate securities also include redeemable preferred stock with a carrying value of $25.9 million at September 30, 2016 and $24.8 million at December 31, 2015 . Available-For-Sale Fixed Maturities by Maturity Date September 30, 2016 Amortized Cost Fair Value (Dollars in thousands) Due in one year or less $ 75,477 $ 77,053 Due after one year through five years 749,459 817,473 Due after five years through ten years 767,278 822,740 Due after ten years 3,295,885 3,710,311 4,888,099 5,427,577 Mortgage-backed and other asset-backed 1,671,393 1,790,018 Total fixed maturities $ 6,559,492 $ 7,217,595 Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Fixed maturities not due at a single maturity date have been included in the above table in the year of final contractual maturity. Net Unrealized Gains (Losses) on Investments in Accumulated Other Comprehensive Income September 30, December 31, (Dollars in thousands) Net unrealized appreciation on: Fixed maturities - available for sale $ 658,103 $ 257,857 Equity securities - available for sale 7,655 5,331 665,758 263,188 Adjustments for assumed changes in amortization pattern of: Deferred acquisition costs (207,140 ) (73,735 ) Value of insurance in force acquired 145 (3,087 ) Unearned revenue reserve 11,737 3,352 Adjustments for assumed changes in policyholder liabilities (11,217 ) (4,090 ) Provision for deferred income taxes (160,747 ) (64,955 ) Net unrealized investment gains $ 298,536 $ 120,673 Net unrealized investment gains and losses are recorded net of deferred income taxes and other adjustments for assumed changes in deferred acquisition costs, value of insurance in force acquired, unearned revenue reserve and policyholder liabilities. Subsequent changes in the fair value of securities for which a previous non-credit OTTI loss was recognized in accumulated other comprehensive income, are reported along with changes in fair value for which no OTTI losses were previously recognized. Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time September 30, 2016 Less than one year One year or more Total Description of Securities Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Percent of Total (Dollars in thousands) Fixed maturities: Corporate $ 148,699 $ (5,643 ) $ 218,384 $ (23,277 ) $ 367,083 $ (28,920 ) 79.2 % Residential mortgage-backed 27,082 (603 ) 24,647 (1,825 ) 51,729 (2,428 ) 6.7 Commercial mortgage-backed 6,512 (53 ) 6,977 (187 ) 13,489 (240 ) 0.7 Other asset-backed 121,800 (566 ) 91,575 (3,894 ) 213,375 (4,460 ) 12.2 State, municipal and other governments 14,658 (448 ) — — 14,658 (448 ) 1.2 Total fixed maturities $ 318,751 $ (7,313 ) $ 341,583 $ (29,183 ) $ 660,334 $ (36,496 ) 100.0 % Equity securities: Non-redeemable preferred stocks $ — $ — $ 13,463 $ (1,100 ) $ 13,463 $ (1,100 ) Total equity securities $ — $ — $ 13,463 $ (1,100 ) $ 13,463 $ (1,100 ) Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time December 31, 2015 Less than one year One year or more Total Description of Securities Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Estimated Fair Value Unrealized Losses Percent of Total (Dollars in thousands) Fixed maturities: Corporate $ 1,115,324 $ (96,062 ) $ 115,730 $ (41,782 ) $ 1,231,054 $ (137,844 ) 88.9 % Residential mortgage-backed 21,646 (725 ) 26,537 (4,618 ) 48,183 (5,343 ) 3.4 Commercial mortgage-backed 48,424 (1,947 ) 7,657 (540 ) 56,081 (2,487 ) 1.6 Other asset-backed 285,395 (3,323 ) 65,298 (3,801 ) 350,693 (7,124 ) 4.6 United States Government and agencies 4,807 (81 ) — — 4,807 (81 ) 0.1 State, municipal and other governments 77,980 (2,183 ) — — 77,980 (2,183 ) 1.4 Total fixed maturities $ 1,553,576 $ (104,321 ) $ 215,222 $ (50,741 ) $ 1,768,798 $ (155,062 ) 100.0 % Equity securities: Non-redeemable preferred stocks $ 21,280 $ (573 ) $ 4,400 $ (600 ) $ 25,680 $ (1,173 ) Common stocks 1,428 (41 ) — — 1,428 (41 ) Total equity securities $ 22,708 $ (614 ) $ 4,400 $ (600 ) $ 27,108 $ (1,214 ) Fixed maturities in the above tables include 216 securities from 177 issuers at September 30, 2016 and 542 securities from 435 issuers at December 31, 2015 . Unrealized losses decreased during the nine-month period of 2016 due primarily to a decrease in treasury rates as well as a decrease in credit spreads, particularly in the energy sector. We do not consider securities to be OTTI when the market decline is attributable to factors such as interest rate movements, market volatility, liquidity, spread widening and credit quality when recovery of all amounts due under the contractual terms of the security is anticipated. Based on our intent not to sell or our belief that we will not be required to sell these securities before recovery of their amortized cost basis, we do not consider these investments to be OTTI at September 30, 2016 . We will monitor the investment portfolio for future changes in issuer facts and circumstances that could result in future impairments beyond those currently identified. Excluding mortgage- and asset-backed securities, no securities from the same issuer had an aggregate unrealized loss in excess of $2.8 million at September 30, 2016 , with the largest unrealized loss from an electricity provider. With respect to mortgage- and asset-backed securities not backed by the United States Government, our largest aggregate unrealized loss from the same issuer at September 30, 2016 was $1.1 million , consisting of two different securities that are backed by different pools of Alt-A residential mortgage loans. Both securities are rated non-investment grade and the largest unrealized loss totaled $0.7 million . As described more fully in Note 1 to our consolidated financial statements included in Item 8 of our 2015 Form 10-K, we perform a regular evaluation of all investment classes for impairment, including fixed maturity securities and equity securities, in order to evaluate whether such investments are OTTI. Credit Loss Component of Other-Than-Temporary Impairments on Fixed Maturities Nine months ended September 30, 2016 2015 (Dollars in thousands) Balance at beginning of period $ (11,498 ) $ (16,772 ) Increases to previously impaired investments (2,172 ) (363 ) Reductions due to investments sold 1,054 757 Balance at end of period $ (12,616 ) $ (16,378 ) The table above sets forth the amount of credit loss impairments on fixed maturities held by the Company as of the dates indicated for which a portion of the OTTI was recognized in other comprehensive income (loss) and corresponding changes in such amounts. Realized Gains (Losses) - Recorded in Income Three months ended September 30, Nine months ended September 30, 2016 2015 2016 2015 (Dollars in thousands) Realized gains (losses) on sales of investments Fixed maturities: Gross gains $ — $ 136 $ 7,379 $ 2,884 Gross losses — (229 ) (8,378 ) (1,832 ) Equity securities 529 — 529 — Securities and indebtedness of related parties 117 — 437 6,457 646 (93 ) (33 ) 7,509 Impairment losses recognized in earnings: Credit-related portion of fixed maturity losses (1) — (363 ) (2,172 ) (363 ) Other credit-related (25 ) (50 ) (75 ) (210 ) Net realized losses on investments recorded in income $ 621 $ (506 ) $ (2,280 ) $ 6,936 (1) Amount represents the credit-related losses recognized for fixed maturities that were impaired to the present value of estimated future cash flows through income but not written down to fair value. As discussed above, the non-credit portion of the losses have been recognized in other comprehensive income (loss). Proceeds from sales of fixed maturities totaled $104.7 million during the nine months ended September 30, 2016 and $88.3 million during the nine months ended September 30, 2015 . Realized gains and losses on sales of investments are determined on the basis of specific identification. Mortgage Loans Our mortgage loan portfolio consists of commercial mortgage loans that we have originated. Our lending policies require that the loans be collateralized by the value of the related property, establish limits on the amount that can be loaned to one borrower and require diversification by geographic location and collateral type. We originate loans with an initial loan-to-value ratio that provides sufficient collateral to absorb losses should we be required to foreclose and take possession of the collateral. In order to identify impairment losses, management maintains and regularly reviews a watch list of mortgage loans that have heightened risk. These loans may include those with borrowers delinquent on contractual payments, borrowers experiencing financial difficulty, increases in rental real estate vacancies and significant declines in collateral value. We evaluate each of our mortgage loans individually and establish an estimated loss, if needed, for each impaired loan identified. An estimated loss is needed for loans for which we do not believe we will collect all amounts due according to the contractual terms of the respective loan agreements. Any loan delinquent on contractual payments is considered non-performing. At September 30, 2016 and December 31, 2015 , there were no non-performing loans over 90 days past due on contractual payments. Mortgage loans are placed on non-accrual status if we have concerns regarding the collectability of future payments. Interest income on non-performing loans is generally recognized on a cash basis. Once mortgage loans are classified as nonaccrual loans, the resumption of the interest accrual would commence only after all past due interest has been collected or the mortgage loan has been restructured such that the collection of interest is considered likely. At September 30, 2016, we had committed to provide additional funding for mortgage loans totaling $33.4 million . These commitments arose in the normal course of business at terms that are comparable to similar investments. Mortgage Loans by Collateral Type September 30, 2016 December 31, 2015 Collateral Type Carrying Value Percent of Total Carrying Value Percent of Total (Dollars in thousands) Office $ 364,698 46.7 % $ 333,400 44.8 % Retail 220,917 28.3 227,039 30.5 Industrial 141,948 18.1 133,085 17.9 Other 53,954 6.9 50,779 6.8 Total $ 781,517 100.0 % $ 744,303 100.0 % Mortgage Loans by Geographic Location within the United States September 30, 2016 December 31, 2015 Region of the United States Carrying Value Percent of Total Carrying Value Percent of Total (Dollars in thousands) South Atlantic $ 247,524 31.7 % $ 233,522 31.4 % West North Central 103,101 13.2 102,555 13.8 Pacific 100,304 12.8 100,188 13.4 East North Central 91,914 11.8 86,019 11.5 Mountain 80,873 10.4 78,750 10.6 West South Central 61,266 7.8 66,677 9.0 Other 96,535 12.3 76,592 10.3 Total $ 781,517 100.0 % $ 744,303 100.0 % Mortgage Loans by Loan-to-Value Ratio September 30, 2016 December 31, 2015 Loan-to-Value Ratio Carrying Value Percent of Total Carrying Value Percent of Total (Dollars in thousands) 0% - 50% $ 269,366 34.5 % $ 264,605 35.6 % 51% - 60% 182,855 23.4 169,045 22.7 61% - 70% 266,845 34.1 234,544 31.5 71% - 80% 45,117 5.8 67,072 9.0 81% - 90% 17,334 2.2 9,037 1.2 Total $ 781,517 100.0 % $ 744,303 100.0 % The loan-to-value ratio is determined using the most recent appraised value. Appraisals are updated periodically when there is indication of a possible significant collateral decline or there are loan modifications or refinance requests. Mortgage Loans by Year of Origination September 30, 2016 December 31, 2015 Year of Origination Carrying Value Percent of Total Carrying Value Percent of Total (Dollars in thousands) 2016 $ 105,923 13.6 % $ — — % 2015 151,727 19.4 154,582 20.9 2014 81,477 10.4 83,546 11.2 2013 70,554 9.0 79,879 10.7 2012 63,806 8.2 65,817 8.8 2011 and prior 308,030 39.4 360,479 48.4 Total $ 781,517 100.0 % $ 744,303 100.0 % Impaired Mortgage Loans September 30, 2016 December 31, 2015 (Dollars in thousands) Unpaid principal balance $ 21,542 $ 21,766 Less: Related allowance (766 ) (851 ) Discount — (87 ) Carrying value of impaired mortgage loans $ 20,776 $ 20,828 Allowance on Mortgage Loans Nine months ended September 30, 2016 2015 (Dollars in thousands) Balance at beginning of period $ 851 $ 857 Charge offs (85 ) (6 ) Balance at end of period $ 766 $ 851 Mortgage Loan Modifications Our commercial mortgage loan portfolio includes loans that have been modified. We assess loan modifications on a loan-by-loan basis to evaluate whether a troubled debt restructuring has occurred. Generally, the types of concessions include: reduction of the contractual interest rate to a below-market rate, extension of the maturity date and/or a reduction of accrued interest. The amount, timing and extent of the concession granted is considered in determining if an impairment loss is needed for the restructuring. There were no loan modifications during the nine months ended September 30, 2016 or 2015. Low Income Housing Tax Credit Investments (LIHTC) We invest in non-guaranteed federal LIHTC, which are included in securities and indebtedness of related parties on the balance sheet. The carrying value of these investments totaled $92.2 million at September 30, 2016 and $94.2 million at December 31, 2015. There were no impairment losses recorded on these investments during the third quarter of 2016 or 2015. We use the equity method of accounting for these investments and recorded the following in our consolidated statement of operations. LIHTC Equity Income (Loss), Net of Related Income Taxes Three months ended September 30, Nine months ended September 30, 2016 2015 2016 2015 (Dollars in thousands) Equity losses from LIHTC $ (1,811 ) $ (1,554 ) $ (5,858 ) $ (5,396 ) Income tax benefits: Tax benefits from equity losses 634 544 2,050 1,889 Investment tax credits 3,581 3,434 10,583 10,109 Equity income from LIHTC, net of related income tax benefits $ 2,404 $ 2,424 $ 6,775 $ 6,602 At September 30, 2016 , we had committed to provide additional funds for limited partnerships and limited liability companies in which we invest. The amounts of these unfunded commitments totaled $29.8 million , including $4.5 million for LIHTC commitments, which are summarized by year in the following table. LIHTC Commitments by Year September 30, 2016 (Dollars in thousands) 2016 $ 2,372 2017 1,164 2018-2024 968 Total $ 4,504 Variable Interest Entities We evaluate our variable interest entity (VIE) investees to determine whether the level of our direct ownership interest, our rights to manage operations, or our obligation to provide ongoing financial support are such that we are the primary beneficiary of the entity, and would therefore be required to consolidate it for financial reporting purposes. After determining that a VIE exists, we review our involvement in the VIE to determine whether we have both the power to direct activities that most significantly impact the economic performance of the VIE, and the obligation to absorb losses or the rights to receive benefits that could be potentially significant to the VIE. This analysis included a review of the purpose and design of the VIE as well as the role that we played in the formation of the entity and how that role could impact our ability to control the VIE. We also review the activities and decisions considered significant to the economic performance of the VIE and assess what power we have in directing those activities and decisions. Finally, we review the agreements in place to determine if there are any guarantees that would affect our maximum exposure to loss. We have reviewed the circumstances surrounding our investments in our VIEs, which are classified as securities and indebtedness of related parties and consist of non-guaranteed federal LIHTC, limited partnerships or limited liability companies accounted for under the equity method. In addition, we have reviewed the ownership interests in our VIEs and determined that we do not hold direct majority ownership or have other contractual rights (such as kick out rights) that give us effective control over these entities resulting in us having both the power to direct activities that most significantly impact the economic performance of the VIE and the obligation to absorb losses or the right to receive benefits that could be potentially significant to the VIE. The maximum loss exposure relative to our VIEs is limited to the carrying value and any unfunded commitments that exist for each particular VIE. Based on this analysis, none of our VIEs were required to be consolidated for any reporting periods presented in this Form 10-Q. In adopting the new guidance referred to in Note 1, additional entities were deemed to be VIEs, and are disclosed below for both periods presented. There were no circumstances that occurred during the reporting period that resulted in any changes in our decision not to consolidate any of our VIEs. We also have not provided additional support or other guarantees that was not previously contractually required (financial or otherwise) to any of the VIEs as of September 30, 2016 or December 31, 2015. VIE Investments by Category September 30, 2016 December 31, 2015 Carrying Value Maximum Exposure to Loss Carrying Value (1) Maximum Exposure to Loss (1) (Dollars in thousands) LIHTC $ 92,238 $ 96,742 $ 94,170 $ 102,626 Investment companies 21,077 40,108 20,004 35,604 Real estate limited partnerships 10,122 14,624 9,554 15,610 Other 236 2,037 637 2,448 Total $ 123,673 $ 153,511 $ 124,365 $ 156,288 (1) Prior year values have been restated for comparability with the amounts as presented under the new accounting guidance discussed in Note 1. In addition, we make passive investments in the normal course of business in structured securities issued by VIEs for which we are not the investment manager. These structured securities include all of the residential mortgage-backed securities, commercial mortgage-backed securities and other asset-backed securities included in our fixed maturities. Our maximum exposure to loss on these securities is limited to our carrying value in the investment. We have determined that we are not the primary beneficiary of these structured securities because we do not have the power to direct the activities that most significantly impact the entities' economic performance. Derivative Instruments We are not significantly involved in hedging activities and have limited exposure to derivatives. We do not apply hedge accounting to any of our derivative positions and they are held at fair value. Our primary exposure relates to purchased call options, which provide an economic hedge to the embedded derivatives in our index annuity and universal life insurance products. We also have embedded derivatives within our modified coinsurance agreements as well as an interest-only fixed maturity investment. Derivatives Instruments by Type September 30, 2016 December 31, 2015 (Dollars in thousands) Assets Freestanding derivatives: Call options (reported in other investments) $ 7,658 $ 2,331 Embedded derivatives: Modified coinsurance (reported in reinsurance recoverable) 4,045 2,636 Interest-only security (reported in fixed maturities) 3,091 4,551 Total assets $ 14,794 $ 9,518 Liabilities Embedded derivatives: Index annuity and universal life products (reported in liability for future policy benefits) $ 15,469 $ 9,374 Modified coinsurance agreements (reported in other liabilities) 368 56 Total liabilities $ 15,837 $ 9,430 Derivative Income (Loss) Three months ended September 30, Nine months ended September 30, 2016 2015 2016 2015 (Dollars in thousands) Change in fair value of free standing derivatives: Call options $ 1,897 $ (1,948 ) $ 4,186 $ (2,632 ) Change in fair value of embedded derivatives: Modified coinsurance agreements 270 (423 ) 1,097 (629 ) Interest-only security 14 — (451 ) — Index annuity and universal life products (669 ) 1,575 (3,358 ) 1,792 Call option amortization (1,509 ) (821 ) (3,983 ) (2,177 ) Call option proceeds 1,234 771 1,308 2,724 Total income (loss) from derivatives $ 1,237 $ (846 ) $ (1,201 ) $ (922 ) Derivative income (loss) is reported in net investment income except for the change in fair value of the embedded derivatives on our index annuity and universal life products, which is reported in interest sensitive product benefits. The call options are supported by securities collateral received of $4.9 million at September 30, 2016 , which is held in a separate custodial account. Subject to certain constraints, we are permitted to sell or re-pledge this collateral, but do not have legal rights to the collateral; accordingly, it has not been recorded on our balance sheet. At September 30, 2016 , none of the collateral had been sold or re-pledged. All of our counterparties are rated A- or better by a nationally recognized statistical rating organization. |