Investment Operations | Investment Operations Fixed Maturity and Equity Securities Available-For-Sale Fixed Maturity and Equity Securities by Investment Category September 30, 2017 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) $ 3,453,472 $ 302,308 $ (18,090 ) $ 3,737,690 $ 20 Residential mortgage-backed 439,818 37,979 (1,921 ) 475,876 429 Commercial mortgage-backed 628,934 38,208 (2,027 ) 665,115 — Other asset-backed 762,634 18,863 (1,839 ) 779,658 2,368 United States Government and agencies 26,188 1,679 (23 ) 27,844 — State and political subdivisions 1,383,005 136,264 (2,117 ) 1,517,152 — Total fixed maturities $ 6,694,051 $ 535,301 $ (26,017 ) $ 7,203,335 $ 2,817 Equity securities: Non-redeemable preferred stocks $ 92,952 $ 8,258 $ (231 ) $ 100,979 Common stocks 29,483 428 — 29,911 Total equity securities $ 122,435 $ 8,686 $ (231 ) $ 130,890 December 31, 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) $ 3,529,997 $ 228,601 $ (49,943 ) $ 3,708,655 $ (1,082 ) Residential mortgage-backed 396,110 29,121 (2,931 ) 422,300 (983 ) Commercial mortgage-backed 546,446 33,645 (4,137 ) 575,954 — Other asset-backed 771,570 8,846 (9,766 ) 770,650 2,544 United States Government and agencies 30,575 1,629 (132 ) 32,072 — State and political subdivisions 1,387,013 119,298 (7,152 ) 1,499,159 — Total fixed maturities $ 6,661,711 $ 421,140 $ (74,061 ) $ 7,008,790 $ 479 Equity securities: Non-redeemable preferred stocks $ 100,042 $ 4,050 $ (1,675 ) $ 102,417 Common stocks 30,437 114 — 30,551 Total equity securities $ 130,479 $ 4,164 $ (1,675 ) $ 132,968 (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, residential mortgage-backed, and other asset-backed securities at September 30, 2017 and other asset-backed securities at December 31, 2016 were in an unrealized gain position 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 fair value of $24.5 million at September 30, 2017 and $23.3 million at December 31, 2016 . Corporate securities also include redeemable preferred stock with a fair value of $22.9 million at September 30, 2017 and $24.5 million at December 31, 2016 . Available-For-Sale Fixed Maturities by Maturity Date September 30, 2017 Amortized Cost Fair Value (Dollars in thousands) Due in one year or less $ 182,411 $ 186,444 Due after one year through five years 650,439 697,790 Due after five years through ten years 720,753 765,931 Due after ten years 3,309,062 3,632,521 4,862,665 5,282,686 Mortgage-backed and other asset-backed 1,831,386 1,920,649 Total fixed maturities $ 6,694,051 $ 7,203,335 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 $ 509,284 $ 347,079 Equity securities - available for sale 8,455 2,489 517,739 349,568 Adjustments for assumed changes in amortization pattern of: Deferred acquisition costs (142,109 ) (95,647 ) Value of insurance in force acquired (14,438 ) (12,382 ) Unearned revenue reserve 10,652 4,215 Adjustments for assumed changes in policyholder liabilities (16,421 ) (3,795 ) Provision for deferred income taxes (124,397 ) (84,684 ) Net unrealized investment gains $ 231,026 $ 157,275 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, 2017 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 $ 142,004 $ (2,278 ) $ 186,461 $ (15,812 ) $ 328,465 $ (18,090 ) 69.5 % Residential mortgage-backed 49,211 (674 ) 27,385 (1,247 ) 76,596 (1,921 ) 7.4 Commercial mortgage-backed 120,022 (1,661 ) 4,981 (366 ) 125,003 (2,027 ) 7.8 Other asset-backed 140,185 (1,211 ) 36,180 (628 ) 176,365 (1,839 ) 7.1 United States Government and agencies 3,598 (23 ) — — 3,598 (23 ) 0.1 State and political subdivisions 49,397 (737 ) 13,727 (1,380 ) 63,124 (2,117 ) 8.1 Total fixed maturities $ 504,417 $ (6,584 ) $ 268,734 $ (19,433 ) $ 773,151 $ (26,017 ) 100.0 % Equity securities: Non-redeemable preferred stocks $ — $ — $ 4,769 $ (231 ) $ 4,769 $ (231 ) Total equity securities $ — $ — $ 4,769 $ (231 ) $ 4,769 $ (231 ) December 31, 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 $ 742,626 $ (23,142 ) $ 220,939 $ (26,801 ) $ 963,565 $ (49,943 ) 67.3 % Residential mortgage-backed 51,873 (1,014 ) 22,744 (1,917 ) 74,617 (2,931 ) 4.0 Commercial mortgage-backed 95,690 (3,590 ) 6,610 (547 ) 102,300 (4,137 ) 5.6 Other asset-backed 371,829 (5,810 ) 95,740 (3,956 ) 467,569 (9,766 ) 13.2 United States Government and agencies 6,438 (132 ) — — 6,438 (132 ) 0.2 State and political subdivisions 150,052 (7,152 ) — — 150,052 (7,152 ) 9.7 Total fixed maturities $ 1,418,508 $ (40,840 ) $ 346,033 $ (33,221 ) $ 1,764,541 $ (74,061 ) 100.0 % Equity securities: Non-redeemable preferred stocks $ 12,774 $ (150 ) $ 13,438 $ (1,525 ) $ 26,212 $ (1,675 ) Total equity securities $ 12,774 $ (150 ) $ 13,438 $ (1,525 ) $ 26,212 $ (1,675 ) Fixed maturities in the above tables include 236 securities from 178 issuers at September 30, 2017 and 516 securities from 404 issuers at December 31, 2016 . Unrealized losses decreased during the nine months ended September 30, 2017 primarily due to a decrease in treasury rates as well as a general decrease in credit spreads. 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, 2017 . We will continue to monitor the investment portfolio for future changes in issuer facts and circumstances that could result in future impairments beyond those currently identified. Our largest unrealized loss was from a retailer and totaled $2.4 million at September 30, 2017 . As described more fully in Note 1 to our consolidated financial statements included in Item 8 of our Form 10-K for the year ended December 31, 2016, 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, 2017 2016 (Dollars in thousands) Balance at beginning of period $ (14,500 ) $ (11,498 ) Increases to previously impaired investments — (2,172 ) Reductions due to investments sold or paid down 1,154 1,054 Reduction for credit loss that no longer has a portion of the OTTI loss recognized in other comprehensive income 587 — Balance at end of period $ (12,759 ) $ (12,616 ) 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 and corresponding changes in such amounts. Credit loss impairments with no portion of the loss recognized in other comprehensive income, such as securities for which OTTI was measured at fair value, are excluded from the table. Realized Gains (Losses) - Recorded in Income Three months ended September 30, Nine months ended September 30, 2017 2016 2017 2016 (Dollars in thousands) Realized gains (losses) on sales of investments Fixed maturities: Gross gains $ 221 $ — $ 1,426 $ 7,379 Gross losses (140 ) — (1,082 ) (8,378 ) Equity securities — 529 (90 ) 529 Other long-term investments — — 40 — Real estate — — 305 — Securities and indebtedness of related parties — 117 — 437 81 646 599 (33 ) Impairment losses recognized in earnings: Credit-related portion of fixed maturity losses (1) — — — (2,172 ) Other credit-related (2) (67 ) (25 ) (133 ) (75 ) Net realized losses on investments recorded in income $ 14 $ 621 $ 466 $ (2,280 ) (1) Amount represents the credit-related losses recognized for fixed maturities that were impaired 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). (2) Amount represents credit-related losses for other investments and fixed maturities written down to fair value through income. Proceeds from sales of fixed maturities totaled $57.7 million during the nine months ended September 30, 2017 and $104.7 million during the nine months ended September 30, 2016 . 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 recognize a loss through an allowance for each loan 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, 2017 and December 31, 2016 , 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, 2017 , we had committed to provide additional funding for mortgage loans totaling $43.4 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, 2017 December 31, 2016 Collateral Type Carrying Value Percent of Total Carrying Value Percent of Total (Dollars in thousands) Office $ 393,731 42.6 % $ 361,088 44.2 % Retail 287,093 31.1 240,602 29.5 Industrial 185,348 20.1 154,005 18.9 Other 57,766 6.2 60,776 7.4 Total $ 923,938 100.0 % $ 816,471 100.0 % Mortgage Loans by Geographic Location within the United States September 30, 2017 December 31, 2016 Region of the United States Carrying Value Percent of Total Carrying Value Percent of Total (Dollars in thousands) South Atlantic $ 274,396 29.7 % $ 266,019 32.6 % Pacific 139,703 15.1 104,337 12.8 West North Central 128,600 13.9 105,753 12.9 East North Central 94,237 10.2 91,550 11.2 Mountain 89,036 9.6 79,707 9.8 West South Central 86,589 9.4 74,258 9.1 Other 111,377 12.1 94,847 11.6 Total $ 923,938 100.0 % $ 816,471 100.0 % Mortgage Loans by Loan-to-Value Ratio September 30, 2017 December 31, 2016 Loan-to-Value Ratio Carrying Value Percent of Total Carrying Value Percent of Total (Dollars in thousands) 0% - 50% $ 321,301 34.8 % $ 274,953 33.7 % 51% - 60% 258,085 27.9 210,555 25.8 61% - 70% 251,142 27.2 233,216 28.5 71% - 80% 63,530 6.9 67,607 8.3 81% - 90% 29,880 3.2 30,140 3.7 Total $ 923,938 100.0 % $ 816,471 100.0 % 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, 2017 December 31, 2016 Year of Origination Carrying Value Percent of Total Carrying Value Percent of Total (Dollars in thousands) 2017 $ 146,053 15.8 % $ — — % 2016 155,559 16.8 158,817 19.4 2015 146,311 15.8 149,302 18.3 2014 78,605 8.5 80,771 9.9 2013 67,840 7.4 69,887 8.6 2012 and prior 329,570 35.7 357,694 43.8 Total $ 923,938 100.0 % $ 816,471 100.0 % Impaired Mortgage Loans September 30, 2017 December 31, 2016 (Dollars in thousands) Unpaid principal balance $ 19,126 $ 21,459 Less: Related allowance (566 ) (713 ) Carrying value of impaired mortgage loans $ 18,560 $ 20,746 Allowance on Mortgage Loans Nine months ended September 30, 2017 2016 (Dollars in thousands) Balance at beginning of period $ 713 $ 851 Recoveries (147 ) (85 ) Balance at end of period $ 566 $ 766 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, 2017 or 2016. 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 $86.0 million at September 30, 2017 and $91.3 million at December 31, 2016. There were no impairment losses recorded on these investments during the first nine months of 2017 or 2016. We use the equity method of accounting for these investments and reported 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, 2017 2016 2017 2016 (Dollars in thousands) Equity losses from LIHTC $ (1,918 ) $ (1,811 ) $ (6,661 ) $ (5,858 ) Income tax benefits: Tax benefits from equity losses 671 634 2,331 2,050 Investment tax credits 3,563 3,581 10,660 10,583 Equity income from LIHTC, net of related income tax benefits $ 2,316 $ 2,404 $ 6,330 $ 6,775 At September 30, 2017 , 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 $54.3 million , including $2.4 million for LIHTC commitments, which are summarized by year in the following table. LIHTC Commitments by Year September 30, 2017 (Dollars in thousands) 2017 $ 1,226 2018 320 2019-2025 857 Total $ 2,403 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 VIE status 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 includes 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 VIEs, which are classified as securities and indebtedness of related parties and consist of 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. 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, 2017 or December 31, 2016. Based on this analysis, none of our VIEs were required to be consolidated for any reporting periods presented in this Form 10-Q. VIE Investments by Category September 30, 2017 December 31, 2016 Carrying Value Maximum Exposure to Loss Carrying Value Maximum Exposure to Loss (Dollars in thousands) LIHTC $ 85,964 $ 88,367 $ 91,255 $ 95,058 Investment companies 24,246 63,778 23,379 45,569 Real estate limited partnerships 10,042 21,992 10,790 14,558 Other 959 1,409 429 2,034 Total $ 121,211 $ 175,546 $ 125,853 $ 157,219 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 Our primary derivative exposures relate to our indexed products, including both the embedded derivatives in the liability for future policy benefits on those products and purchased call options, which provide an economic hedge against those embedded derivatives. We also have embedded derivatives within our modified coinsurance agreements as well as an interest-only fixed maturity investment. We do not apply hedge accounting to any of our derivative positions, and they are held at fair value. Derivatives Instruments by Type September 30, 2017 December 31, 2016 (Dollars in thousands) Assets Freestanding derivatives: Call options (reported in other investments) $ 13,108 $ 9,360 Embedded derivatives: Modified coinsurance (reported in reinsurance recoverable) 2,101 3,411 Interest-only security (reported in fixed maturities) 2,420 3,374 Total assets $ 17,629 $ 16,145 Liabilities Embedded derivatives: Indexed annuity and universal life products (reported in liability for future policy benefits) $ 24,074 $ 15,778 Modified coinsurance agreements (reported in other liabilities) 312 114 Total liabilities $ 24,386 $ 15,892 Derivative Income (Loss) Three months ended September 30, Nine months ended September 30, 2017 2016 2017 2016 (Dollars in thousands) Call options $ 2,482 $ 1,622 $ 6,247 $ 1,511 Change in fair value of embedded derivatives: Modified coinsurance agreements (86 ) 270 (1,508 ) 1,097 Interest-only security 28 14 (167 ) (451 ) Indexed annuity and universal life products 560 (669 ) 878 (3,358 ) Total income (loss) from derivatives $ 2,984 $ 1,237 $ 5,450 $ (1,201 ) Derivative income (loss) is reported in net investment income except for the change in fair value of the embedded derivatives on our indexed annuity and universal life products, which is reported in interest sensitive product benefits. We are exposed to credit losses in the event of nonperformance of the derivative counterparties. This credit risk is minimized by purchasing such agreements from financial institutions with high credit ratings (currently rated A- or better by nationally recognized statistical rating organizations). We have also entered into credit support agreements with the counterparties requiring them to post collateral when net exposures exceed pre-determined thresholds that vary by counterparty. The net amount of such exposure is essentially the market value less collateral held for such agreements with each counterparty. The call options are supported by securities collateral received of $7.9 million at September 30, 2017 , 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, 2017 , none of the collateral had been sold or re-pledged. As of September 30, 2017 , our net derivative exposure was $5.5 million . |