Investment Operations | Investment Operations Fixed Maturity and Equity Securities Available-For-Sale Fixed Maturity Securities by Investment Category September 30, 2018 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 $ 3,226,039 $ 148,003 $ (60,509 ) $ 3,313,533 $ — Residential mortgage-backed 592,376 28,761 (13,668 ) 607,469 3,026 Commercial mortgage-backed 883,023 14,063 (32,412 ) 864,674 — Other asset-backed 748,415 16,410 (4,700 ) 760,125 1,364 United States Government and agencies 19,712 816 (295 ) 20,233 — States and political subdivisions 1,456,051 87,208 (10,268 ) 1,532,991 — Total fixed maturities $ 6,925,616 $ 295,261 $ (121,852 ) $ 7,099,025 $ 4,390 Available-For-Sale Fixed Maturity and Equity Securities by Investment Category December 31, 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 $ 3,374,927 $ 329,299 $ (15,955 ) $ 3,688,271 $ (504 ) Residential mortgage-backed 483,671 35,890 (3,280 ) 516,281 339 Commercial mortgage-backed 674,076 34,464 (3,233 ) 705,307 — Other asset-backed 818,071 18,645 (3,214 ) 833,502 845 United States Government and agencies 23,378 1,606 (79 ) 24,905 — States and political subdivisions 1,383,127 141,813 (1,239 ) 1,523,701 — Total fixed maturities $ 6,757,250 $ 561,717 $ (27,000 ) $ 7,291,967 $ 680 Equity securities: Non-redeemable preferred stocks $ 92,951 $ 7,146 $ (265 ) $ 99,832 Common stocks 3,764 549 — 4,313 Total equity securities $ 96,715 $ 7,695 $ (265 ) $ 104,145 (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 residential mortgage-backed and other asset-backed securities at September 30, 2018 and December 31, 2017 were in an unrealized gain position due to increases in estimated fair value subsequent to initial recognition of non-credit losses on such securities. Available-For-Sale Fixed Maturities by Maturity Date September 30, 2018 Amortized Cost Fair Value (Dollars in thousands) Due in one year or less $ 116,178 $ 118,398 Due after one year through five years 545,151 562,662 Due after five years through ten years 699,717 708,989 Due after ten years 3,340,756 3,476,708 4,701,802 4,866,757 Mortgage-backed and other asset-backed 2,223,814 2,232,268 Total fixed maturities $ 6,925,616 $ 7,099,025 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 on Investments in Accumulated Other Comprehensive Income September 30, December 31, (Dollars in thousands) Net unrealized appreciation on: Fixed maturities - available for sale $ 173,409 $ 534,718 Equity securities - available for sale — 7,430 173,409 542,148 Adjustments for assumed changes in amortization pattern of: Deferred acquisition costs (46,865 ) (147,173 ) Value of insurance in force acquired (6,980 ) (14,870 ) Unearned revenue reserve 5,673 12,705 Adjustments for assumed changes in policyholder liabilities (64 ) (18,499 ) Provision for deferred income taxes (26,286 ) (78,605 ) Net unrealized investment gains $ 98,887 $ 295,706 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 Securities with Unrealized Losses by Length of Time September 30, 2018 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 $ 1,008,619 $ (41,103 ) $ 179,151 $ (19,406 ) $ 1,187,770 $ (60,509 ) 49.7 % Residential mortgage-backed 321,318 (11,240 ) 44,511 (2,428 ) 365,829 (13,668 ) 11.2 Commercial mortgage-backed 492,258 (22,110 ) 97,859 (10,302 ) 590,117 (32,412 ) 26.6 Other asset-backed 301,551 (2,819 ) 93,174 (1,881 ) 394,725 (4,700 ) 3.9 United States Government and agencies 3,889 (221 ) 2,423 (74 ) 6,312 (295 ) 0.2 States and political subdivisions 218,383 (7,995 ) 16,697 (2,273 ) 235,080 (10,268 ) 8.4 Total fixed maturities $ 2,346,018 $ (85,488 ) $ 433,815 $ (36,364 ) $ 2,779,833 $ (121,852 ) 100.0 % Fixed Maturity and Equity Securities with Unrealized Losses by Length of Time December 31, 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 $ 85,019 $ (1,261 ) $ 183,820 $ (14,694 ) $ 268,839 $ (15,955 ) 59.1 % Residential mortgage-backed 76,393 (1,757 ) 31,779 (1,523 ) 108,172 (3,280 ) 12.1 Commercial mortgage-backed 151,158 (2,078 ) 16,398 (1,155 ) 167,556 (3,233 ) 12.0 Other asset-backed 159,111 (2,006 ) 71,064 (1,208 ) 230,175 (3,214 ) 11.9 United States Government and agencies 5,698 (47 ) 1,864 (32 ) 7,562 (79 ) 0.3 States and political subdivisions 5,904 (96 ) 20,505 (1,143 ) 26,409 (1,239 ) 4.6 Total fixed maturities $ 483,283 $ (7,245 ) $ 325,430 $ (19,755 ) $ 808,713 $ (27,000 ) 100.0 % Equity securities: Non-redeemable preferred stocks $ 2,819 $ (71 ) $ 4,807 $ (194 ) $ 7,626 $ (265 ) Total equity securities $ 2,819 $ (71 ) $ 4,807 $ (194 ) $ 7,626 $ (265 ) Fixed maturities in the above tables include 763 securities from 473 issuers at September 30, 2018 and 247 securities from 154 issuers at December 31, 2017 . Unrealized losses increased during the nine months ended September 30, 2018 due to higher market interest rates. 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, 2018 . 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. 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, 2017, we perform a regular evaluation of all investment classes for impairment 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, 2018 2017 (Dollars in thousands) Balance at beginning of period $ (12,392 ) $ (14,500 ) Reductions due to investments sold or paid down 3,648 1,154 Reduction for credit loss that no longer has a portion of the OTTI loss recognized in other comprehensive income 2,529 587 Balance at end of period $ (6,215 ) $ (12,759 ) 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 the non-credit 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, 2018 2017 2018 2017 (Dollars in thousands) Realized gains (losses) on sales of investments Fixed maturities: Gross gains $ 25 $ 221 $ 1,821 $ 1,426 Gross losses (1 ) (140 ) (2 ) (1,082 ) Equity securities — — — (90 ) Other long-term investments (1 ) — (19 ) 40 Real estate — — — 305 23 81 1,800 599 Net unrealized losses recognized during the period on equity securities held at the end of the period (1) (732 ) — (3,415 ) — Net realized gains (losses) (709 ) 81 (1,615 ) 599 Impairment losses recognized in earnings: Other credit-related (2) (50 ) (67 ) (1,090 ) (133 ) Net realized gains (losses) on investments recorded in income $ (759 ) $ 14 $ (2,705 ) $ 466 (1) See Note 1 to our consolidated financial statements for discussion of change in accounting policy for equity securities during 2018. (2) Amount represents credit-related losses for fixed maturities written down to fair value through income and impairment losses related to investments accounted for under the equity method of accounting, which are included in securities and indebtedness of related parties within our consolidated balance sheets. Proceeds from sales of fixed maturities totaled $59.3 million during the nine months ended September 30, 2018 and $57.7 million during the nine months ended September 30, 2017 . 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. 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 non-accrual 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, 2018 and December 31, 2017 , there were no non-performing loans over 90 days past due on contractual payments. At September 30, 2018 , we had committed to provide additional funding for mortgage loans totaling $21.1 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, 2018 December 31, 2017 Collateral Type Carrying Value Percent of Total Carrying Value Percent of Total (Dollars in thousands) Office $ 425,459 41.9 % $ 410,090 42.2 % Retail 306,614 30.2 292,257 30.1 Industrial 211,585 20.8 207,180 21.3 Other 71,960 7.1 62,285 6.4 Total $ 1,015,618 100.0 % $ 971,812 100.0 % Mortgage Loans by Geographic Location within the United States September 30, 2018 December 31, 2017 Region of the United States Carrying Value Percent of Total Carrying Value Percent of Total (Dollars in thousands) South Atlantic $ 294,262 29.0 % $ 296,947 30.5 % Pacific 164,405 16.2 146,320 15.0 West North Central 122,743 12.1 127,096 13.1 East North Central 105,982 10.4 91,971 9.5 Mountain 102,339 10.1 105,627 10.9 West South Central 91,402 9.0 85,566 8.8 East South Central 65,459 6.4 67,228 6.9 Middle Atlantic 35,123 3.5 16,052 1.7 New England 33,903 3.3 35,005 3.6 Total $ 1,015,618 100.0 % $ 971,812 100.0 % Mortgage Loans by Loan-to-Value Ratio September 30, 2018 December 31, 2017 Loan-to-Value Ratio Carrying Value Percent of Total Carrying Value Percent of Total (Dollars in thousands) 0% - 50% $ 404,171 39.8 % $ 334,037 34.4 % 51% - 60% 283,036 27.9 258,359 26.6 61% - 70% 288,808 28.4 297,404 30.6 71% - 80% 21,076 2.1 63,116 6.5 81% - 90% 18,527 1.8 18,896 1.9 Total $ 1,015,618 100.0 % $ 971,812 100.0 % 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, 2018 December 31, 2017 Year of Origination Carrying Value Percent of Total Carrying Value Percent of Total (Dollars in thousands) 2018 $ 93,611 9.2 % $ — — % 2017 209,307 20.6 214,365 22.1 2016 150,686 14.8 154,359 15.9 2015 134,529 13.3 144,890 14.9 2014 75,598 7.4 77,866 8.0 2013 and prior 351,887 34.7 380,332 39.1 Total $ 1,015,618 100.0 % $ 971,812 100.0 % Impaired Mortgage Loans September 30, 2018 December 31, 2017 (Dollars in thousands) Unpaid principal balance $ 18,724 $ 19,027 Less: Related allowance (346 ) (497 ) Carrying value of impaired mortgage loans $ 18,378 $ 18,530 Allowance on Mortgage Loans Nine months ended September 30, 2018 2017 (Dollars in thousands) Balance at beginning of period $ 497 $ 713 Recoveries (151 ) (147 ) Balance at end of period $ 346 $ 566 Mortgage Loan Modifications Our commercial mortgage loan portfolio can include 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, 2018 or September 30, 2017 . 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 we have a variable interest, 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 consist of (i) limited partnerships or limited liability companies accounted for under the equity method included in securities and indebtedness of related parties and (ii) non-guaranteed federal LIHTC investments included in other assets. LIHTC investments take the form of limited partnerships, which in turn invest in a number of low income housing projects. We use the proportional amortization method of accounting for these investments. The proportional amortization method amortizes the cost of the investment over the period in which the investor expects to receive tax credits and other tax benefits, and the resulting amortization is recognized along with the tax benefits as a component of federal income tax expense on our consolidated statements of operations. The net benefits reflected in federal income tax expense related to LIHTC investments were $0.9 million for the third quarter of 2018 and $2.7 million for the nine months ended September 30, 2018 , compared to $1.3 million for the third quarter of 2017 and $3.8 million at for the nine months ended September 30, 2017 . The carrying value of our LIHTC investments totaled $56.7 million at September 30, 2018 and $65.7 million at December 31, 2017 . See Note 1 to our consolidated financial statements for discussion of a change in accounting method applied to these investments. At September 30, 2018 , 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 $56.4 million , including $1.6 million for LIHTC investment commitments, which are summarized by year in the following table. LIHTC Investment Commitments by Year September 30, 2018 (Dollars in thousands) 2018 $ 341 2019 248 2020-2025 996 Total $ 1,585 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, 2018 or December 31, 2017. 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, 2018 December 31, 2017 Carrying Value Maximum Exposure to Loss Carrying Value Maximum Exposure to Loss (Dollars in thousands) LIHTC investments $ 56,715 $ 58,300 $ 65,710 $ 67,396 Investment companies 37,388 82,167 25,335 62,372 Real estate limited partnerships 9,694 19,522 8,589 20,590 Other 455 649 1,182 1,488 Total $ 104,252 $ 160,638 $ 100,816 $ 151,846 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 of 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 exposure relates to purchased call options, which provide an economic hedge against the embedded derivatives in our indexed 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. 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, 2018 December 31, 2017 (Dollars in thousands) Assets Freestanding derivatives: Call options (reported in other investments) $ 19,140 $ 14,824 Embedded derivatives: Modified coinsurance assumed (reported in reinsurance recoverable) 98 2,125 Modified coinsurance ceded (reported in reinsurance recoverable) 20 — Interest-only security (reported in fixed maturities) 1,422 2,096 Total assets $ 20,680 $ 19,045 Liabilities Embedded derivatives: Indexed annuity and universal life products (reported in liability for future policy benefits) $ 42,017 $ 27,774 Modified coinsurance agreements (reported in other liabilities) 288 268 Total liabilities $ 42,305 $ 28,042 Derivative Income (Loss) Three months ended September 30, Nine months ended September 30, 2018 2017 2018 2017 (Dollars in thousands) Change in fair value of free standing derivatives: Call options $ 5,999 $ 2,482 $ 7,039 $ 6,247 Change in fair value of embedded derivatives: Modified coinsurance agreements (1,209 ) (86 ) (2,027 ) (1,508 ) Interest-only security (1 ) 28 (79 ) (167 ) Indexed annuity and universal life products (5,509 ) 560 (2,563 ) 878 Total income (loss) from derivatives $ (720 ) $ 2,984 $ 2,370 $ 5,450 Derivative income 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 $14.3 million at September 30, 2018 , 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, 2018 , none of the collateral had been sold or re-pledged. As of September 30, 2018 , our net derivative exposure was $5.1 million . |