| Investments | Investments The following tables show the cost or amortized cost, gross unrealized gains and losses, fair value and other-than-temporary impairment (“OTTI”) of our fixed maturity and equity securities as of the dates indicated: June 30, 2015 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value OTTI in AOCI (a) Fixed maturity securities: United States government and government agencies and authorities $ 170,201 $ 4,576 $ (376 ) $ 174,401 $ — States, municipalities and political subdivisions 705,878 54,635 (1,605 ) 758,908 — Foreign governments 549,039 75,012 (1,611 ) 622,440 — Asset-backed 3,762 1,578 (124 ) 5,216 1,478 Commercial mortgage-backed 29,974 673 — 30,647 — Residential mortgage-backed 1,018,385 55,042 (4,327 ) 1,069,100 16,472 Corporate 7,321,135 798,462 (34,370 ) 8,085,227 21,157 Total fixed maturity securities $ 9,798,374 $ 989,978 $ (42,413 ) $ 10,745,939 $ 39,107 Equity securities: Common stocks $ 24,119 $ 15,772 $ (12 ) $ 39,879 $ — Non-redeemable preferred stocks 436,947 48,991 (2,031 ) 483,907 — Total equity securities $ 461,066 $ 64,763 $ (2,043 ) $ 523,786 $ — December 31, 2014 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value OTTI in AOCI (a) Fixed maturity securities: United States government and government agencies and authorities $ 172,070 $ 5,201 $ (429 ) $ 176,842 $ — States, municipalities and political subdivisions 703,167 67,027 (353 ) 769,841 — Foreign governments 591,981 74,339 (1,457 ) 664,863 — Asset-backed 3,917 1,680 (78 ) 5,519 1,570 Commercial mortgage-backed 44,907 1,109 — 46,016 — Residential mortgage-backed 911,004 58,876 (1,154 ) 968,726 17,732 Corporate 7,621,054 1,026,927 (16,614 ) 8,631,367 21,612 Total fixed maturity securities $ 10,048,100 $ 1,235,159 $ (20,085 ) $ 11,263,174 $ 40,914 Equity securities: Common stocks $ 22,300 $ 15,651 $ (1 ) $ 37,950 $ — Non-redeemable preferred stocks 412,575 50,975 (2,093 ) 461,457 — Total equity securities $ 434,875 $ 66,626 $ (2,094 ) $ 499,407 $ — (a) Represents the amount of OTTI recognized in accumulated other comprehensive income (“AOCI”). Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date. Our states, municipalities and political subdivisions holdings are highly diversified across the U.S. and Puerto Rico, with no individual state’s exposure (including both general obligation and revenue securities) exceeding 0.5% of the overall investment portfolio as of June 30, 2015 and December 31, 2014. At June 30, 2015 and December 31, 2014, the securities include general obligation and revenue bonds issued by states, cities, counties, school districts and similar issuers, including $335,964 and $270,107 , respectively, of advance refunded or escrowed-to-maturity bonds (collectively referred to as “pre-refunded bonds”), which are bonds for which an irrevocable trust has been established to fund the remaining payments of principal and interest. As of June 30, 2015 and December 31, 2014, revenue bonds account for 50% and 51% of the holdings, respectively. Excluding pre-refunded revenue bonds, the activities supporting the income streams of the Company’s revenue bonds are across a broad range of sectors, primarily highway, water, airport and marina, higher education, specifically pledged tax revenues, and other miscellaneous sources such as bond banks, finance authorities and appropriations. The Company’s investments in foreign government fixed maturity securities are held mainly in countries and currencies where the Company has policyholder liabilities, which allow the assets and liabilities to be more appropriately matched. At June 30, 2015, approximately 77% , 10% and 5% of the foreign government securities were held in the Canadian government/provincials and the governments of Brazil and Germany, respectively. At December 31, 2014, approximately 76% , 10% and 5% of the foreign government securities were held in the Canadian government/provincials and the governments of Brazil and Germany, respectively. No other country represented more than 2% and 3% of our foreign government securities as of June 30, 2015 and December 31, 2014, respectively. The Company has European investment exposure in its corporate fixed maturity and equity securities of $967,422 with a net unrealized gain of $90,871 at June 30, 2015 and $1,060,655 with a net unrealized gain of $116,975 at December 31, 2014. Approximately 22% of the corporate European exposure is held in the financial industry at June 30, 2015 and December 31, 2014. Our largest European country exposure represented approximately 5% of the fair value of our corporate securities as of June 30, 2015 and December 31, 2014. Approximately 6% of the fair value of the corporate European securities are pound and euro-denominated and are not hedged to U.S. dollars, but held to support those foreign-denominated liabilities. Our international investments are managed as part of our overall portfolio with the same approach to risk management and focus on diversification. The Company has exposure to the energy sector in its corporate fixed maturity securities of $927,651 with a net unrealized gain of $75,138 at June 30, 2015 and $992,012 with a net unrealized gain of $89,590 at December 31, 2014. Approximately 88% and 89% of the energy exposure is rated as investment grade as of June 30, 2015 and December 31, 2014, respectively. The cost or amortized cost and fair value of fixed maturity securities at June 30, 2015 by contractual maturity are shown below. Expected maturities may differ from contractual maturities because issuers of the securities may have the right to call or prepay obligations with or without call or prepayment penalties. Cost or Amortized Cost Fair Value Due in one year or less $ 307,598 $ 313,370 Due after one year through five years 1,995,950 2,110,987 Due after five years through ten years 2,280,879 2,382,011 Due after ten years 4,161,826 4,834,608 Total 8,746,253 9,640,976 Asset-backed 3,762 5,216 Commercial mortgage-backed 29,974 30,647 Residential mortgage-backed 1,018,385 1,069,100 Total $ 9,798,374 $ 10,745,939 The following table summarizes the proceeds from sales of available-for-sale securities and the gross realized gains and gross realized losses that have been included in earnings as a result of those sales. Three Months Ended June 30, Six Months Ended June 30, 2015 2014 2015 2014 Proceeds from sales $ 804,476 $ 449,405 $ 1,356,989 $ 1,002,404 Gross realized gains 13,912 8,804 26,255 31,587 Gross realized losses 5,844 1,300 11,443 6,567 The following table sets forth the net realized gains (losses), including OTTI, recognized in the statement of operations as follows: Three Months Ended June 30, Six Months Ended June 30, 2015 2014 2015 2014 Net realized gains (losses) related to sales and other: Fixed maturity securities $ 6,746 $ 6,500 $ 12,259 $ 21,690 Equity securities 1,080 13 1,954 5,137 Other investments 4,173 (396 ) 4,311 (959 ) Total net realized gains related to sales and other 11,999 6,117 18,524 25,868 Net realized losses related to other-than-temporary impairments: Fixed maturity securities — (30 ) (2,570 ) (30 ) Total net realized losses related to other-than- temporary impairments — (30 ) (2,570 ) (30 ) Total net realized gains $ 11,999 $ 6,087 $ 15,954 $ 25,838 Other-Than-Temporary Impairments The Company follows the OTTI guidance, which requires entities to separate an OTTI of a debt security into two components when there are credit related losses associated with the impaired debt security for which the Company asserts that it does not have the intent to sell, and it is more likely than not that it will not be required to sell before recovery of its cost basis. Under the OTTI guidance, the amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other, non-credit factors ( e.g. , interest rates, market conditions, etc.) is recorded as a component of other comprehensive income. In instances where no credit loss exists but the Company intends to sell the security or it is more likely than not that the Company will have to sell the debt security prior to the anticipated recovery, the decline in market value below amortized cost is recognized as an OTTI in earnings. In periods after the recognition of an OTTI on debt securities, the Company accounts for such securities as if they had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. For debt securities for which OTTI was recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected will be accreted or amortized into net investment income. There was no OTTI recorded for the three months ended June 30, 2015. For the six months ended June 30, 2015, the Company recorded $3,208 of OTTI, of which $2,570 was related to credit losses and recorded as net OTTI losses recognized in earnings, with the remaining $638 related to all other factors and recorded as an unrealized loss component of AOCI. For the three and six months ended June 30, 2014, the Company recorded $40 and $69 , respectively, of OTTI, of which $30 and $30 , respectively was related to credit losses and recorded as net OTTI losses recognized in earnings, with the remaining $10 and $39 , respectively, related to all other factors and recorded as an unrealized loss component of AOCI. The following table sets forth the amount of credit loss impairments recognized within the results of operations on fixed maturity securities held by the Company as of the dates indicated, for which a portion of the OTTI loss was recognized in AOCI, and the corresponding changes in such amounts. Three Months Ended June 30, 2015 2014 Balance, March 31, $ 36,057 $ 44,301 Additions for credit loss impairments recognized in the current period on securities previously impaired — 30 Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security (603 ) (2,163 ) Reductions for credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period (1,146 ) (2,920 ) Balance, June 30, $ 34,308 $ 39,248 Six Months Ended June 30, 2015 2014 Balance, January 1, $ 35,424 $ 45,278 Additions for credit loss impairments recognized in the current period on securities previously impaired — 30 Additions for credit loss impairments recognized in the current period on securities not previously impaired 2,570 — Reductions for increases in cash flows expected to be collected that are recognized over the remaining life of the security (1,075 ) (2,645 ) Reductions for credit loss impairments previously recognized on securities which matured, paid down, prepaid or were sold during the period (2,611 ) (3,415 ) Balance, June 30, $ 34,308 $ 39,248 We regularly monitor our investment portfolio to ensure investments that may be other-than-temporarily impaired are timely identified, properly valued, and charged against earnings in the proper period. The determination that a security has incurred an other-than-temporary decline in value requires the judgment of management. Assessment factors include, but are not limited to, the length of time and the extent to which the market value has been less than cost, the financial condition and rating of the issuer, whether any collateral is held, the intent and ability of the Company to retain the investment for a period of time sufficient to allow for recovery for equity securities and the intent to sell or whether it is more likely than not that the Company will be required to sell for fixed maturity securities. Inherently, there are risks and uncertainties involved in making these judgments. Changes in circumstances and critical assumptions such as a continued weak economy, a more pronounced economic downturn or unforeseen events which affect one or more companies, industry sectors, or countries could result in additional impairments in future periods for other-than-temporary declines in value. Any equity security whose price decline is deemed other-than-temporary is written down to its then current market value with the amount of the impairment reported as a realized loss in that period. The impairment of a fixed maturity security that the Company has the intent to sell or that it is more likely than not that the Company will be required to sell is deemed other-than-temporary and is written down to its market value at the balance sheet date with the amount of the impairment reported as a realized loss in that period. For all other-than-temporarily impaired fixed maturity securities that do not meet either of these two criteria, the Company is required to analyze its ability to recover the amortized cost of the security by calculating the net present value of projected future cash flows. For these other-than-temporarily impaired fixed maturity securities, the net amount recognized in earnings is equal to the difference between the amortized cost of the fixed maturity security and its net present value. The Company considers different factors to determine the amount of projected future cash flows and discounting methods for corporate debt and residential and commercial mortgage-backed or asset-backed securities. For corporate debt securities, the split between the credit and non-credit losses is driven principally by assumptions regarding the amount and timing of projected future cash flows. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the security at the date of acquisition. For residential and commercial mortgage-backed and asset-backed securities, cash flow estimates, including prepayment assumptions, are based on data from widely accepted third-party data sources or internal estimates. In addition to prepayment assumptions, cash flow estimates vary based on assumptions regarding the underlying collateral including default rates, recoveries and changes in value. The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed maturity security prior to impairment at the balance sheet date. The discounted cash flows become the new amortized cost basis of the fixed maturity security. In periods subsequent to the recognition of an OTTI, the Company generally accretes the discount (or amortizes the reduced premium) into net investment income, up to the non-discounted amount of projected future cash flows, resulting from the reduction in cost basis, based upon the amount and timing of the expected future cash flows over the estimated period of cash flows. The investment category and duration of the Company’s gross unrealized losses on fixed maturity securities and equity securities at June 30, 2015 and December 31, 2014 were as follows: June 30, 2015 Less than 12 months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Fixed maturity securities: United States Government and government agencies and authorities $ 48,420 $ (316 ) $ 8,549 $ (60 ) $ 56,969 $ (376 ) States, municipalities and political subdivisions 20,761 (634 ) 2,363 (971 ) 23,124 (1,605 ) Foreign governments 48,399 (319 ) 26,975 (1,292 ) 75,374 (1,611 ) Asset-backed — — 1,318 (124 ) 1,318 (124 ) Residential mortgage-backed 243,223 (3,936 ) 13,750 (391 ) 256,973 (4,327 ) Corporate 1,061,803 (32,266 ) 18,709 (2,104 ) 1,080,512 (34,370 ) Total fixed maturity securities $ 1,422,606 $ (37,471 ) $ 71,664 $ (4,942 ) $ 1,494,270 $ (42,413 ) Equity securities: Common stock $ 667 $ (12 ) $ — $ — $ 667 $ (12 ) Non-redeemable preferred stocks 78,449 (1,164 ) 12,461 (867 ) 90,910 (2,031 ) Total equity securities $ 79,116 $ (1,176 ) $ 12,461 $ (867 ) $ 91,577 $ (2,043 ) December 31, 2014 Less than 12 months 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Fixed maturity securities: United States Government and government agencies and authorities $ 34,551 $ (188 ) $ 21,488 $ (241 ) $ 56,039 $ (429 ) States, municipalities and political subdivisions 3,050 (282 ) 4,633 (71 ) 7,683 (353 ) Foreign governments 19,886 (67 ) 37,741 (1,390 ) 57,627 (1,457 ) Asset-backed — — 1,348 (78 ) 1,348 (78 ) Residential mortgage-backed 22,337 (71 ) 61,682 (1,083 ) 84,019 (1,154 ) Corporate 640,641 (13,132 ) 113,918 (3,482 ) 754,559 (16,614 ) Total fixed maturity securities $ 720,465 $ (13,740 ) $ 240,810 $ (6,345 ) $ 961,275 $ (20,085 ) Equity securities: Common stock $ — $ — $ 196 $ (1 ) $ 196 $ (1 ) Non-redeemable preferred stocks 8,844 (264 ) 24,784 (1,829 ) 33,628 (2,093 ) Total equity securities $ 8,844 $ (264 ) $ 24,980 $ (1,830 ) $ 33,824 $ (2,094 ) Total gross unrealized losses represent approximately 3% and 2% of the aggregate fair value of the related securities at June 30, 2015 and December 31, 2014, respectively. Approximately 87% and 63% of these gross unrealized losses have been in a continuous loss position for less than twelve months at June 30, 2015 and December 31, 2014, respectively. The total gross unrealized losses are comprised of 642 and 385 individual securities at June 30, 2015 and December 31, 2014, respectively. In accordance with its policy described above, the Company concluded that for these securities an adjustment to its results of operations for other-than-temporary impairments of the gross unrealized losses was not warranted at June 30, 2015 and December 31, 2014. These conclusions were based on a detailed analysis of the underlying credit and expected cash flows of each security. As of June 30, 2015, the gross unrealized losses that have been in a continuous loss position for twelve months or more were concentrated in the Company’s states, municipalities and political subdivisions, foreign governments, and corporate fixed maturity securities, and in non-redeemable preferred stocks. The non-redeemable preferred stocks are perpetual preferred securities that have characteristics of both debt and equity securities. To evaluate these securities, we apply an impairment model similar to that used for our fixed maturity securities. As of June 30, 2015, the Company did not intend to sell these securities and it was not more likely than not that the Company would be required to sell them and no underlying cash flow issues were noted. Therefore, the Company did not recognize an OTTI on those perpetual preferred securities that had been in a continuous unrealized loss position for twelve months or more. As of June 30, 2015, the Company did not intend to sell the fixed maturity securities and it was not more likely than not that the Company would be required to sell the securities before the anticipated recovery of their amortized cost basis. The gross unrealized losses are primarily attributable to widening credit spreads associated with an underlying shift in overall credit risk premium. The Company has entered into commercial mortgage loans, collateralized by the underlying real estate, on properties located throughout the U.S. and Canada. At June 30, 2015, approximately 39% of the outstanding principal balance of commercial mortgage loans was concentrated in the states of California, New York, and Oregon. Although the Company has a diversified loan portfolio, an economic downturn could have an adverse impact on the ability of its debtors to repay their loans. The outstanding balance of commercial mortgage loans range in size from $40 to $14,990 at June 30, 2015 and from $77 to $15,190 at December 31, 2014. Credit quality indicators for commercial mortgage loans are loan-to-value and debt-service coverage ratios. Loan-to-value and debt-service coverage ratios are measures commonly used to assess the credit quality of commercial mortgage loans. The loan-to-value ratio compares the principal amount of the loan to the fair value of the underlying property collateralizing the loan, and is commonly expressed as a percentage. The debt-service coverage ratio compares a property’s net operating income to its debt-service payments and is commonly expressed as a ratio. The loan-to-value and debt-service coverage ratios are generally updated annually in the third quarter. The following summarizes our loan-to-value and average debt-service coverage ratios as of the dates indicated: June 30, 2015 Loan-to-Value Carrying Value % of Gross Mortgage Loans Debt-Service Coverage Ratio 70% and less $ 1,171,935 92.3 % 1.95 71 – 80% 62,653 4.9 % 1.29 81 – 95% 35,844 2.8 % 1.04 Gross commercial mortgage loans 1,270,432 100 % 1.89 Less valuation allowance (3,399 ) Net commercial mortgage loans $ 1,267,033 December 31, 2014 Loan-to-Value Carrying Value % of Gross Mortgage Loans Debt-Service Coverage Ratio 70% and less $ 1,168,454 91.6 % 2.01 71 – 80% 73,762 5.8 % 1.26 81 – 95% 27,268 2.1 % 1.04 Greater than 95% 6,531 0.5 % 0.43 Gross commercial mortgage loans 1,276,015 100 % 1.94 Less valuation allowance (3,399 ) Net commercial mortgage loans $ 1,272,616 All commercial mortgage loans that are individually impaired have an established mortgage loan valuation allowance for losses. Changing economic conditions affect our valuation of commercial mortgage loans. Changing vacancies and rents are incorporated into the discounted cash flow analysis that we perform for monitored loans and may contribute to the establishment of (or an increase or decrease in) a commercial mortgage loan valuation allowance for losses. In addition, we continue to monitor the entire commercial mortgage loan portfolio to identify risk. Areas of emphasis are properties that have exposure to specific geographic events, have deteriorating credits or have experienced a reduction in debt-service coverage ratio. Where warranted, we have established or increased a valuation allowance based upon this analysis. Collateralized Transactions The Company lends fixed maturity securities, primarily bonds issued by the U.S. government and government agencies and authorities, and U.S. corporations, to selected broker/dealers. All such loans are negotiated on an overnight basis; term loans are not permitted. The Company receives collateral, greater than or equal to 102% of the fair value of the securities lent, plus accrued interest, in the form of cash and cash equivalents held by a custodian bank for the benefit of the Company. The use of cash collateral received is unrestricted. The Company reinvests the cash collateral received, generally in investments of high credit quality that are designated as available-for-sale. The Company monitors the fair value of securities loaned and the collateral received, with additional collateral obtained, as necessary. The Company is subject to the risk of loss on the re-investment of cash collateral. The Company's investment portfolio is readily marketable and convertible to cash sufficient to provide for short term needs related to the securities lending transactions. As of June 30, 2015 and December 31, 2014, our collateral held under securities lending agreements, of which its use is unrestricted, was $95,291 and $95,985 , respectively, and is included in the consolidated balance sheets under the collateral held/pledged under securities agreements. Our liability to the borrower for collateral received was $95,289 and $95,986 , respectively, and is included in the consolidated balance sheets under the obligation under securities agreements. The difference between the collateral held and obligations under securities lending is recorded as an unrealized gain (loss) and is included as part of AOCI. All securities were in an unrealized gain position as of June 30, 2015. All securities with unrealized losses have been in a continuous loss position for less than 12 months as of December 31, 2014. The Company includes the available-for-sale investments purchased with the cash collateral in its evaluation of other-than-temporary impairments. As of June 30, 2015, all of the obligation under securities agreements is invested in corporate fixed maturities, money market funds and daily repurchase agreements with a remaining contractual maturity of one year or less. Cash proceeds that the Company receives as collateral for the securities it lends and subsequent repayment of the cash are regarded by the Company as cash flows from financing activities, since the cash received is considered a borrowing. Since the Company reinvests the cash collateral generally in investments that are designated as available-for-sale, the reinvestment is presented as cash flows from investing activities. |
