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Fair Value

12 Months Ended

Dec. 31, 2019

Fair Values

Fair value is based on an exit price, which is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As not all financial instruments are actively traded, various valuation methods may be used to estimate fair value. These methods rely on observable market data or, if observable market data is not available, the best information available. Significant judgment may be required to interpret the data and select the assumptions used in the valuation estimates, particularly when observable market data is not available.

In the discussion that follows, we have ranked our financial instruments by the level of judgment used in the determination of the fair values presented above. The levels are defined as follows:


•	Level 1 - Fair values are based on unadjusted quoted prices in active markets for identical assets or liabilities.


•	Level 2 - Fair values are based on inputs, other than quoted prices from active markets, that are observable for the asset or liability, either directly or indirectly.


•	Level 3 - Fair values are based on significant unobservable inputs for the asset or liability.

In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, a financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the financial instrument. From time to time there may be movements between levels as inputs become more or less observable, which may depend on several factors including the activity of the market for the specific security, the activity of the market for similar securities, the level of risk spreads and the source from which we obtain the information.

The following methods and assumptions were used in estimating the fair value of our financial instruments measured at fair value on a recurring basis:

Fixed maturities:

Level 1 fixed maturities consist of U.S. Treasury issues that are actively traded, allowing us to use current market prices as an estimate of their fair value.

Level 2 fixed maturities consist of corporate, mortgage- and asset-backed, United States Government agencies, state and political subdivisions and private placement corporate securities with observable market data, and in some circumstances recent trade activity. When quoted prices of identical assets in active markets are not available, our first priority is to obtain prices from third-party pricing vendors. We have regular interaction with these vendors to ensure we understand their pricing methodologies and to confirm they are utilizing observable market information. Their methodologies vary by asset class and include inputs such as estimated cash flows, benchmark yields, reported trades, credit quality, industry events and economic events. Fixed maturities with validated prices from pricing services, which includes the majority of our public fixed maturities in all asset classes, are generally reflected in Level 2.

Also included in Level 2 are private placement corporate bonds with no quoted market prices available, for which an internal model using substantially all observable inputs or a matrix pricing valuation approach is used. In the matrix approach, securities are grouped into pricing categories that vary by sector, rating and average life. Each pricing category is assigned a risk spread based on studies of observable public market data. The expected cash flows of the security are then discounted back at the current Treasury curve plus the appropriate risk spread.

Level 3 fixed maturities include corporate, mortgage- and asset-backed and private placement corporate securities for which there is little or no current market data available. We use external pricing sources, or if prices are not available, we will estimate fair value internally. Fair values of private corporate investments in Level 3 are determined by reference to the public market, private transactions or valuations for comparable companies or assets in the relevant asset class when such amounts are available. For other securities for which an exit price based on relevant observable inputs is not obtained, the fair value is determined using a matrix calculation. Fair values estimated through the use of matrix pricing methods rely on an estimate of credit spreads to a risk-free U.S. Treasury yield. Selecting the credit spread requires judgment based on an understanding of the security and may include a market liquidity premium. Our selection of comparable companies as well as the level of spread requires significant judgment. Increases in spreads used in our matrix models, or those used to value comparable companies, will result in a decrease in discounted cash flows used, and accordingly in the estimated fair value of the security.

We obtain fixed maturity fair values from a variety of external independent pricing services, including brokers, with access to observable data including recent trade information, if available. In certain circumstances in which an external price is not available for a Level 3 security, we will internally estimate its fair value. Our process for evaluation and selection of the fair values includes:

•

We follow a “pricing waterfall” policy, which establishes the pricing source preference for a particular security or security type. The order of preference is based on our evaluation of the valuation methods used, the source’s knowledge of the instrument and the reliability of the prices we have received from the source in the past. Our valuation policy dictates that fair values are initially sought from third-party pricing services. If our review of the prices received from our preferred source indicates an inaccurate price, we will use an alternative source within the waterfall and document the decision. In the event that fair values are not available from one of our external pricing services or upon review of the fair values provided it is determined that they may not be reflective of market conditions, those securities are submitted to brokers familiar with the security to obtain non-binding price quotes. Broker quotes tend to be used in limited circumstances such as for newly issued, private placement corporate bonds and other instruments that are not widely traded. For those securities for which an externally provided fair value is not available, we use cash flow modeling techniques to estimate fair value.


•	We evaluate third-party pricing source estimation methodologies to assess whether they will provide a fair value that approximates a market exit price.


•	We perform an overall analysis of portfolio fair value movement against general movements in interest rates and spreads.


•	We compare period-to-period price trends to detect unexpected price fluctuations based on our knowledge of the market and the particular instrument. As fluctuations are noted, we will perform further research that may include discussions with the original pricing source or other external sources to ensure we are in agreement with the valuation.


•	We compare prices between different pricing sources for unusual disparity.


•	We meet at least quarterly with our Investment Committee, the group that oversees our valuation process, to discuss valuation practices and observations during the pricing process.

Equity securities:

Level 1 equity securities consist of listed common stocks and mutual funds that are actively traded, allowing us to use current market prices as an estimate of their fair value.

Level 2 equity securities consist of non-redeemable preferred stock. Estimated fair value for the non-redeemable preferred stock is obtained from external pricing sources using a matrix pricing approach.

Level 3 equity securities consist of non-redeemable preferred stock for which fair value estimates are based on the value of comparable securities that are actively traded. Increases in spreads used to value comparable companies, will result in a decrease in discounted cash flows used, and accordingly in the estimated fair value of the security.

In the case that external pricing services are used for certain Level 1 and Level 2 equity securities, our review process is consistent with the process used to determine the fair value of fixed maturities discussed above.

Other investments:

Level 2 other investments measured at fair value include call options with fair values based on counterparty market prices adjusted for a credit component of the counterparty, net of cash collateral received.

Cash, cash equivalents and short-term investments:

Level 1 cash, cash equivalents and short-term investments are highly liquid instruments for which historical cost approximates fair value.

Reinsurance recoverable:

Level 2 reinsurance recoverable includes embedded derivatives in our modified coinsurance contracts under which we cede or assume business. Fair values of these embedded derivatives are based on the difference between the fair value and the cost basis of the underlying fixed maturities, which are valued consistent with the discussion of fixed maturities above.

Assets held in separate accounts:

Level 1 assets held in separate accounts consist of mutual funds that are actively traded, allowing us to use current market prices as an estimate of their fair value.

Future policy benefits - indexed product embedded derivatives:

Indexed product contracts include embedded derivatives that are measured at fair value on a recurring basis. These embedded derivatives are a Level 3 measurement. The fair value of the embedded derivatives is based on the discounted excess of projected account values (including a risk margin) over projected guaranteed account values. The key unobservable inputs required in the projection of future values that require management judgment include the risk margin as well as our credit risk. Should the risk margin increase or the credit risk decrease, the discounted cash flows and the estimated fair value of the obligation will increase.

Other liabilities:

Level 2 other liabilities include the embedded derivatives in our modified coinsurance contracts under which we cede business. Fair values for the embedded derivatives are based on the difference between the fair value and the cost basis of the underlying fixed maturities.



Valuation of our Financial Instruments Measured on a Recurring Basis by Hierarchy Levels

	December 31, 2019
	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Fair Value
	(Dollars in thousands)
Assets
Fixed maturities:
Corporate securities	$	—	$	3,772,362	$	6,588	$	3,778,950
Residential mortgage-backed securities	—		672,388		—		672,388
Commercial mortgage-backed securities	—		1,032,693		12,780		1,045,473
Other asset-backed securities	—		704,766		9,755		714,521
United States Government and agencies	4,821		9,302		—		14,123
States and political subdivisions	—		1,477,173		—		1,477,173
Total fixed maturities	4,821		7,668,684		29,123		7,702,628
Non-redeemable preferred stocks	—		67,873		6,927		74,800
Common stocks (1)	17,027		—		—		17,027
Other investments	—		31,469		—		31,469
Cash, cash equivalents and short-term investments	29,142		—		—		29,142
Reinsurance recoverable	—		2,327		—		2,327
Assets held in separate accounts	645,881		—		—		645,881
Total assets	$	696,871	$	7,770,353	$	36,050	$	8,503,274

Liabilities
Future policy benefits - indexed product embedded derivatives	$	—	$	—	$	76,346	$	76,346
Other liabilities	—		254		—		254
Total liabilities	$	—	$	254	$	76,346	$	76,600



Valuation of our Financial Instruments Measured on a Recurring Basis by Hierarchy Levels

	December 31, 2018
	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Fair Value
	(Dollars in thousands)
Assets
Fixed maturities:
Corporate securities	$	—	$	3,257,874	$	22,011	$	3,279,885
Residential mortgage-backed securities	—		606,860		—		606,860
Commercial mortgage-backed securities	—		810,626		67,940		878,566
Other asset-backed securities	—		703,969		3,601		707,570
United States Government and agencies	7,917		12,618		—		20,535
States and political subdivisions	—		1,539,629		—		1,539,629
Total fixed maturities	7,917		6,931,576		93,552		7,033,045
Non-redeemable preferred stocks	—		77,433		6,862		84,295
Common stocks (1)	5,261		—		—		5,261
Other investments	—		4,745		—		4,745
Cash, cash equivalents and short-term investments	34,748		—		—		34,748
Reinsurance recoverable	—		157		—		157
Assets held in separate accounts	561,281		—		—		561,281
Total assets	$	609,207	$	7,013,911	$	100,414	$	7,723,532

Liabilities
Future policy benefits - indexed product embedded derivatives	$	—	$	—	$	40,028	$	40,028
Other liabilities	—		780		—		780
Total liabilities	$	—	$	780	$	40,028	$	40,808

(1)

A private equity fund with a fair value estimate of $8.4 million at December 31, 2019 and $3.3 million at December 31, 2018 using net asset value per share as a practical expedient, has not been classified in the fair value hierarchy above in accordance with fair value reporting guidance. This fund invests in senior secured middle market loans and had unfunded commitments totaling $1.7 million at December 31, 2019 and $6.8 million at December 31, 2018. The investment is not currently eligible for redemption.



Level 3 Assets by Valuation Source - Recurring Basis

	December 31, 2019
	Third-party vendors			Priced internally			Fair Value
	(Dollars in thousands)
Corporate securities	$	—		$	6,588		$	6,588
Commercial mortgage-backed securities	12,780			—			12,780
Other asset-backed securities	8,000			1,755			9,755
Non-redeemable preferred stocks	—			6,927			6,927
Total level 3 assets	$	20,780		$	15,270		$	36,050
Percent of total	57.6		%	42.4		%	100.0		%



Level 3 Assets by Valuation Source - Recurring Basis

	December 31, 2018
	Third-party vendors			Priced internally			Fair Value
	(Dollars in thousands)
Corporate securities	$	1,940		$	20,071		$	22,011
Commercial mortgage-backed securities	67,940			—			67,940
Other asset-backed securities	—			3,601			3,601
Non-redeemable preferred stocks	—			6,862			6,862
Total level 3 assets	$	69,880		$	30,534		$	100,414
Percent of total	69.6		%	30.4		%	100.0		%



Quantitative Information about Level 3 Fair Value Measurements - Recurring Basis

	December 31, 2019
	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(Dollars in thousands)
Assets
Corporate securities	$	6,588	Discounted cash flow	Credit spread	2.11% - 5.85% (4.33%)
Commercial mortgage-backed securities	12,780		Discounted cash flow	Credit spread	1.18% - 2.22% (1.92%)
Other asset-backed securities	6,000		Discounted cash flow	Credit spread	2.15% - 2.30% (2.23%)
Non-redeemable preferred stocks	6,927		Discounted cash flow	Credit spread	2.72% (2.72%)
Total assets	$	32,295

Liabilities
Future policy benefits - indexed product embedded derivatives	$	76,346	Discounted cash flow	Credit risk Risk margin	0.40% - 1.35% (0.80%) 0.15% - 0.40% (0.25%)



	December 31, 2018
	Fair Value		Valuation Technique	Unobservable Input	Range (Weighted Average)
	(Dollars in thousands)
Assets
Corporate securities	$	19,178	Discounted cash flow	Credit spread	1.23% - 7.00% (4.01%)
Commercial mortgage-backed securities	55,866		Discounted cash flow	Credit spread	1.45% - 3.55% (2.58%)
Non-redeemable preferred stocks	6,862		Discounted cash flow	Credit spread	4.36% (4.36%)
Total assets	$	81,906

Liabilities
Future policy benefits - indexed product embedded derivatives	$	40,028	Discounted cash flow	Credit risk Risk margin	0.55% - 1.80% (1.25%) 0.15% - 0.40% (0.25%)

The tables above exclude certain securities with the fair value based on non-binding broker quotes for which we could not reasonably obtain the quantitative unobservable inputs.



Level 3 Financial Instruments Changes in Fair Value - Recurring Basis

	December 31, 2019
								Realized and unrealized gains (losses), net
	Balance, December 31, 2018		Purchases		Disposals			Included in net income		Included in other compre-hensive income			Transfers into Level 3 (1)		Transfers out of Level 3 (1)			Amort-ization included in net income			Balance, December 31, 2019
	(Dollars in thousands)
Assets
Corporate securities	$	22,011	$	6,000	$	(3,344	)	$	—	$	443		$	3,643	$	(22,137	)	$	(28	)	$	6,588
Residential mortgage-backed securities	—		18,378		—			—		—			—		(18,378		)	—			—
Commercial mortgage-backed securities	67,940		7,540		(376		)	—		578			—		(62,902		)	—			12,780
Other asset-backed securities	3,601		28,710		(977		)	—		(869		)	—		(20,710		)	—			9,755
Non-redeemable preferred stocks	6,862		—		—			—		65			—		—			—			6,927
Total assets	$	100,414	$	60,628	$	(4,697	)	$	—	$	217		$	3,643	$	(124,127	)	$	(28	)	$	36,050

Liabilities
Future policy benefits - indexed product embedded derivatives	$	40,028	$	15,325	$	(7,014	)	$	28,007	$	—		$	—	$	—		$	—		$	76,346



	December 31, 2018
								Realized and unrealized gains (losses), net
	Balance, December 31, 2017		Purchases		Disposals			Included in net income			Included in other compre-hensive income			Transfers into Level 3 (1)		Transfers out of Level 3 (1)			Amort-ization included in net income			Balance, December 31, 2018
	(Dollars in thousands)
Assets
Corporate securities	$	33,600	$	—	$	(9,432	)	$	—		$	(974	)	$	7,082	$	(8,530	)	$	265		$	22,011
Residential mortgage-backed securities	9,124		27,818		—			—			—			—		(36,942		)	—			—
Commercial mortgage-backed securities	85,701		36,008		(1,337		)	—			(3,599		)	—		(48,787		)	(46		)	67,940
Other asset-backed securities	53,480		28,855		(2,799		)	—			(12		)	—		(75,923		)	—			3,601
Non-redeemable preferred stocks	7,407		—		—			(545		)	—			—		—			—			6,862
Total assets	$	189,312	$	92,681	$	(13,568	)	$	(545	)	$	(4,585	)	$	7,082	$	(170,182	)	$	219		$	100,414

Liabilities
Future policy benefits - indexed product embedded derivatives	$	27,774	$	11,514	$	(4,447	)	$	5,187		$	—		$	—	$	—		$	—		$	40,028

(1)

Transfers into Level 3 represent assets previously priced using an external pricing service with access to observable inputs no longer available and therefore, were priced using non-binding broker quotes. Transfers out of Level 3 include those assets that we are now able to obtain pricing from a third-party pricing vendor that uses observable inputs. The fair values of newly issued securities often require additional estimation until a market is created, which is generally within a few months after issuance. Once a market is created, as was the case for the majority of the security transfers out of the Level 3 category above, Level 2 valuation sources become available.

The Company has other financial assets and financial liabilities that are not carried at fair value but for which fair value disclosure is required. The following table presents the carrying value, fair value and fair value hierarchy level of these financial assets and financial liabilities.



Valuation of our Financial Instruments Not Reported at Fair Value by Hierarchy Levels

	December 31, 2019
	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Fair Value		Carrying Value
	(Dollars in thousands)
Assets
Mortgage loans	$	—	$	—	$	1,059,073	$	1,059,073	$	1,011,678
Policy loans	—		—		256,787		256,787		201,589
Other investments	—		29,534		2,215		31,749		31,211
Total assets	$	—	$	29,534	$	1,318,075	$	1,347,609	$	1,244,478

Liabilities
Future policy benefits	$	—	$	—	$	4,381,863	$	4,381,863	$	4,270,073
Supplementary contracts without life contingencies	—		—		309,601		309,601		296,915
Advance premiums and other deposits	—		—		245,480		245,480		245,480
Long-term debt	—		—		84,438		84,438		97,000
Liabilities related to separate accounts	—		—		644,691		644,691		645,881
Total liabilities	$	—	$	—	$	5,666,073	$	5,666,073	$	5,555,349



	December 31, 2018
	Quoted prices in active markets for identical assets (Level 1)		Significant other observable inputs (Level 2)		Significant unobservable inputs (Level 3)		Fair Value		Carrying Value
	(Dollars in thousands)
Assets
Mortgage loans	$	—	$	—	$	1,045,497	$	1,045,497	$	1,039,829
Policy loans	—		—		237,496		237,496		197,366
Other investments	—		—		30,087		30,087		29,020
Total assets	$	—	$	—	$	1,313,080	$	1,313,080	$	1,266,215

Liabilities
Future policy benefits	$	—	$	—	$	3,981,947	$	3,981,947	$	4,217,904
Supplementary contracts without life contingencies	—		—		298,869		298,869		303,627
Advance premiums and other deposits	—		—		252,318		252,318		252,318
Long-term debt	—		—		65,999		65,999		97,000
Liabilities related to separate accounts	—		—		559,799		559,799		561,281
Total liabilities	$	—	$	—	$	5,158,932	$	5,158,932	$	5,432,130

Level 3 Financial Instruments Measured at Fair Value on a Nonrecurring Basis

Certain assets are measured at fair value on a nonrecurring basis, generally mortgage loans or real estate that have been deemed to be impaired during the reporting period. There were no mortgage loans or real estate impaired to fair value during 2019.

During 2018, one mortgage loan was impaired to a fair value totaling $11.1 million which resulted in an impairment charge of $2.8 million.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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