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Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2022

(4) Fair Value of Financial Instruments

Fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Invested assets recorded at fair value are measured and classified in accordance with a three-tier fair value hierarchy based on observable and unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our view of market assumptions in the absence of observable market information. We classify and disclose all invested assets carried at fair value in one of the following three levels:

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Level 1. Quoted prices for identical instruments in active markets. Level 1 consists of financial instruments whose value is based on quoted market prices in active markets, such as cash, cash equivalents in money market funds, exchange-traded common stocks and actively traded mutual fund investments;

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Level 2. Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in active markets. Level 2 includes those financial instruments that are valued using industry-standard pricing methodologies, models or other valuation methodologies. Various inputs are considered in deriving the fair value of the underlying financial instrument, including interest rate and yield curves, credit spread, and foreign exchange rates. All significant inputs are observable, or derived from observable information in the marketplace or are supported by observable levels at which transactions are executed in the marketplace. Financial instruments in this category primarily include: cash equivalents and short-term investments in U.S. treasury securities, certain public and private corporate fixed-maturity and equity securities; government or agency securities; and certain mortgage- and asset-backed securities; and

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Level 3. Valuations derived from valuation techniques in which one or more significant inputs are unobservable. Level 3 consists of financial instruments whose fair value is estimated based on industry-standard pricing methodologies and models using significant inputs not based on, nor corroborated by, readily available market information. Valuations for this category primarily consist of non-binding broker quotes. Financial instruments in this category primarily include less liquid mortgage- and asset-backed securities and equity securities.

As of each reporting period, all assets and liabilities recorded at fair value are classified in their entirety based on the lowest level of input (Level 3 being the lowest in the hierarchy) that is significant to the fair value measurement. Significant levels of estimation and judgment are required to determine the fair value of certain of our investments. The factors influencing these estimations and judgments are subject to change in subsequent reporting periods.

The estimated fair value and hierarchy classifications for assets and liabilities that are measured at fair value on a recurring basis were as follows:

	March 31, 2022
	Level 1		Level 2		Level 3		Total
	(In thousands)
Fair value assets:
Available-for-sale fixed-maturity securities:
U.S. government and agencies	$	-	$	31,911	$	-	$	31,911
Foreign government		-		148,991		-		148,991
States and political subdivisions		-		141,715		-		141,715
Corporates		5,518		1,641,193		-		1,646,711
Mortgage- and asset-backed securities:
Residential mortgage-backed securities		-		447,124		-		447,124
Commercial mortgage-backed securities		-		142,865		-		142,865
Other asset-backed securities		-		139,911		5,903		145,814
Total available-for-sale fixed-maturity securities		5,518		2,693,710		5,903		2,705,131
Short-term investments		-		42,301		1,399		43,700
Total available-for-sale securities		5,518		2,736,011		7,302		2,748,831
Equity securities		35,118		1,026		3,387		39,531
Trading securities		-		12,717		-		12,717
Cash and cash equivalents		359,779		-		-		359,779
Separate accounts		-		2,696,891		-		2,696,891
Total fair value assets	$	400,415	$	5,446,645	$	10,689	$	5,857,749
Fair value liabilities:
Separate accounts	$	-	$	2,696,891	$	-	$	2,696,891
Total fair value liabilities	$	-	$	2,696,891	$	-	$	2,696,891

	December 31, 2021
	Level 1		Level 2		Level 3		Total
	(In thousands)
Fair value assets:
Available-for-sale fixed-maturity securities:
U.S. government and agencies	$	-	$	32,400	$	-	$	32,400
Foreign government		-		152,976		-		152,976
States and political subdivisions		-		153,527		-		153,527
Corporates		5,898		1,707,786		-		1,713,684
Mortgage-and asset-backed securities:
Residential mortgage-backed securities		-		375,604		27		375,631
Commercial mortgage-backed securities		-		145,525		-		145,525
Other asset-backed securities		-		128,824		-		128,824
Total available-for-sale fixed-maturity securities		5,898		2,696,642		27		2,702,567
Short-term investments		-		85,243		-		85,243
Total available-for-sale securities		5,898		2,781,885		27		2,787,810
Equity securities		37,912		1,070		3,569		42,551
Trading securities		-		24,355		-		24,355
Cash and cash equivalents		351,508		40,993		-		392,501
Separate accounts		-		2,799,992		-		2,799,992
Total fair value assets	$	395,318	$	5,648,295	$	3,596	$	6,047,209
Fair value liabilities:
Separate accounts	$	-	$	2,799,992	$	-	$	2,799,992
Total fair value liabilities	$	-	$	2,799,992	$	-	$	2,799,992

In estimating fair value of our investments, we use a third-party pricing service for approximately 99% of our securities that are measured at fair value on a recurring basis. The remaining securities are primarily thinly-traded securities, such as private placements, and are valued using models based on observable inputs on public corporate spreads having similar characteristics (e.g., sector, average life and quality rating), liquidity and yield based on quality rating, average life and U.S. Treasury yields. All observable data inputs are corroborated by independent third-party data. We also corroborate pricing information provided by our third-party pricing service by performing a review of selected securities. Our review activities include: obtaining detailed information about the assumptions, inputs and methodologies used in pricing the security; documenting this information; and corroborating it by comparison to independently obtained prices and/or independently developed pricing methodologies.

Furthermore, we perform internal reasonableness assessments on fair value determinations within our portfolio throughout the year and as of year-end, including pricing variance analyses and comparisons to alternative pricing sources and benchmark returns. If a fair value appears unusual relative to these assessments, we will re-examine the inputs and may challenge a fair value assessment made by the pricing service. If there is a known pricing error, we will request a reassessment by the pricing service. If the pricing service is unable to perform the reassessment on a timely basis, we will determine the appropriate price by requesting a reassessment from an alternative pricing service or other qualified source as necessary. We do not adjust quotes or prices except in a rare circumstance to resolve a known error.

Because many fixed-maturity securities do not trade on a daily basis, third-party pricing services generally determine fair value using industry-standard methodologies, which vary by asset class. For corporates, governments, and agency securities, these methodologies include developing prices by incorporating available market information such as U.S. Treasury curves, benchmarking of similar securities including new issues, sector groupings, quotes from market participants and matrix pricing. Observable information is compiled and integrates relevant credit information, perceived market movements and sector news. Additionally, security prices are periodically back-tested to validate and/or refine models as conditions warrant. Market indicators and industry and economic events are also monitored as triggers to obtain additional data. For certain structured securities (such as mortgage- and asset-backed securities) with limited trading activity, third-party pricing services generally use industry-standard pricing methodologies that incorporate market information, such as index prices or discounting expected future cash flows based on underlying collateral, and quotes from market participants, to estimate fair value. If one or more of these input measures are not deemed observable for a particular security, the security will be classified as Level 3 in the fair value hierarchy.

Where specific market information is unavailable for certain securities, pricing models produce estimates of fair value primarily using Level 2 inputs along with certain Level 3 inputs. These models include matrix pricing. The pricing matrix uses current U.S. Treasury rates and credit spreads received from third-party sources to estimate fair value. The credit spreads incorporate the issuer’s industry- or issuer-specific credit characteristics and the security’s time to maturity, if warranted. Remaining unpriced securities are valued using an estimate of fair value based on indicative market prices that include significant unobservable inputs not based on, nor corroborated by, market information, including the utilization of non-binding broker quotes.

The roll-forward of the Level 3 assets measured at fair value on a recurring basis was as follows:

	Three months ended March 31,
	2022			2021
	(In thousands)
Level 3 assets, beginning of period	$	3,596		$	2,047
Net unrealized gains (losses) included in other comprehensive income		(2	)		-
Realized gains (losses) and accretion (amortization) recognized in earnings		(207	)		(84	)
Purchases		5,903			-
Sales		-			-
Settlements		-			-
Transfers into Level 3		1,399			2,214
Transfers out of Level 3		-			-
Level 3 assets, end of period	$	10,689		$	4,177

We obtain independent pricing quotes based on observable inputs as of the end of the reporting period for all securities in Level 2. Those inputs include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers, quoted prices for similar instruments in markets that are not active, and other relevant data. We monitor these inputs for market indicators, industry and economic events. There were no material transfers between Level 1 and Level 3 during the three months ended March 31, 2022 and 2021.

The carrying values and estimated fair values of our financial instruments were as follows:

	March 31, 2022				December 31, 2021
	Carrying value		Estimated fair value		Carrying value		Estimated fair value
	(In thousands)
Assets:
Fixed-maturity securities (available-for-sale)	$	2,705,131	$	2,705,131	$	2,702,567	$	2,702,567
Fixed-maturity security (held-to-maturity) ⁽³⁾		1,390,310		1,445,074		1,379,100		1,551,113
Short-term investments (available-for-sale)		43,700		43,700		85,243		85,243
Equity securities		39,531		39,531		42,551		42,551
Trading securities		12,717		12,717		24,355		24,355
Policy loans ⁽³⁾		30,295		30,295		30,612		30,612
Deposit asset underlying 10% coinsurance agreement ⁽³⁾		229,193		229,193		231,368		231,368
Separate accounts		2,696,891		2,696,891		2,799,992		2,799,992
Liabilities:
Notes payable - Long term ^(1) (2)	$	592,303	$	553,037	$	592,102	$	605,667
Surplus note ^(1) (3)		1,389,811		1,438,524		1,378,585		1,545,854
Separate accounts		2,696,891		2,696,891		2,799,992		2,799,992

(1)	Carrying value amounts shown are net of issuance costs.

(2)	Classified as a Level 2 fair value measurement.

(3)	Classified as a Level 3 fair value measurement.

The fair values of financial instruments presented above are estimates of the fair values at a specific point in time using various sources and methods, including market quotations and a complex matrix system that takes into account issuer sector, quality, and spreads in the current marketplace.

Financial Instruments Recognized at Fair Value in the Balance Sheet. Estimated fair values of investments in AFS securities are principally a function of current spreads and interest rates that are corroborated by independent third-party data. Therefore, the fair values presented are indicative of amounts we could realize or settle at the respective balance sheet date. We do not necessarily intend to dispose of or liquidate such instruments prior to maturity. Trading securities and equity securities, including common and nonredeemable preferred stocks, are carried at fair value. Segregated funds in separate accounts are carried at the underlying value of the variable insurance contracts, which is fair value.

The carrying amounts for cash and cash equivalents, trade receivables, accrued investment income, accounts payable, notes payable – short term, cash collateral and payables for security transactions approximate their fair values due to the short-term nature of these instruments. Consequently, such financial instruments are not included in the above table.

- 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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