Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2018

3.Fair Values of Financial Instruments

Fair value estimates are made at specific points in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale, at one time, the Company’s entire holding of a particular financial instrument. Although fair value estimates are calculated using assumptions that management believes are appropriate, changes in assumptions could significantly affect estimates.

Fair value estimates are determined for existing financial instruments without attempting to estimate the value of anticipated future business and the value of assets and certain liabilities that are not considered financial instruments. Accordingly, the aggregate fair value estimates presented do not represent the underlying value of the Company.

The Company has procedures in place to validate the fair values received from the independent pricing service. The Company assesses whether prices received represent a reasonable estimate of fair value through various controls designed to ensure that valuations represent a fair price, including calculation of portfolio returns, comparison of returns to corresponding benchmark returns, analysis of periodic changes in market prices, evaluation of corresponding market yields and spread levels, and comparing prices from multiple pricing sources. On an ongoing basis, the Company monitors the pricing service valuation methods and evaluates the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy.

In addition, tax ramifications related to the realization of unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in any of the estimates. The following methods and assumptions were used by the Company in estimating the fair value of its financial instruments:

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Fixed maturity and equity securities: Fair values were determined by an independent pricing service and are downloaded from Clearwater Analytics. The Company does not own any securities for which a fair value was not provided by the pricing service or a custody statement. Fair values are checked for reasonableness.

If a fair value had not been provided for a security, the Company would use a fair value estimated from yield data relating to instruments or securities with similar characteristics or as determined in good faith by the Company’s investment advisor, DWS.

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Derivative instruments: Fair values were determined by an independent pricing service and are downloaded from Clearwater Analytics. Fair values are checked for reasonableness.

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Policy loans: The carrying value of policy loans approximates fair value.

•

Cash and cash equivalents: The carrying value approximates fair value.

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Policyholder account balance: For deposit liabilities, the fair value was based on the amount payable on demand at the reporting date and approximates fair value.

Amounts related to the Company’s financial instruments as of December 31, 2018 and 2017 are as follows:

	Carrying\Fair		Carrying\Fair
	Value		Value
	December, 31 2018		December, 31 2017
	(Dollar in thousands)
Financial instruments recorded as assets:
Fixed maturity securities	$	184,475	$	188,452
Equity securities		6,004		6,209
Policy loans		9,581		9,852
Derivative instruments		202		395
Cash and cash equivalents		33,252		4,085
Separate account		20,819		24,779
Financial instruments recorded as liabilities:
Policyholder account balance:
Interest sensitive life contracts		41,478		41,078
Annuities		74,820		68,745
Dividend accumulations and other ⁽¹⁾		6,705		7,076
Separate account		20,819		24,779

(1) included within Reserve for deposit type funds in the consolidated balance sheet

Fair value is defined as 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. The hierarchy for inputs used in determining fair value maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that observable inputs be used when available. Assets and liabilities recorded on the Consolidated Statements of Financial Position at fair value are categorized in the fair value hierarchy based on the observability of inputs to the valuation techniques as follows:

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Level 1 — Assets and liabilities whose values are based on unadjusted quoted prices for identical assets or liabilities in an active market that the Company can access.

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Level 2 — Assets and liabilities whose values are based on the following: Quoted prices for similar assets or liabilities in active markets;

Quoted prices for identical or similar assets or liabilities in markets that are not active; or

Valuation models whose inputs are observable, directly or indirectly, for substantially the full term of the asset or liability.

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Level 3 — Assets and liabilities whose values are based on prices or valuation techniques that require that are both unobservable and significant to the overall fair value measurement. Unobservable inputs reflect the Company’s estimates of the assumptions that market participants would use in valuing the assets and liabilities.

Summary of significant valuation techniques and inputs for assets and liabilities measured at fair value on a recurring basis:

Level 1 measurements:

Fixed maturity securities: Comprised of U.S. Treasury and GNMA agency securities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

Equities: Comprised of actively traded, exchange-listed equities. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

Derivative instruments: Comprised of actively traded, exchange-listed derivatives. Valuation is based on unadjusted quoted prices for identical assets in active markets that the Company can access.

Cash Equivalents: Comprised of money market funds. Market values for the money market funds are obtained from the fund managers.

Separate account assets: Comprised of actively traded mutual funds that have daily quoted net asset values for identical assets that the Company can access. Market values for the actively traded mutual funds in which the separate account assets are invested are obtained daily from the fund managers.

Level 2 measurements:

Fixed maturity securities:

States, political subdivisions, and corporate securities: As valuation technique the pricing vendor employs multi-dimensional relational application model which uses standard inputs including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications. The pricing vendor also monitors market indicators, and industry and economic events. For high yield corporate securities, observations of equity and credit default swap curves are also used.

Residential mortgage-backed securities: As valuation technique the pricing vendor employs option-adjusted spread (“OAS”) model and prepayment model as well as volatility driven, multi-dimensional spread tables using standard inputs including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications plus new issue data, monthly prepayment information, and collateral performance. The pricing vendor also monitors market indicators, and industry and economic events.

Commercial mortgage-backed securities: As valuation technique the pricing vendor employs multi-dimensional spread table and price tables using standard inputs including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data including market research publications plus new issue data, monthly prepayment information, collateral performance, and real estate analysis from third party. The pricing vendor also monitors market indicators, and industry and economic events.

Level 3 measurements:

Equities: The primary inputs to the valuation include quoted prices for identical or similar assets in markets that exhibit less liquidity relative to those markets supporting Level 2 fair value measurements, contractual cash flows, benchmark yields, collateral performance, credit spreads, and other estimates including custody statements.

The following table presents the Company’s securities measured at fair value on a recurring basis as of December 31, 2018 and 2017:

	Recurring Fair Value Measurements
	at December 31, 2018 Using:
Description	Fair Values		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
	(Dollar in thousands)
Fixed maturity securities:
U.S. government	$	4,057	$	4,057	$	—	$	—
States, political subdivisions, other		30,989		—		30,989		—
Corporate		106,286		—		106,286		—
Residential mortgage-backed securities		37,522		—		37,522		—
Commercial mortgage-backed securities		5,621		—		5,621		—
Total Fixed maturities		184,475		4,057		180,418		—
Equities		6,004		3,733		—		2,271
Derivative instruments		202		202		—		—
Cash equivalents⁽¹⁾		33,252		33,252		—		—
Separate accounts⁽²⁾		20,819		20,819		—		—
Total	$	244,752	$	62,063	$	180,418	$	2,271

	Recurring Fair Value Measurements
	at December 31, 2017 Using:
Description	Fair Values		Quote Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Other Unobservable Inputs (Level 3)
	(Dollar in thousands)
Fixed maturity securities:
U.S. government	$	4,162	$	4,162	$	—	$	—
States, political subdivisions, other		27,614		—		27,614		—
Corporate		109,395		—		109,395		—
Residential mortgage-backed securities		43,086		—		43,086		—
Commercial mortgage-backed securities		4,195		—		4,195		—
Total Fixed maturities		188,452		4,162		184,290		—
Equities		6,209		4,027		—		2,182
Derivative instruments		395		395		—		—
Cash equivalents⁽¹⁾		4,085		4,085		—		—
Separate accounts⁽²⁾		24,779		24,779		—		—
Total	$	223,920	$	37,448	$	184,290	$	2,182

(1) Cash equivalents are invested in money market funds with daily liquidity. The estimated fair value of cash equivalents is based on the estimated fair value of the underlying assets as provided by fund managers in daily net asset values and included in Level 1 assets.

(2) Separate account assets are invested in money market funds with daily liquidity. The estimated fair value of separate account assets is based on the estimated fair value of the underlying assets as provided by fund managers in daily net asset values and included in Level 1 assets.

The following table shows quantitative information about significant unobservable inputs related to the Level 3 fair value measurements reported in the tables used as of December 31, 2018 and 2017:

			Primary	Significant	Range
Fair Value at December 31, 2018			Valuation Technique(s)	Unobservable Inputs	Min			Max			Weighted Average
Rreef America REIT II	$	2,237	Discounted Cash Flows	Discounted Rate		5.25	%		8.75	%		6.48	%
				Term capitalization rate		4.25	%		8.14	%		5.43	%

			Primary	Significant	Range
Fair Value at December 31, 2017			Valuation Technique(s)	Unobservable Inputs	Min			Max			Weighted Average
Rreef America REIT II	$	2,150	Discounted Cash Flows	Discounted Rate		5.50	%		9.00	%		6.61	%
				Term capitalization rate		4.00	%		8.25	%		5.62	%

The following table presents the rollforward of Level 3 assets held at fair value on a recurring basis as of December 31, 2018 and 2017:

	For the years ended December 31,
	2018		2017
	(Dollars in thousands)
Balance, beginning of period	$	2,182	$	3,169
Gains included in net income		—		396
Settlements		—		(1,000	)
Unrealized gains (losses) in OCI		89		(383	)
Balance, end of period	$	2,271	$	2,182

- 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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