Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We use valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, accounting standards establish

a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

A review of fair value hierarchy classifications is conducted on a quarterly basis. Changes in the valuation inputs, or their ability to be observed, may result in a reclassification for certain financial assets or liabilities. Reclassifications impacting Level 3 of the fair value hierarchy are reported as transfers in/out of the Level 3 category as of the beginning of the period in which the reclassifications occur.

A description of the valuation methodologies used for assets measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Level 1 measurements

There were no assets or liabilities classified as level 1 at September 30, 2022, or December 31, 2021.

Level 2 measurements

Cash: The carrying value of cash approximates the fair value because of the short maturity of the instruments.

Investment escrow: The Company had escrow funds of as of September 30, 2022, and December 31, 2021, of $0.3 million and $3.6 million, respectively. These escrow funds were used to settle mortgage loans that did not close until October and January 2022, respectively. The money held in escrow at September 30, 2022, and December 31, 2021 was carried at cost.

Fixed maturity securities: Fixed maturity securities are recorded at fair value on a recurring basis utilizing a third-party pricing source such as the Automated Valuation Service (“AVS”) Securities Valuation Office (“SVO”) pricing. The valuations are reviewed and validated quarterly through random testing by comparisons to separate pricing models or other third-party pricing services. For the nine months ended September 30, 2022, and the year ended December 31, 2021, there were no material changes to the valuation methods or assumptions used to determine fair values, and no broker or third-party prices were changed from the values received.

Derivatives: Derivatives are reported at fair market value utilizing a third-party pricing indexes such as the Standard & Poor’s (“S&P”) 500 index and the S&P Multi-Asset Risk Control (“MARC”) 5% index.

Equity securities: Equity securities at September 30, 2022, and December 31, 2021, consisted of exchange traded funds (“ETFs”) that are recorded at fair value utilizing a third-party pricing source with the change in fair value recorded through realized gains and losses on the Consolidated Statement of Comprehensive Loss. As of September 30, 2022, and December 31, 2021 we held $9.3 million and $21.9 million, respectively of ETFs.

Notes receivable: The Company held in notes receivable as of September 30, 2022, and December 31, 2021, a note of $6.2 million and $6.0 million respectively, that includes paid-in-kind (“PIK”) interest. The note receivable is between American Life and Chelsea Holdings Midwest LLC with an interest rate of 5% per annum that was rated BBB+ by a nationally recognized statistical rating organization (“NRSRO”). This note is being carried at cost plus PIK interest.

Level 3 measurements

Term loans: The assets classified as term loans are carried at unpaid principal net of amortization of discount or accretion, which approximates fair value or carried at fair market value based on a valuation using market standard valuation methodologies. The inputs used to measure the fair value of these assets are classified as Level 3 within the fair value hierarchy.

Mortgage loans on real estate, held for investment: Mortgage loans are generally stated at principal amounts outstanding, net of deferred expenses and allowance for loan loss. Interest on loans is recognized on an accrual basis at the applicable interest rate on the principal amount outstanding. Loan origination fees and direct costs, as well as premiums and discounts, are amortized as level yield adjustments over the respective loan terms. Unamortized net fees or costs are recognized upon early repayment of the loans. Loan commitment fees are generally deferred and amortized on an effective yield basis over the term of the loan. Impaired loans are generally carried on a non-accrual status. Loans are ordinarily placed on non-accrual status when, in management’s opinion, the collection of principal or interest is unlikely, or when the collection of principal or interest is 90 days or more past due. As of September 30, 2022, the Company held one asset valued at $7.7 million with an impairment of $0.9 million. No such valuations were established as of December 31, 2021.

Other invested assets: Other invested assets include collateral loans, private credit investments, equipment leases, and a private fund investment. The collateral loans, private credit investments, and equipment leases are carried at amortized cost which approximates fair value. The private fund investment is carried at statement value with approximates fair value of the fund. The inputs used to measure these assets are classified as Level 3 within the fair value hierarchy.

Federal Home Loan Bank (FHLB) stock: The carrying value of FHLB stock approximates fair value since the Company can redeem such stock with FHLB at cost. As a member of the FHLB, the Company is required to purchase this stock, which is carried at cost and classified as restricted equity securities.

Preferred stock: The perpetual preferred stock held as of September 30, 2022, and December 31, 2021, of $10.0 million was carried at fair market utilizing a third-party pricing source such as AVS SVO pricing, along with other non-observable inputs. The valuations are reviewed and validated quarterly through random testing by comparisons to separate pricing models or other third-party pricing services.

As of September 30, 2022, the fair market value of the Ascona preferred stock and warrants was $7.2 million and $2.0 million, respectively. As of December 31, 2021, the fair market value of the Ascona preferred stock and warrants was $4.9 million and $3.8. million, respectively. The Ascona preferred stock and warrants have no readily available market value; therefore, a valuation of the investments was prepared by a third-party.

Policy loans: Policy loans are stated at unpaid principal balances. As these loans are fully collateralized by the cash surrender value of the underlying insurance policies, the carrying value of the policy loans approximates their fair value.

Deposit-type contracts: The fair value for direct and assumed liabilities under deposit-type insurance contracts (accumulation annuities) is calculated using a discounted cash flow approach. Cash flows are projected using actuarial assumptions and discounted to the valuation date using risk-free rates adjusted for credit risk and nonperformance risk of the liabilities. The fair values for insurance contracts other than deposit-type contracts are not required to be disclosed.

Embedded derivative for equity-indexed contracts: The Company has embedded derivatives in its FIA policyholder obligations. These embedded derivatives are carried at the fair market value as of September 30, 2022, and December 31, 2021. The fair value of the embedded derivative component of our FIA obligation is estimated at each valuation date by projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and discounting the excess of projected contract value amounts at the applicable risk-free interest rates adjusted for our nonperformance risk related to those obligations. The projections of FIA policy contract values are based on best estimate assumptions for future policy growth and decrements including lapse, partial withdrawal and mortality rates. The best estimate assumptions for future policy growth include assumptions for expected index credits on the next policy anniversary date which are derived from fair values of the underlying equity call options purchased to fund such index credits and the present value of expected costs of annual call options purchased in the future by us to fund index credits beyond the next policy anniversary. The projections of minimum guaranteed contract values include the same best estimate assumptions for policy decrements as assumptions used to project policy contract values.

The following table presents the Company’s fair value hierarchy for those financial instruments measured at fair value on a recurring basis as of September 30, 2022, and December 31, 2021.


			Significant
	Quoted		Other		Significant
	In Active		Observable		Unobservable				Estimated
	Markets		Inputs		Inputs		Net Asset		Fair
(In thousands)	(Level 1)		(Level 2)		(Level 3)		Value		Value
September 30, 2022
Financial assets
Fixed maturity securities:
Bonds
U.S. government obligations	$	—	$	1,495	$	—	$	—	$	1,495
Mortgage-backed securities		—		211,343		—		—		211,343
Asset-backed securities		—		34,648		—		—		34,648
Collateralized loan obligations		—		275,375		—		—		275,375
States and political subdivisions-general obligations		—		102		—		—		102
States and political subdivisions-special revenue		—		121		—		—		121
Corporate		—		37,924		—		—		37,924
Term loans		—		—		476,522		—		476,522
Redeemable preferred stock		—		10,551		—		—		10,551
Total fixed maturity securities		—		571,559		476,522		—		1,048,081
Mortgage loans on real estate, held for investment		—		—		204,423		—		204,423
Derivatives		—		11,840		—		—		11,840
Equity securities		—		9,325		—		—		9,325
Other invested assets		—		—		71,022		7,547		78,569
Investment escrow		—		344		—		—		344
Federal Home Loan Bank (FHLB) stock		—		—		501		—		501
Preferred stock		—		—		21,579		—		21,579
Notes receivable		—		6,189		—		—		6,189
Policy loans		—		—		21		—		21
Total Investments	$	—	$	599,257	$	774,068	$	7,547	$	1,380,872
Financial liabilities
Embedded derivative for equity-indexed contracts	$	—	$	—	$	120,835	$	—		120,835

December 31, 2021
Financial assets
Fixed maturity securities:
Bonds
U.S. government obligations	$	—	$	1,882	$	—	$	—	$	1,882
Mortgage-backed securities		—		55,280		—		—		55,280
Asset-backed securities		—		24,951		—		—		24,951
Corporate		—		274,523		—		—		274,523
States and political subdivisions-general obligations		—		114		—		—		114
States and political subdivisions-special revenue		—		5,612		—		—		5,612
Corporate		—		37,139		—		—		37,139
Term loans		—		—		267,468		—		267,468
Trust preferred		—		2,237		—		—		2,237
Redeemable preferred stock		—		14,090		—		—		14,090
Total fixed maturity securities		—		415,828		267,468		—		683,296
Mortgage loans on real estate, held for investment		—		—		183,203		—		183,203
Derivatives		—		23,022		—		—		23,022
Equity securities		—		21,869		—		—		21,869
Other invested assets		—		—		35,293		—		35,293
Investment escrow		—		3,611		—		—		3,611
Federal Home Loan Bank (FHLB) stock		—		—		500		—		500
Preferred stock		—		—		18,686		—		18,686
Notes receivable		—		5,960		—		—		5,960
Policy loans		—		—		87		—		87
Total Investments	$	—	$	470,290	$	505,237	$	—	$	975,527
Financial liabilities
Embedded derivative for equity-indexed contracts	$	—	$	—	$	123,692	$	—	$	123,692

There were no transfers of financial instruments between any levels during the nine months ended September 30, 2022, or for the year ended December 31, 2021.

Accounting standards require disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring basis are discussed above. As of September 30, 2022, and December 31, 2021, there were no financial assets or financial liabilities measured at fair value on a non-recurring basis.

The following disclosure contains the carrying values, estimated fair values and their corresponding placement in the fair value hierarchy for financial assets and financial liabilities as of September 30, 2022, and as of December 31, 2021, respectively:


	September 30, 2022
			Fair Value Measurements Using
			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical Assets		Observable		Unobservable
	Carrying		and Liabilities		Inputs		Inputs		Fair
(In thousands)	Amount		(Level 1)		(Level 2)		(Level 3)		Value
Assets:
Policy loans	$	21	$	—	$	—	$	21	$	21
Cash equivalents		208,664		—		208,664		—		208,664
Liabilities:
Policyholder deposits (deposit-type contracts)		1,537,583		—		—		1,537,583		1,537,583


	December 31, 2021
			Fair Value Measurements Using
			Quoted Prices in
			Active Markets		Significant Other		Significant
			for Identical Assets		Observable		Unobservable
	Carrying		and Liabilities		Inputs		Inputs		Fair
(In thousands)	Amount		(Level 1)		(Level 2)		(Level 3)		Value
Assets:
Policy loans	$	87	$	—	$	—	$	87	$	87
Cash equivalents		142,013		—		142,013		—		142,013
Liabilities:
Policyholder deposits (deposit-type contracts)		1,075,439		—		—		1,075,439		1,075,439

The following table presents a reconciliation of the beginning balance for all assets and liabilities measured at fair value on a recurring basis using level three inputs during the nine months ended September 30, 2022:


	September 30, 2022
			Total realized and unrealized gains (losses)
	Beginning Balance			Included in Income	Included in AOCI		Net Purchases, Issuances, Sales, and Settlements		Ending Balance
(In thousands)
Assets
Term loans	$	267,468	$	—	$	512	$	208,542		476,522
Mortgage loans on real estate,
held for investment		183,203		—		—		21,220		204,423
Common Stock		500		—		—		1		501
Other invested assets		35,293		(76)		(1,616)		37,421		71,022
Preferred stock		18,686		-		—		2,893		21,579
Total level 3 assets	$	505,150	$	(76)	$	(1,104)	$	270,077	$	774,047
Liabilities
Embedded derivative for equity-indexed contracts		(123,692)		(9,632)		—		12,489		(120,835)
Total level 3 liabilities	$	(123,692)	$	(9,632)	$	—	$	12,489	$	(120,835)

The following table presents a reconciliation of the beginning balance for all investments measured at fair value on a recurring basis using level three inputs during the year ended December 31, 2021:


	December 31, 2021
			Total realized and unrealized gains (losses)
(In thousands)	Beginning Balance			Included in Income	Included in AOCI		Net Purchases, Issuances, Sales, and Settlements		Ending Balance
Assets
Term loans	$	107,254	$	(1,326)	$	225	$	161,315	$	267,468
Mortgage loans on real estate,
held for investment		94,990		—		—		88,213		183,203
Federal Home Loan Bank (FHLB) stock		—		—		—		500		500
Other invested assets		21,897		810		(671)		13,257		35,293
Preferred stock		3,898		—		157		14,631		18,686
Total level 3 assets	$	228,039	$	(516)	$	(289)	$	277,916	$	505,150
Liabilities
Embedded derivative for equity-indexed contracts		(84,501)		(4,169)		—		(35,022)		(123,692)
Total level 3 liabilities	$	(84,501)	$	(4,169)	$	—	$	(35,022)	$	(123,692)

Significant Unobservable Inputs—Significant unobservable inputs occur when we could not obtain or corroborate the quantitative detail of the inputs. This applies to fixed maturity securities, preferred stock, mortgage loans and certain derivatives, as well as embedded derivatives in liabilities. Additional significant unobservable inputs are described below.

Interest sensitive contract liabilities – embedded derivative – Significant unobservable inputs we use in the fixed indexed annuities embedded derivative of the interest sensitive contract liabilities valuation include:

●

Nonperformance risk – For contracts we issue, we use the credit spread, relative to the US Department of the Treasury (Treasury) curve based on our public credit rating as of the valuation date. This represents our credit risk for use in the estimate of the fair value of embedded derivatives.

●

Option budget – We assume future hedge costs in the derivative’s fair value estimate. The level of option budgets determines the future costs of the options and impacts future policyholder account value growth.

●

Policyholder behavior – We regularly review the lapse and withdrawal assumptions (surrender rate). These are based on our initial pricing assumptions updated for actual experience. Actual experience may be limited for recently issued products.

Preferred equity and warrants – Significant unobservable inputs we use in the preferred equity and warrants include discount rates and earnings before interest, taxes, depreciation, and amortization (“EBITDA”) Multiples.

●

EBITDA Multiple -The warrants valued using a market approach guideline public company method ("GCPM") using a multiplier of EBITDA.

●

Discount Rates - For the preferred equity, discounted cash flow models are used to assist with the calculation the fair value.

The following summarizes the unobservable inputs for available for sale and trading securities and the embedded derivatives of fixed indexed annuities:

September 30, 2022

(In millions, except for percentages and multiples)

Fair value

Valuation technique

Unobservable inputs

Minimum

Maximum

Weighted average*

Impact of an increase in the input on fair value

Interest sensitive contract liabilities - fixed indexed annuities embedded derivatives

$110.5

Option Budget Method

Nonperformance risk

0.7%

1.9%

1.3%

Decrease

Option budget

1.1%

4.5%

2.6%

Increase

Surrender rate

0.5%

15% (base)
30% (add'l shock)

8.2%

Decrease

Preferred equity

$4.9

Yield analysis

Discount rates

17.5%

19.5%

18.5%

Increase

Detachable warrants

$3.8

Market Approach - GPCM

EBITDA Multiples

9.0x

10.0x

100.0%

Increase

* Weighted by account value

December 31, 2021

(In millions, except for percentages and multiples)

Fair value

Valuation technique

Unobservable inputs

Minimum

Maximum

Weighted average*

Impact of an increase in the input on fair value

Interest sensitive contract liabilities - fixed indexed annuities embedded derivatives

$123.7

Option Budget Method

Nonperformance risk

0.3%

1.1%

0.6%

Decrease

Option budget

1.1%

3.4%

2.4%

Increase

Surrender rate

0.5%

15% (base)
30% (add'l shock)

7.7%

Decrease

Preferred equity

$4.9

Yield analysis

Discount rates

17.5%

19.5%

18.5%

Increase

Detachable warrants

$3.8

Market Approach - GPCM

EBITDA Multiples

9.0x

10.0x

100.0%

Increase

* Weighted by account value