XML 34 R23.htm IDEA: XBRL DOCUMENT v3.7.0.1
Fair Value of Financial Instruments (Tables)
 3 Months Ended
Mar. 31, 2017
Fair Value Disclosures [Abstract]  
Hierarchy of Assets and Liabilities Measured at Fair Value on Recurring Basis

The following tables present the Company’s hierarchy for its assets and liabilities measured at fair value on a recurring basis at March 31, 2017 and December 31, 2016:

 

 

 

March 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity available-for-sale ("AFS") securities (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

 

$

 

-

 

 

$

 

892,795

 

 

$

 

-

 

 

$

 

892,795

 

Asset-backed securities

 

 

 

-

 

 

 

 

36,098

 

 

 

 

13,288

 

 

 

 

49,386

 

Commercial mortgage-backed securities

 

 

 

-

 

 

 

 

74,572

 

 

 

 

-

 

 

 

 

74,572

 

Residential mortgage-backed securities

 

 

 

-

 

 

 

 

68,444

 

 

 

 

-

 

 

 

 

68,444

 

Municipals

 

 

 

-

 

 

 

 

871

 

 

 

 

-

 

 

 

 

871

 

Government and government agencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

 

 

351,481

 

 

 

 

199

 

 

 

 

-

 

 

 

 

351,680

 

Foreign

 

 

 

1,474

 

 

 

 

24,222

 

 

 

 

-

 

 

 

 

25,696

 

Total fixed maturity AFS securities

 

$

 

352,955

 

 

$

 

1,097,201

 

 

$

 

13,288

 

 

$

 

1,463,444

 

Equity AFS securities (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking securities

 

$

 

-

 

 

$

 

27,405

 

 

$

 

-

 

 

$

 

27,405

 

Industrial securities

 

 

 

-

 

 

 

 

5,800

 

 

 

 

-

 

 

 

 

5,800

 

Total equity AFS securities

 

$

 

-

 

 

$

 

33,205

 

 

$

 

-

 

 

$

 

33,205

 

Cash equivalents (b)

 

$

 

-

 

 

$

 

106,058

 

 

$

 

-

 

 

$

 

106,058

 

Derivative assets (c)

 

 

 

-

 

 

 

 

2,609

 

 

 

 

-

 

 

 

 

2,609

 

Fair value recoverable of ceded guaranteed minimum income benefits ("GMIB") embedded derivatives (d)

 

 

 

-

 

 

 

 

-

 

 

 

 

39,244

 

 

 

 

39,244

 

Investments measured at net asset value ("NAV") (e)

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

5,796,266

 

Total assets

 

$

 

352,955

 

 

$

 

1,239,073

 

 

$

 

52,532

 

 

$

 

7,440,826

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future policy benefits (embedded derivatives only) (f)

 

$

 

-

 

 

$

 

-

 

 

$

 

48,395

 

 

$

 

48,395

 

Derivative liabilities (c)

 

 

 

-

 

 

 

 

7,051

 

 

 

 

-

 

 

 

 

7,051

 

Total liabilities

 

$

 

-

 

 

$

 

7,051

 

 

$

 

48,395

 

 

$

 

55,446

 

 

 

 

December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity AFS securities (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate securities

 

$

 

-

 

 

$

 

911,851

 

 

$

 

-

 

 

$

 

911,851

 

Asset-backed securities

 

 

 

-

 

 

 

 

43,372

 

 

 

 

9,215

 

 

 

 

52,587

 

Commercial mortgage-backed securities

 

 

 

-

 

 

 

 

76,513

 

 

 

 

-

 

 

 

 

76,513

 

Residential mortgage-backed securities

 

 

 

-

 

 

 

 

96,177

 

 

 

 

-

 

 

 

 

96,177

 

Municipals

 

 

 

-

 

 

 

 

856

 

 

 

 

-

 

 

 

 

856

 

Government and government agencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

United States

 

 

 

341,379

 

 

 

 

-

 

 

 

 

-

 

 

 

 

341,379

 

Foreign

 

 

 

1,480

 

 

 

 

6,194

 

 

 

 

-

 

 

 

 

7,674

 

Total fixed maturity AFS securities

 

$

 

342,859

 

 

$

 

1,134,963

 

 

$

 

9,215

 

 

$

 

1,487,037

 

Equity AFS securities (a)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Banking securities

 

$

 

-

 

 

$

 

26,726

 

 

$

 

-

 

 

$

 

26,726

 

Industrial securities

 

 

 

-

 

 

 

 

5,825

 

 

 

 

-

 

 

 

 

5,825

 

Total equity AFS securities

 

$

 

-

 

 

$

 

32,551

 

 

$

 

-

 

 

$

 

32,551

 

Cash equivalents (b)

 

 

 

-

 

 

 

 

265,538

 

 

 

 

-

 

 

 

 

265,538

 

Derivative assets (c)

 

 

 

-

 

 

 

 

16,526

 

 

 

 

-

 

 

 

 

16,526

 

Fair value recoverable of ceded GMIB embedded

   derivatives (d)

 

 

 

-

 

 

 

 

-

 

 

 

 

48,166

 

 

 

 

48,166

 

Investments measured at NAV (e)

 

 

 

-

 

 

 

 

-

 

 

 

 

-

 

 

 

 

5,730,860

 

Total assets

 

$

 

342,859

 

 

$

 

1,449,578

 

 

$

 

57,381

 

 

$

 

7,580,678

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future policy benefits (embedded derivatives only) (f)

 

$

 

-

 

 

$

 

-

 

 

$

 

55,143

 

 

$

 

55,143

 

Derivative liabilities (c)

 

 

 

-

 

 

 

 

15,165

 

 

 

 

-

 

 

 

 

15,165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

$

 

-

 

 

$

 

15,165

 

 

$

 

55,143

 

 

$

 

70,308

 

 

(a)

The fair values of debt securities are determined by management after taking into consideration several sources of data. When available, the Company uses quoted market prices in active markets to determine the fair value of its debt securities. The Company’s valuation policy utilizes a pricing hierarchy that dictates that publicly available prices are initially sought from indices and third party pricing services. In the event that pricing is not available from these sources, those securities are submitted to brokers to obtain quotes. The majority of brokers’ quotes are non-binding. As part of the pricing process, the Company assesses the appropriateness of each quote (i.e., as to whether the quote is based on observable market transactions or not) to determine the most appropriate estimate of fair value. Lastly, securities are priced using internal cash flow modeling techniques. These valuation methodologies commonly use the following inputs: reported trades, bids, offers, issuer spreads, benchmark yields, estimated prepayment speeds, and/or estimated cash flows.

Third-party pricing services and brokers will often determine prices using recently reported trades for identical or similar securities. The third-party pricing services and brokers make adjustments for the elapsed time from the trade date to the Balance Sheet date to take into account available market information. Lacking recently reported trades, third-party pricing services and brokers will use modeling techniques to determine a security price where expected future cash flows are developed based on the performance of the underlying collateral and discounted using an estimated market rate.

Periodically, the Company performs an analysis of the inputs obtained from third-party pricing services and brokers to ensure that the inputs are reasonable and produce a reasonable estimate of fair value. The Company’s asset specialists and investment valuation specialists consider both qualitative and quantitative factors as part of this analysis. Several examples of analytical procedures performed include, but are not limited to, recent transactional activity for similar debt securities, review of pricing statistics and trends and consideration of recent relevant market events. Other controls and procedures over pricing received from indices, third-party pricing services, or brokers include validation checks, such as exception reports that highlight significant price changes, stale prices or un-priced securities.

Following is additional discussion of the valuation methodologies for certain types of debt securities:

Corporate debt securities - Valuations of corporate debt securities are monitored and reviewed on a monthly basis. The pricing hierarchy is dependent on the possibility of corroboration of market prices when available. If no market prices are available, valuations are determined by a discounted cash flow methodology using an internally calculated yield. The yield is comprised of a credit spread over a given benchmark, taking into effect liquidity risk for thinly traded securities.

Residential mortgage-backed securities (“RMBS”), commercial mortgage-backed securities (“CMBS”) and asset backed securities (“ABS”) - Valuations of RMBS, CMBS and ABS are monitored and reviewed on a monthly basis. Valuations are based on a pricing hierarchy and, depending on the asset type, the pricing hierarchy consists of a waterfall that starts with making use of market prices from indices and follows with making use of third-party pricing services or brokers. The pricing hierarchy is dependent on the possibility of corroborating the market prices. If no market prices are available, the Company uses either internal models or another available pricing source to determine fair value. Significant inputs included in the internal models are generally determined based on relative value analyses, which incorporate comparisons to instruments with similar collateral and risk profiles. Market standard models may be used to model the specific collateral composition and cash flow structure of each transaction. The most significant unobservable input is the illiquidity premium, which is embedded in the discount rate.

Government and government agencies - When available, the Company uses quoted market prices in active markets to determine the fair value of its government and government agencies’ investments. When the Company cannot make use of quoted market prices, market prices from indices or quotes from third-party pricing services or brokers are used.

Equity securities – Valuations of equity securities are monitored and reviewed on a monthly basis. When available, the Company uses quoted market prices in active markets to determine the fair value of its equity investments. When the Company cannot make use of quoted market prices, quotes from a third-party vendor, broker, or custodian are used. 

(b)

Cash equivalents are primarily valued at amortized cost, which approximates fair value. Operating cash is not included in the above table.

(c)

Level 2 derivatives include interest rate swaps, inflation swaps, variance swaps, total return swaps, and credit default swaps for which the Company utilized readily accessible quoted index levels and broker quotes. The fair value of interest rate swaps is calculated based on the change in the underlying floating rate curve measured using the London Inter-Bank Offered Rate (“LIBOR”) at the reporting date, as compared to the fixed leg of the swap. The fair value for inflation swaps is calculated as the difference between the consumer price index (or related readily accessible quoted inflation index level) at the reporting date and the last reset date, multiplied by the notional value of the swap. The fair value for variance swaps is calculated as the difference between the estimated volatility of the underlying Standard & Poor’s 500 Composite Price Index (“S&P”) at maturity and the actual volatility of the underlying S&P at initiation (i.e., strike) multiplied by the notional value of the swap. Total return swaps are valued based on the change in the underlying equity index as of the last reset date. The fair value for equity options is calculated using the Black-Scholes model and market observable inputs for the underlying market price and volatility surface. Credit default swaps are valued using a discounted cash flow model where future premium payments and protection payments are corrected for the probability of default, which is modeled using an arbitrage free credit spread model.

(d)

The Company reinsures a portion of its variable annuity business that offer GMIB reinsurance. GMIB reinsurance contracts are treated as embedded derivatives since they contain payment provisions for net settlement and are therefore reported separately from the host contract.

(e)

Amounts are comprised of certain investments that are measured at fair value using the NAV per share (or its equivalent) as a practical expedient and have not been classified in the fair value hierarchy in accordance with Subtopic 820-10. These investments do not have lockup periods.

 

 

 

 

March 31, 2017

 

 

 

 

 

 

 

 

 

December 31, 2016

 

Investment:

 

 

Fair

 

 

 

Unfunded

 

 

 

Redemption

 

 

Redemption

 

 

Fair

 

 

 

Unfunded

 

Limited Partnerships

 

 

Value

 

 

 

Commitments

 

 

 

Frequency

 

 

Notice Period

 

 

Value

 

 

 

Commitments

 

Limited Partnership - Private Equity

 

$

 

1,704

 

 

$

 

-

 

 

 

None

 

 

None

 

$

 

1,759

 

 

$

 

-

 

Limited Partnership - Hedge Funds

 

 

 

70,905

 

 

 

 

102

 

 

 

Quarterly

 

 

60-65 days

 

 

 

69,151

 

 

 

 

-

 

 

 

$

 

72,609

 

 

$

 

102

 

 

 

 

 

 

 

 

$

 

70,910

 

 

$

 

-

 

Separate Accounts

 

 

 

5,723,657

 

 

 

 

-

 

 

 

None

 

 

None

 

 

 

5,659,950

 

 

 

 

-

 

Investments measured at NAV

 

$

 

5,796,266

 

 

$

 

102

 

 

 

 

 

 

 

 

$

 

5,730,860

 

 

$

 

-

 

 

(f)

The Company recognizes liabilities for contracts containing guaranteed minimum withdrawal benefits ("GMWB") and stand-alone living benefits ("SALB"), which are reported at fair value. The liabilities for the contracts containing GMWB are treated as embedded derivatives, which are required to be reported separately from the host contract. The fair value of these guarantees is calculated as the present value of future expected payments to policyholders less the present value of assessed fees attributable to the guarantees. Given the complexity and long-term nature of the guarantees, their fair values are determined using stochastic techniques under a variety of market return, discount rate and actuarial assumptions. Since two of the assumptions are unobservable and are considered to be significant inputs to the liability valuation, the liability included in future policy benefits has been reflected within Level 3 of the fair value hierarchy.

Summary of Change in Fair Value of Level 3 Fixed Maturity AFS Securities

The following table provides a summary of the change in fair value of the Company's Level 3 fixed maturity AFS securities at March 31, 2017 and December 31, 2016: 

 

 

 

 

Three Months Ended March 31, 2017

 

 

 

Twelve Months Ended December 31, 2016

 

Balance at beginning of period (a)

 

$

 

9,215

 

 

$

 

6,666

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized gains (losses) (b)

 

 

 

116

 

 

 

 

(243

)

Purchases

 

 

 

3,999

 

 

 

 

2,792

 

Sales

 

 

 

(42

)

 

 

 

(326

)

Transfers into Level 3

 

 

 

-

 

 

 

 

2,113

 

Transfers out of Level 3

 

 

 

-

 

 

 

 

(1,954

)

Net realized investment gains (c)

 

 

 

-

 

 

 

 

167

 

Balance at end of period (a)

 

$

 

13,288

 

 

$

 

9,215

 

 

(a)

Recorded as a component of fixed maturity AFS securities on the Balance Sheets.

(b)

Recorded as a component of other comprehensive income (loss) in net unrealized holding gains (losses) on AFS securities arising during the period.

(c)

Recorded as a component of net realized investment gains (losses) for fixed maturity in the Statements of Income (Loss).
Summary of Changes in Fair Value of Level 3 Liabilities (Assets)

The following table provides a summary of the changes in fair value of the Company’s Level 3 liabilities (assets) at March 31, 2017 and December 31, 2016:

 

 

 

Three Months Ended

 

 

Twelve Months Ended

 

 

 

March 31, 2017

 

 

December 31, 2016

 

 

 

 

 

 

 

 

GMIB

 

 

 

 

 

 

 

 

 

 

GMIB

 

 

 

 

 

 

GMWB

 

 

Reinsurance

 

 

SALB

 

 

GMWB

 

 

Reinsurance

 

 

SALB

 

Balance at beginning of period (a)

 

$

 

54,414

 

 

$

 

(48,166

)

 

$

 

729

 

 

$

 

60,618

 

 

$

 

(61,426

)

 

$

 

511

 

Changes in interest rates (b)

 

 

 

1,532

 

 

 

 

(802

)

 

 

 

-

 

 

 

 

(4,179

)

 

 

 

2,262

 

 

 

 

-

 

Changes in equity markets (b)

 

 

 

(7,963

)

 

 

 

9,199

 

 

 

 

-

 

 

 

 

(5,988

)

 

 

 

12,560

 

 

 

 

218

 

Other (b)

 

 

 

(317

)

 

 

 

525

 

 

 

 

-

 

 

 

 

3,963

 

 

 

 

(1,562

)

 

 

 

-

 

Balance at end of period (a)

 

$

 

47,666

 

 

$

 

(39,244

)

 

$

 

729

 

 

$

 

54,414

 

 

$

 

(48,166

)

 

$

 

729

 

 

(a)

GMWB and SALB are recorded as a component of future policy benefits on the Balance Sheets and GMIB reinsurance is recorded as recoverable of ceded GMIB embedded derivatives, at fair value on the Balance Sheets.

(b)

Recorded as a component of policy benefits in the Statements of Income (Loss).
Summary of Quantitative Inputs and Assumptions Related to Level 3 Assets and Liabilities

The following tables provides a summary of the quantitative inputs and assumptions of the Company's Level 3 assets and liabilities at March 31, 2017 and December 31, 2016: 

 

 

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

 

 

Range

 

Description

 

Fair Value

 

 

Valuation Techniques

 

Unobservable Inputs

 

(Weighted Average)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

$

 

13,288

 

 

Broker

 

See comment below (a)

 

See comment below (a)

 

Total fixed maturity securities

 

$

 

13,288

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future policy benefits (embedded derivatives) -

   GMIB Reinsurance

 

 

 

39,244

 

 

Discounted cash flows

 

Own credit risk

 

 

45

 

 

 

 

 

 

 

 

 

 

Long-term volatility

 

25% - 30%

 

Total assets

 

$

 

52,532

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

Future policy benefits (embedded derivatives) - GMWB

 

$

 

47,666

 

 

Discounted cash flows

 

Own credit risk

 

 

45

 

 

 

 

 

 

 

 

 

 

Long-term volatility

 

25% - 30%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Future policy benefits - SALB

 

 

 

729

 

 

See comment below (b)

 

See comment below (b)

 

See comment below (b)

 

Total liabilities

 

$

 

48,395

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2016

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

 

 

Range

Description

 

Fair Value

 

 

Valuation Techniques

 

Unobservable Inputs

 

(Weighted Average)

Assets

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities

 

 

 

 

 

 

 

 

 

 

 

Asset-backed securities

 

$

 

9,215

 

 

Broker

 

See comment below (a)

 

See comment below (a)

 

 

 

 

 

 

 

 

 

 

 

 

Future policy benefits (embedded derivatives) -

   GMIB Reinsurance

 

 

 

48,166

 

 

Discounted cash flows

 

Own credit risk

 

50

 

 

 

 

 

 

 

 

 

Long-term volatility

 

25% - 30%

Total assets

 

$

 

57,381

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Future policy benefits (embedded derivatives) -

   GMWB

 

$

 

54,414

 

 

Discounted cash flows

 

Own credit risk

 

50

 

 

 

 

 

 

 

 

 

Long-term volatility

 

25% - 30%

 

 

 

 

 

 

 

 

 

 

 

 

Future policy benefits - SALB

 

 

 

729

 

 

See comment below (b)

 

See comment below (b)

 

See comment below (b)

Total liabilities

 

$

 

55,143

 

 

 

 

 

 

 

 

(a)

The Company has obtained non-binding broker quotes, which cannot be corroborated by market observable data, to assist in determining the fair values of the Level 3 asset-backed securities. The Company does not receive the unobservable inputs used by the broker but performs annual reviews to approve the use of brokers and obtains an asset specialist’s review of the broker’s price.

(b)

The SALB is a product with fewer than 150 policies.  Due to the small size of this block, the liability was established based on the fees.
Estimated Fair Value of Assets Not Carried at Fair Value on Balance Sheets

The following tables provides the estimated fair value of the Company's assets not carried at fair value on the Balance Sheets at March 31, 2017 and December 31, 2016:

 

 

 

March 31, 2017

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans on real estate (a)

 

$

 

-

 

 

$

 

-

 

 

$

 

124,725

 

 

$

 

124,725

 

Policy loans (b)

 

 

 

-

 

 

 

 

627,399

 

 

 

 

-

 

 

 

 

627,399

 

Total assets

 

$

 

-

 

 

$

 

627,399

 

 

$

 

124,725

 

 

$

 

752,124

 

 

 

 

December 31, 2016

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mortgage loans on real estate (a)

 

$

 

-

 

 

$

 

-

 

 

$

 

115,020

 

 

$

 

115,020

 

Policy loans (b)

 

 

 

-

 

 

 

 

632,834

 

 

 

 

-

 

 

 

 

632,834

 

Total assets

 

$

 

-

 

 

$

 

632,834

 

 

$

 

115,020

 

 

$

 

747,854

 

 

(a)

The fair value of mortgage loans on real estate is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and/or similar remaining maturities.

(b)

Policy loans are stated at unpaid principal balance. The book value of policy loans approximates their fair value.