Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2017

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 June 30, 2017 and December 31, 2016:

	June 30, 2017
	Level 1		Level 2		Level 3		Total
Assets
Fixed maturity available-for-sale ("AFS") securities (a)
Corporate securities	$	-	$	883,959	$	-	$	883,959
Asset-backed securities		-		58,572		9,347		67,919
Commercial mortgage-backed securities		-		74,607		-		74,607
Residential mortgage-backed securities		-		67,712		-		67,712
Municipals		-		874		-		874
Government and government agencies
United States		353,867		-		-		353,867
Foreign		1,468		24,420		-		25,888
Total fixed maturity AFS securities	$	355,335	$	1,110,144	$	9,347	$	1,474,826
Equity AFS securities (a)
Banking securities	$	-	$	28,143	$	-	$	28,143
Industrial securities		-		5,786		-		5,786
Total equity AFS securities	$	-	$	33,929	$	-	$	33,929
Cash equivalents (b)	$	-	$	288,019	$	-	$	288,019
Derivative assets (c)		-		6,444		-		6,444
Fair value recoverable of ceded guaranteed minimum income benefits ("GMIB") embedded derivatives (d)		-		-		36,890		36,890
Investments measured at net asset value ("NAV") (e)		-		-		-		5,784,814
Total assets	$	355,335	$	1,438,536	$	46,237	$	7,624,922

Liabilities
Future policy benefits (embedded derivatives only) (f)	$	-	$	-	$	49,489	$	49,489
Derivative liabilities (c)		-		3,703		-		3,703
Total liabilities	$	-	$	3,703	$	49,489	$	53,192

	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, 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, credit default swaps, and options 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 ASC 820-10. These investments do not have lockup periods.

		June 30, 2017								December 31, 2016
Investment:		Fair			Unfunded		Redemption	Redemption		Fair			Unfunded
Limited Partnerships		Value			Commitments		Frequency	Notice Period		Value			Commitments
Limited Partnership - Private Equity	$		1,194	$		-	None	None	$		1,759	$		-
Limited Partnership - Hedge Funds			70,522			543	Quarterly	60-65 days			69,151			-
	$		71,716	$		543			$		70,910	$		-
Separate Accounts			5,713,098			-	None	None			5,659,950			-
Investments measured at NAV	$		5,784,814	$		543			$		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 June 30, 2017 and December 31, 2016:

	Six Months Ended June 30, 2017			Twelve Months Ended December 31, 2016
	Fixed Maturity AFS			Fixed Maturity AFS
	Securities			Securities
Balance at beginning of period (a)	$	9,215		$	6,666
Change in unrealized gains (losses) (b)		202			(243	)
Purchases		4,000			2,792
Sales		(77	)		(326	)
Transfers into Level 3		-			2,113
Transfers out of Level 3		(3,993	)		(1,954	)
Net realized investment gains (c)		-			167
Balance at end of period (a)	$	9,347		$	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) (“OCI”) 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 June 30, 2017 and December 31, 2016:

	Six Months Ended								Twelve Months Ended
	June 30, 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)		5,642			(2,904	)		-		(4,179	)		2,262			-
Changes in equity markets (b)		(11,279	)		13,710			-		(5,988	)		12,560			218
Other (b)		(17	)		470			-		3,963			(1,562	)		-
Balance at end of period (a)	$	48,760		$	(36,890	)	$	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 June 30, 2017 and December 31, 2016:

	June 30, 2017
	Estimated				Range
Description	Fair Value		Valuation Techniques	Unobservable Inputs	(Weighted Average)
Assets
Fixed maturity securities
Asset-backed securities	$	9,347	Broker	See comment below (a)	See comment below (a)
Total fixed maturity securities	$	9,347

Future policy benefits (embedded derivatives) - GMIB Reinsurance		36,890	Discounted cash flows	Own credit risk	35
				Long-term volatility	25% - 30%
Total assets	$	46,237

Liabilities
Future policy benefits (embedded derivatives) - GMWB	$	48,760	Discounted cash flows	Own credit risk	35
				Long-term volatility	25% - 30%

Future policy benefits - SALB		729	See comment below (b)	See comment below (b)	See comment below (b)
Total liabilities	$	49,489

	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 June 30, 2017 and December 31, 2016:

	June 30, 2017
	Level 1		Level 2		Level 3		Total
Assets
Mortgage loans on real estate (a)	$	-	$	-	$	126,881	$	126,881
Policy loans (b)		-		618,134		-		618,134
Total assets	$	-	$	618,134	$	126,881	$	745,015

	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.