Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2017

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

NOTE 3 - Fair Value of Financial Instruments

The Company is required under GAAP to disclose estimated fair values for certain financial and nonfinancial assets and liabilities. Fair values of the Company's insurance contracts other than annuity contracts are not required to be disclosed. However, the estimated fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk through the matching of investment maturities with amounts due under insurance contracts.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between knowledgeable, unrelated and willing market participants on the measurement date. In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The Company categorizes its financial and nonfinancial assets and liabilities into a three-level hierarchy based on the priority of the inputs to the valuation technique. The three levels of inputs that may be used to measure fair value are:

Level 1	Unadjusted quoted prices in active markets for identical assets or liabilities. Level 1 assets and liabilities include fixed maturity and equity securities (both common stock and preferred stock) that are traded in an active exchange market, as well as U.S. Treasury securities.
Level 2	Unadjusted observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for the assets or liabilities. Level 2 assets and liabilities include fixed maturity securities (1) with quoted prices that are traded less frequently than exchange-traded instruments or (2) values based on discounted cash flows with observable inputs. This category generally includes certain U.S. Government and agency mortgage-backed securities, non-agency structured securities, corporate fixed maturity securities, preferred stocks and derivative instruments.
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, certain discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation and for which the significant inputs are unobservable. This category generally includes certain private debt and equity investments, as well as embedded derivatives.

When the inputs used to measure fair value fall within different levels of the hierarchy, the level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. As a result, a Level 3 fair value measurement may include inputs that are observable (Level 1 or Level 2) and unobservable (Level 3). Net transfers into or out of each of the three levels are reported as having occurred at the end of the reporting period in which the transfers were determined.

The following discussion describes the valuation methodologies used for financial assets and financial liabilities measured at fair value. The techniques utilized in estimating the fair values are affected by the assumptions used, including discount rates and estimates of the amount and timing of future cash flows. The use of different methodologies, assumptions and inputs may have a material effect on the estimated fair values of the Company's investment holdings. Care is exercised in deriving conclusions about the Company's business, its value or financial position based on the fair value information of financial assets and liabilities presented below.

Fair value estimates are made at a specific point in time, based on available market information and judgments about the financial asset or financial liability, including estimates of both the timing and amount of expected future cash flows and the credit standing of the issuer. In some cases, fair value estimates cannot be substantiated by comparison to independent markets. In addition, the disclosed fair value may not be realized in the immediate settlement of the financial asset or financial liability. The disclosed fair values do not reflect any premium or discount that could result from offering for sale at one time an entire holding of a particular financial asset or financial liability. In periods of market disruption, the ability to observe prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from Level 1 to Level 2 or from Level 2 to Level 3. Potential taxes and other expenses that would be incurred in an actual sale or settlement are not reflected in amounts disclosed.

Investments

For fixed maturity securities, each month the Company obtains fair value prices from its investment managers and custodian bank. Fair values for the Company's fixed maturity securities are based primarily on prices provided by its investment managers as well as its custodian bank for certain securities. The prices from the custodian bank are compared to prices from the investment managers. Differences in prices between the sources that the Company considers significant are researched and the Company utilizes the price that it considers most representative of an exit price. Both the investment managers and the custodian bank use a variety of independent, nationally recognized pricing sources to determine market valuations. Each designate specific pricing services or indexes for each sector of the market based upon the provider's expertise. Typical inputs used by these pricing sources include, but are not limited to, reported trades, benchmark yield curves, benchmarking of like securities, ratings designations, sector groupings, issuer spreads, bids, offers, and/or estimated cash flows and prepayment speeds.

When the pricing sources cannot provide fair value determinations, the Company obtains non-binding price quotes from broker-dealers. The broker-dealers' valuation methodologies are sometimes matrix-based, using indicative evaluation measures and adjustments for specific security characteristics and market sentiment. The market inputs utilized in the evaluation measures and adjustments include: benchmark yield curves, reported trades, broker-dealer quotes, ratings and corresponding issuer spreads, two-sided markets, benchmark securities, bids, offers, reference data, and industry and economic events. The extent of the use of each market input depends on the market sector and the market conditions. Depending on the security, the priority of the use of inputs may change or some market inputs may not be relevant. For some securities, additional inputs may be necessary.

The Company analyzes price and market valuations received to verify reasonableness, to understand the key assumptions used and their sources, to conclude the prices obtained are appropriate, and to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Based on this evaluation and investment class analysis, each security is classified into Level 1, 2, or 3. The Company has in place certain control processes to determine the reasonableness of the financial asset fair values. These processes are designed to ensure (1) the values received are reasonable and accurately recorded, (2) the data inputs and valuation techniques utilized are appropriate and consistently applied, and (3) the assumptions are reasonable and consistent with the objective of determining fair value. For example, on a continuing basis, the Company assesses the reasonableness of individual security values received from pricing sources that vary from certain thresholds.

The Company's fixed maturity securities portfolio is primarily publicly traded, which allows for a high percentage of the portfolio to be priced through pricing services. Approximately 90.7% of the portfolio, based on fair value, was priced through pricing services or index priced as of both December 31, 2017 and 2016. The remainder of the portfolio was priced by broker-dealers or pricing models. When non-binding broker-dealer quotes can be corroborated by comparison to other vendor quotes, pricing models or analyses, the securities are generally classified as Level 2, otherwise they are classified as Level 3. There were no significant changes to the valuation process during 2017.

When a public quotation is not available, equity securities are valued by using non-binding broker-dealer quotes or through the use of pricing models or analyses that are based on market information regarding interest rates, credit spreads and liquidity. The underlying source data for calculating the matrix of credit spreads relative to the U.S. Treasury curve are nationally recognized indices. In addition, credit rating (or credit quality equivalent information) of securities is also factored into a pricing matrix. These inputs are based on assumptions deemed appropriate given the circumstances and are believed to be consistent with what other market participants would use when pricing such securities. There were no significant changes to the valuation process in 2017. At December 31, 2017, all of the publicly traded equity securities were priced from observable market quotations. Fair values of equity securities have been determined by the Company from observable market quotations, when available.

Short-term and other investments are comprised of short-term fixed maturity securities, derivative instruments (all call options), policy loans, mortgage loans, and restricted FHLB membership and activity stocks, as well as certain alternative investments which are accounted for using the equity method of accounting and are excluded from the fair value hierarchy.

In summary, the following investments are carried at fair value:

• Fixed maturity securities, as described above.

• Equity securities, as described above.

• Short-term fixed maturity securities — Because of the nature of these assets, carrying amounts generally approximate fair values.

• Derivative instruments, all call options — Fair values are based on the amount of cash expected to be received to settle each derivative instrument on the reporting date. These amounts are obtained from each of the counterparties using industry accepted valuation models and observable inputs. Significant inputs include contractual terms, underlying index prices, market volatilities, interest rates and dividend yields.

• FHLB membership and activity stocks — Fair value is based on redemption value, which is equal to par value.

Financial Instruments Measured and Carried at Fair Value

The following table presents the Company's fair value hierarchy for those assets and liabilities measured and carried at fair value on a recurring basis. At December 31, 2017, Level 3 investments comprised approximately 2.8% of the Company's total investment portfolio fair value.

($ in thousands)	Carrying		Fair		Fair Value Measurements at Reporting Date Using
	Amount		Value		Level 1		Level 2		Level 3
December 31, 2017
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	696,725	$	696,725	$	—	$	693,375	$	3,350
Other, including U.S. Treasury securities	735,408		735,408		13,393		722,015		—
Municipal bonds	1,893,253		1,893,253		—		1,843,925		49,328
Foreign government bonds	102,738		102,738		—		102,738		—
Corporate bonds	2,578,954		2,578,954		14,345		2,491,630		72,979
Other mortgage-backed securities	1,716,997		1,716,997		—		1,612,403		104,594
Total fixed maturity securities	7,724,075		7,724,075		27,738		7,466,086		230,251
Equity securities	135,466		135,466		82,208		53,252		6
Short-term investments	62,593		62,593		62,593		—		—
Other investments	28,050		28,050		—		28,050		—
Totals	$	7,950,184	$	7,950,184	$	172,539	$	7,547,388	$	230,257
Financial Liabilities
Investment contract and life policy reserves, embedded derivatives	$	594	$	594	$	—	$	594	$	—
Other policyholder funds, embedded derivatives	$	80,733	$	80,733	$	—	$	—	$	80,733
December 31, 2016
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	442,419	$	442,419	$	—	$	439,004	$	3,415
Other, including U.S. Treasury securities	467,143		467,143		13,631		453,512		—
Municipal bonds	1,769,397		1,769,397		—		1,722,900		46,497
Foreign government bonds	98,669		98,669		—		98,669		—
Corporate bonds	2,810,221		2,810,221		13,532		2,736,498		60,191
Other mortgage-backed securities	1,868,859		1,868,859		—		1,767,615		101,244
Total fixed maturity securities	7,456,708		7,456,708		27,163		7,218,198		211,347
Equity securities	141,649		141,649		98,632		43,011		6
Short-term investments	44,918		44,918		44,167		—		751
Other investments	20,194		20,194		—		20,194		—
Totals	$	7,663,469	$	7,663,469	$	169,962	$	7,281,403	$	212,104
Financial Liabilities
Investment contract and life policy reserves, embedded derivatives	$	158	$	158	$	—	$	158	$	—
Other policyholder funds, embedded derivatives	$	59,393	$	59,393	$	—	$	—	$	59,393

The Company transferred one equity security between Levels 2 and 1 during 2017 because that security became more actively traded. The Company did not have any transfers between Levels 1 and 2 during 2016. The following tables present reconciliations for the periods indicated for all Level 3 assets and liabilities measured at fair value on a recurring basis.

($ in thousands)	Financial Assets																						Financial Liabilities(1)
	Municipal Bonds			Corporate  Bonds			Other Mortgage- Backed Securities (2)				Total Fixed Maturity Securities				Equity Securities		Short-term Investments			Total
Beginning balance, January 1, 2017	$	46,497		$	60,191		$	104,659			$	211,347			$	6	$	751		$	212,104		$	59,393
Transfers into Level 3 (3)	5,214			38,483			43,091				86,788				—		—			86,788			—
Transfers out of Level 3 (3)	(5,557		)	(16,252		)	(6,542		)		(28,351		)		—		(751		)	(29,102		)	—
Total gains or losses
Net realized investment gains (losses) included in net  income related to financial assets	—			(1		)	(1,832		)		(1,833		)		—		—			(1,833		)	—
Net realized (gains) losses included in net income related to financial liabilities	—			—			—				—				—		—			—			12,942
Net unrealized investment gains (losses) included in OCI	3,977			661			2,075				6,713				—		—			6,713			—
Purchases	—			—			—				—				—		—			—			—
Issuances	—			—			—				—				—		—			—			12,605
Sales	—			(1,999		)	(9,179		)		(11,178		)		—		—			(11,178		)	—
Settlements	—			—			—				—				—		—			—			—
Paydowns, maturities and distributions	(803		)	(8,104		)	(24,328		)		(33,235		)		—		—			(33,235		)	(4,207		)
Ending balance, December 31, 2017	$	49,328		$	72,979		$	107,944			$	230,251			$	6	$	—		$	230,257		$	80,733
Beginning balance, January 1, 2016	$	30,379		$	67,575		$	75,466			$	173,420			$	6	$	—		$	173,426		$	39,021
Transfers into Level 3 (3)	17,710			27,561			39,128				84,399				—		751			85,150			—
Transfers out of Level 3 (3)	—			(14,334		)	(6,694		)		(21,028		)		—		—			(21,028		)	—
Total gains or losses
Net realized investment gains (losses) included in net  income related to financial assets	—			(1,833		)	(56		)		(1,889		)		—		—			(1,889		)	—
Net realized (gains) losses included in net income related to financial liabilities	—			—			—				—				—		—			—			5,011
Net unrealized investment gains (losses) included in OCI	(990		)	(205		)	5,895			—	4,700			—	—		—			4,700			—
Purchases	—			—			—				—				—		—			—			—
Issuances	—			—			—				—				—		—			—			17,113
Sales	—			—			—				—				—		—			—			—
Settlements	—			—			—				—				—		—			—			—
Paydowns, maturities and distributions	(602		)	(18,573		)	(9,080		)		(28,255		)		—		—			(28,255		)	(1,752		)
Ending balance, December 31, 2016	$	46,497		$	60,191		$	104,659			$	211,347			$	6	$	751		$	212,104		$	59,393

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(1) Represents embedded derivatives, all related to the Company's FIA products, reported in Other policyholder funds in the Company's Consolidated Balance Sheets.

(2) Includes U.S. Government and federally sponsored agency obligations for mortgage-backed securities and other mortgage-backed securities.

(3) Transfers into and out of Level 3 during the years ended December 31, 2017 and 2016 were attributable to changes in the availability of observable market information for individual fixed maturity securities and short-term investments. The Company's policy is to recognize transfers into and transfers out of the levels as having occurred at the end of the reporting period in which the transfers were determined.

At December 31, 2017, the Company impaired Level 3 securities for a $1,833 thousand realized loss. At December 31, 2016 the Company impaired Level 3 securities for a $1,889 thousand realized loss. For the years ended December 31, 2017 and 2016, realized losses of $12,942 thousand and $5,011 thousand, respectively, were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held. 

The valuation techniques and significant unobservable inputs used in the fair value measurement for financial assets and liabilities classified as Level 3 are subject to the control processes as previously described in this Note. Generally, valuation techniques for fixed maturity securities include spread pricing, matrix pricing and discounted cash flow methodologies; include inputs such as quoted prices for identical or similar securities that are less liquid; and are based on lower levels of trading activity than securities classified as Level 2. The valuation techniques and significant unobservable inputs used in the fair value measurement for equity securities classified as Level 3 use similar valuation techniques and significant unobservable inputs as those used for fixed maturity securities.

The sensitivity of the estimated fair values to changes in the significant unobservable inputs for fixed maturity and equity securities included in Level 3 generally relates to interest rate spreads, illiquidity premiums and default rates. Significant spread widening in isolation will adversely impact the overall valuation, while significant spread tightening will lead to substantial valuation increases. Significant increases (decreases) in illiquidity premiums in isolation will result in substantially lower (higher) valuations. Significant increases (decreases) in expected default rates in isolation will result in substantially lower (higher) valuations.

Financial Instruments Not Carried at Fair Value; Disclosure Required

The Company has various other financial assets and financial liabilities used in the normal course of business that are not carried at fair value, but for which fair value disclosure is required. The following table presents the carrying value, fair value and fair value hierarchy of these financial assets and financial liabilities.

($ in thousands)	Carrying		Fair		Fair Value Measurements at Reporting Date Using
	Amount		Value		Level 1		Level 2		Level 3
December 31, 2017
Financial Assets
Investments
Other investments	$	154,898	$	159,575	$	—	$	—	$	159,575
Financial Liabilities
Investment contract and life policy reserves, fixed annuity contracts	4,452,972		4,366,334		—		—		4,366,334
Investment contract and life policy reserves, account values on life contracts	82,911		88,620		—		—		88,620
Other policyholder funds	643,528		643,528		—		575,622		67,906
Long-term debt	297,469		311,315		—		311,315		—
December 31, 2016
Financial Assets
Investments
Other investments	$	151,965	$	156,536	$	—	$	—	$	156,536
Financial Liabilities
Investment contract and life policy reserves, fixed annuity contracts	4,360,456		4,280,528		—		—		4,280,528
Investment contract and life policy reserves, account values on life contracts	79,591		85,066		—		—		85,066
Other policyholder funds	649,557		649,557		—		575,253		74,304
Long-term debt	247,209		248,191		—		248,191		—

Other Investments

Other investments includes policy loans and mortgage loans. For policy loans the fair value is based on estimates using discounted cash flow analysis and current interest rates being offered for new loans. For mortgage loans, the fair value is estimated by discounting the future cash flows using current rates at which similar loans would be made to borrowers with similar credit ratings and similar remaining maturities.

Investment Contract and Life Policy Reserves

The fair values of fixed annuity contract liabilities and policyholder account balances on life contracts are equal to the discounted estimated future cash flows (using the Company's current interest rates for similar products including consideration of minimum guaranteed interest rates). The Company carries these financial liabilities at cost.

Also, included in investment contract and life policy reserves are embedded derivatives related to the Company's IUL products. These embedded derivatives are carried at fair value with fair value equal to the fair value of the current call options purchased to hedge the liability.

Other Policyholder Funds

Other policyholder funds are liabilities related to supplementary contracts without life contingencies and dividend accumulations, as well as balances outstanding under funding agreements with the FHLB and embedded derivatives related to the FIA products. Except for embedded derivatives, each of these components is carried at cost, which management believes is a reasonable estimate of fair value due to the relatively short duration of these items, based on the Company's past experience.

The fair value of the embedded derivatives related to FIA products is estimated at each reporting date by (1) projecting policy contract values and minimum guaranteed contract values over the expected lives of the contracts and (2) discounting the excess of the projected contract value amounts at the applicable risk free interest rates adjusted for the Company's nonperformance risk related to those liabilities. The projections of policy contract values are based on the Company's best estimate assumptions for future contract growth and decrements. The assumptions for future contract growth include the expected index credits which are derived from the fair values of the underlying call options purchased to fund such index credits and the expected costs of annual call options that will be purchased in the future to fund index credits beyond the next contract anniversary. Projections of minimum guaranteed contract values include the same best estimate assumptions for contract decrements used to project policy contract values.

Long-term Debt

The Company carries long-term debt at amortized cost. The fair value of long-term debt is estimated based on unadjusted quoted market prices of the Company's securities or unadjusted market prices based on similar publicly traded issues when trading activity for the Company's securities is not sufficient to provide a market price.