Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2018

Fair Value Disclosures [Abstract]

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.

Information regarding the three-level hierarchy presented below and the valuation methodologies utilized by the Company to estimate fair values at a point in time is included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, specifically in Note 3 -- Fair Value of Financial Instruments.

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 June 30, 2018, Level 3 invested assets comprised 3.3% of the Company’s total investment portfolio at fair value.

($ in thousands)					Fair Value Measurements at
	Carrying		Fair		Reporting Date Using
	Amount		Value		Level 1			Level 2			Level 3
June 30, 2018
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	707,324	$	707,324	$	—		$	703,543		$	3,781
Other, including U.S. Treasury securities	782,223		782,223		13,201			769,022			—
Municipal bonds	1,827,511		1,827,511		—			1,777,590			49,921
Foreign government bonds	95,505		95,505		—			95,505			—
Corporate bonds	2,397,724		2,397,724		13,397			2,291,664			92,663
Other mortgage-backed securities	1,665,278		1,665,278		—			1,539,998			125,280
Total fixed maturity securities	7,475,565		7,475,565		26,598			7,177,322			271,645
Equity securities	130,780		130,780		80,236		—	50,538		—	6
Short-term investments	176,497		176,497		176,497			—			—
Other investments	21,876		21,876		—			21,876			—
Totals	$	7,804,718	$	7,804,718	$	283,331		$	7,249,736		$	271,651
Financial Liabilities
Investment contract and life policy reserves, embedded derivatives	$	486	$	486	$	—		$	486		$	—
Other policyholder funds, embedded derivatives	77,788		77,788		—			—			77,788
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

During the six month period ended June 30, 2018, there were no transfers between Level 1 and Level 2. During the six month period ended June 30, 2017, an equity security was transferred into Level 1 from Level 2 as a result of increased liquidity in the market and a sustained increase in the market activity for this asset. The following table presents 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, April, 1, 2018	$	49,748		$	78,780		$	115,334		$	243,862		$	6		$	—	$	243,868		$	78,486
Transfers into Level 3 (3)	—			29,709			18,322			48,031			—			—		48,031			—
Transfers out of Level 3 (3)	—			(11,279		)	(4,230		)	(15,509		)	—			—		(15,509		)	—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—			(246		)	—			(246		)	—			—		(246		)	—
Net (gains) losses included in net income related to financial liabilities	—			—			—			—			—			—		—			(1,291		)
Net unrealized investment gains (losses) included in OCI	397			(700		)	1,659			1,356			—			—		1,356			—
Purchases	—			—			—			—			—			—		—			—
Issuances	—			—			—			—			—			—		—			2,107
Sales	—			—			—			—			—			—		—			—
Settlements	—			—			—			—			—			—		—			—
Paydowns, maturities and distributions	(224		)	(3,601		)	(2,024		)	(5,849		)	—			—		(5,849		)	(1,514		)
Ending balance, June 30, 2018	$	49,921		$	92,663		$	129,061		$	271,645		$	6		$	—	$	271,651		$	77,788
Beginning balance, January 1, 2018	$	49,328		$	72,979		$	107,944		$	230,251		$	6		$	—	$	230,257		$	80,733
Transfers into Level 3 (3)	—			40,487			33,144			73,631			—			—		73,631			—
Transfers out of Level 3 (3)	—			(11,279		)	(4,230		)	(15,509		)	—			—		(15,509		)	—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—			(246		)	—			(246		)	3			—		(243		)	—
Net (gains) losses included in net income related to financial liabilities	—			—			—			—			—			—		—			(3,513		)
Net unrealized investment gains (losses) included in OCI	840			(1,587		)	637			(110		)	—			—		(110		)	—
Purchases	—			—			—			—			—			—		—			—
Issuances	—			—			—			—			—			—		—			3,439
Sales	—			—			—			—			(3		)	—		(3		)	—
Settlements	—			—			—			—			—			—		—			—
Paydowns, maturities and distributions	(247		)	(7,691		)	(8,434		)	(16,372		)	—			—		(16,372		)	(2,871		)
Ending balance, June 30, 2018	$	49,921		$	92,663		$	129,061		$	271,645		$	6		$	—	$	271,651		$	77,788

________________

(1) Represents embedded derivatives, all related to 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 three and six month periods ended June 30, 2018 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.

($ in thousands)	Financial Assets																				Financial Liabilities(1)
	Municipal Bonds			Corporate Bonds			Mortgage- Backed Securities (2)			Total Fixed Maturity Securities			Equity Securities		Short-term Investments			Total
Beginning balance, April 1, 2017	$	53,462		$	82,495		$	112,794		$	248,751		$	6	$	—		$	248,757		$	64,261
Transfers into Level 3 (3)	—			2,001			9,482			11,483			—		—			11,483			—
Transfers out of Level 3 (3)	(5,557		)	(5,853		)	—			(11,410		)	—		—			(11,410		)	—
Total gains or losses
Net realized investment gains (losses) included in net income related to financial assets	—			—			(1,714		)	(1,714		)	—		—			(1,714		)	—
Net realized (gains) losses included in net income related to financial liabilities	—			—			—			—			—		—			—			1,238
Net unrealized investment gains (losses) included in other comprehensive income	1,287			359			3,093			4,739			—		—			4,739			—
Purchases	—			—			—			—			—		—			—			—
Issuances	—			—			—			—			—		—			—			3,397
Sales	—			—			—			—			—		—			—			—
Settlements	—			—			—			—			—		—			—			—
Paydowns, maturities and distributions	(69		)	(1,950		)	(3,331		)	(5,350		)	—		—			(5,350		)	(901		)
Ending balance, June 30, 2017	$	49,123		$	77,052		$	120,324		$	246,499		$	6	$	—		$	246,505		$	67,995
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			31,919			24,521			61,654			—		—			61,654			—
Transfers out of Level 3 (3)	(5,557		)	(11,963		)	—			(17,520		)	—		(751		)	(18,271		)	—
Total gains or losses
Net realized investment gains (losses) included in net income related to financial assets	—			—			(1,714		)	(1,714		)	—		—			(1,714		)	—
Net realized (gains) losses included in net income related to financial liabilities	—			—			—			—			—		—			—			3,546
Net unrealized investment gains (losses) included in other comprehensive income	3,158			455			2,322			5,935			—		—			5,935			—
Purchases	—			—			—			—			—		—			—			—
Issuances	—			—			—			—			—		—			—			6,786
Sales	—			—			—			—			—		—			—			—
Settlements	—			—			—			—			—		—			—			—
Paydowns, maturities and distributions	(189		)	(3,550		)	(9,464		)	(13,203		)	—		—			(13,203		)	(1,730		)
Ending balance, June 30, 2017	$	49,123		$	77,052		$	120,324		$	246,499		$	6	$	—		$	246,505		$	67,995

________________

(1) Represents embedded derivatives, all related to 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 three and six month periods ended June 30, 2017 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.

For the six month period ended June 30, 2018, the Company realized a net loss of $243 thousand on two Level 3 securities. For the six month period ended June 30, 2017, the Company impaired two Level 3 securities for a $1,714 thousand realized loss. For the three and six month periods ended June 30, 2018, net investment gains of $1,291 thousand and $3,513 thousand, respectively, were included in earnings that were attributable to the changes in the fair value of Level 3 liabilities (embedded derivatives) still held; for the three and six months ended June 30, 2017, the respective loss amounts were $1,238 thousand and $3,546 thousand.

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 described in Note 3 -- Fair Value of Financial Instruments -- Investments in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. 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 relate 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)					Fair Value Measurements at
	Carrying		Fair		Reporting Date Using
	Amount		Value		Level 1		Level 2		Level 3
June 30, 2018
Financial Assets
Investments
Other investments	$	154,327	$	159,019	$	—	$	—	$	159,019
Financial Liabilities
Investment contract and life policy reserves, fixed annuity contracts	4,498,302		4,399,614		—		—		4,399,614
Investment contract and life policy reserves, account values on life contracts	84,163		89,761		—		—		89,761
Other policyholder funds	640,722		640,722		—		575,928		64,794
Long-term debt	297,603		302,695		—		302,695		—
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		—