Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2018

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 each reporting date 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 September 30, 2018, Level 3 invested assets comprised 3.2% 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
September 30, 2018
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	750,836	$	750,836	$	—		$	747,469		$	3,367
Other, including U.S. Treasury securities	782,600		782,600		13,101			769,499			—
Municipal bonds	1,883,674		1,883,674		—			1,834,345			49,329
Foreign government bonds	95,003		95,003		—			95,003			—
Corporate bonds	2,335,496		2,335,496		13,188			2,233,443			88,865
Other mortgage-backed securities	1,681,530		1,681,530		—			1,561,613			119,917
Total fixed maturity securities	7,529,139		7,529,139		26,289			7,241,372			261,478
Equity securities	133,184		133,184		82,389		—	50,789		—	6
Short-term investments	74,647		74,647		70,705			3,942			—
Other investments	22,698		22,698		—			22,698			—
Totals	$	7,759,668	$	7,759,668	$	179,383		$	7,318,801		$	261,484
Financial Liabilities
Investment contract and life policy reserves, embedded derivatives	$	722	$	722	$	—		$	722		$	—
Other policyholder funds, embedded derivatives	82,265		82,265		—			—			82,265

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 nine month period ended September 30, 2018, there were no transfers between Level 1 and Level 2. During the nine month period ended September 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, July 1, 2018	$	49,921		$	92,663		$	129,061		$	271,645		$	6		$	—	$	271,651		$	77,788
Transfers into Level 3⁽³⁾	—			—			17,030			17,030			—			—		17,030			—
Transfers out of Level 3 ⁽³⁾	—			—			(970		)	(970		)	—			—		(970		)	—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—			—			—			—			—			—		—			—
Net (gains) losses included in net income related to financial liabilities	—			—			—			—			—			—		—			2,205
Net unrealized investment gains (losses) on securities included in OCI	(471		)	128			(6,184		)	(6,527		)	—			—		(6,527		)	—
Purchases	—			—			—			—			—			—		—			—
Issuances	—			—			—			—			—			—		—			3,940
Sales	—			—			(187		)	(187		)	—			—		(187		)	—
Settlements	—			—			—			—			—			—		—			—
Paydowns, maturities and distributions	(121		)	(3,926		)	(15,466		)	(19,513		)	—			—		(19,513		)	(1,668		)
Ending balance, September 30, 2018	$	49,329		$	88,865		$	123,284		$	261,478		$	6		$	—	$	261,484		$	82,265

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			50,174			90,661			—			—		90,661			—
Transfers out of Level 3 ⁽³⁾	—			(11,279		)	(5,200		)	(16,479		)	—			—		(16,479		)	—
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	—			—			—			—			—			—		—			(1,308		)
Net unrealized investment gains (losses) on securities included in OCI	369			(1,459		)	(5,547		)	(6,637		)	—			—		(6,637		)	—
Purchases	—			—			—			—			—			—		—			—
Issuances	—			—			—			—			—			—		—			7,379
Sales	—			—			(187		)	(187		)	(3		)	—		(190		)	—
Settlements	—			—			—			—			—			—		—			—
Paydowns, maturities and distributions	(368		)	(11,617		)	(23,900		)	(35,885		)	—			—		(35,885		)	(4,539		)
Ending balance, September 30, 2018	$	49,329		$	88,865		$	123,284		$	261,478		$	6		$	—	$	261,484		$	82,265

________________


⁽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 nine month periods ended September 30, 2018 were attributable to changes in the availability of observable market information for individual fixed maturity securities. 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, July 1, 2017	$	49,123		$	77,052		$	120,324		$	246,499		$	6	$	—		$	246,505		$	67,995
Transfers into Level 3 ⁽³⁾	—			23,501			11,961			35,462			—		—			35,462			—
Transfers out of Level 3 ⁽³⁾	—			1			(881		)	(880		)	—		—			(880		)	—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—			(1		)	(160		)	(161		)	—		—			(161		)	—
Net (gains) losses included in net income related to financial liabilities	—			—			—			—			—		—			—			2,587
Net unrealized investment gains (losses) on securities included in OCI	382			(192		)	(377		)	(187		)	—		—			(187		)	—
Purchases	—			—			—			—			—		—			—			—
Issuances	—			—			—			—			—		—			—			3,752
Sales	—			(1,999		)	—			(1,999		)	—		—			(1,999		)	—
Settlements	—			—			—			—			—		—			—			—
Paydowns, maturities and distributions	(293		)	(4,117		)	(9,249		)	(13,659		)	—		—			(13,659		)	(1,348		)
Ending balance, September 30, 2017	$	49,212		$	94,245		$	121,618		$	265,075		$	6	$	—		$	265,081		$	72,986

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			55,420			36,482			97,116			—		—			97,116			—
Transfers out of Level 3 ⁽³⁾	(5,557		)	(11,962		)	(881		)	(18,400		)	—		(751		)	(19,151		)	—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—			(1		)	(1,874		)	(1,875		)	—		—			(1,875		)	—
Net (gains) losses included in net income related to financial liabilities	—			—			—			—			—		—			—			6,133
Net unrealized investment gains (losses) on securities included in OCI	3,540			263			1,945			5,748			—		—			5,748			—
Purchases	—			—			—			—			—		—			—			—
Issuances	—			—			—			—			—		—			—			10,538
Sales	—			(1,999		)	—			(1,999		)	—		—			(1,999		)	—
Settlements	—			—			—			—			—		—			—			—
Paydowns, maturities and distributions	(482		)	(7,667		)	(18,713		)	(26,862		)	—		—			(26,862		)	(3,078		)
Ending balance, September 30, 2017	$	49,212		$	94,245		$	121,618		$	265,075		$	6	$	—		$	265,081		$	72,986

________________


⁽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 nine month periods ended September 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 nine month period ended September 30, 2018, the Company realized a net loss of $243 thousand on three Level 3 securities. For the nine month period ended September 30, 2017, the Company impaired two Level 3 securities for a $1,875 thousand realized loss. For the three and nine month periods ended September 30, 2018, net investment losses of $2,205 thousand and gains of $1,308 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 nine month periods ended September 30, 2017, the respective loss amounts were $2,587 thousand and $6,133 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
September 30, 2018
Financial Assets
Investments
Other investments	$	155,410	$	160,121	$	—	$	—	$	160,121
Financial Liabilities
Investment contract and life policy reserves, fixed annuity contracts	4,545,232		4,445,442		—		—		4,445,442
Investment contract and life policy reserves, account values on life contracts	85,698		91,254		—		—		91,254
Other policyholder funds	640,187		640,187		—		576,021		64,166
Long-term debt	297,671		304,614		—		304,614		—

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		—

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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