Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2019

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 (which are investment 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 Note 3 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

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, 2019, Level 3 invested assets comprised 4.0% 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, 2019
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	586,758	$	586,758	$	—	$	584,070	$	2,688
Other, including U.S. Treasury securities	566,437		566,437		16,288		550,149		—
Municipal bonds	1,599,693		1,599,693		—		1,552,709		46,984
Foreign government bonds	47,367		47,367		—		47,367		—
Corporate bonds	1,321,286		1,321,286		13,997		1,228,067		79,222
Other mortgage-backed securities	1,412,729		1,412,729		—		1,286,979		125,750
Total fixed maturity securities	5,534,270		5,534,270		30,285		5,249,341		254,644
Equity securities	100,143		100,143		57,530		42,544		69
Short-term investments	247,872		247,872		246,872		1,000		—
Other investments	24,503		24,503		—		24,503		—
Totals	$	5,906,788	$	5,906,788	$	334,687	$	5,317,388	$	254,713
Separate Account (variable annuity) assets ⁽¹⁾	$	2,310,886	$	2,310,886	$	2,310,886	$	—	$	—
Financial Liabilities
Investment contract and life policy reserves, embedded derivatives	$	940	$	940	$	—	$	940	$	—
Other policyholder funds, embedded derivatives	$	85,961	$	85,961	$	—	$	—	$	85,961

December 31, 2018
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	787,441	$	787,441	$	—	$	784,224	$	3,217
Other, including U.S. Treasury securities	833,542		833,542		13,291		820,251		—
Municipal bonds	2,003,969		2,003,969		—		1,956,438		47,531
Foreign government bonds	84,904		84,904		—		84,904		—
Corporate bonds	2,079,510		2,079,510		12,281		1,986,487		80,742
Other mortgage-backed securities	1,725,952		1,725,952		—		1,608,958		116,994
Total fixed maturity securities	7,515,318		7,515,318		25,572		7,241,262		248,484
Equity securities	111,750		111,750		64,330		47,415		5
Short-term investments	122,222		122,222		117,296		4,926		—
Other investments	16,147		16,147		—		16,147		—
Totals	$	7,765,437	$	7,765,437	$	207,198	$	7,309,750	$	248,489
Separate Account (variable annuity) assets ⁽¹⁾	$	2,001,128	$	2,001,128	$	2,001,128	$	—	$	—
Financial Liabilities
Investment contract and life policy reserves, embedded derivatives	$	248	$	248	$	—	$	248	$	—
Other policyholder funds, embedded derivatives	$	78,700	$	78,700	$	—	$	—	$	78,700

________________

⁽¹⁾ Separate Account (variable annuity) liabilities are equal to the estimated fair value of the Separate Account (variable annuity) assets.

During the six month periods ended June 30, 2019 and 2018, there were no transfers between Level 1 and Level 2. 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		Total
Beginning balance, April 1, 2019	$	47,756		$	82,482		$	135,790		$	266,028		$	5	$	266,033		$	84,629
Transfers into Level 3⁽³⁾	—			2,808			—			2,808			64		2,872			—
Transfers out of Level 3 ⁽³⁾	—			(4,876		)	—			(4,876		)	—		(4,876		)	—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—			—			—			—			—		—			—
Net realized (gains) losses included in net income related to financial liabilities	—			—			—			—			—		—			371
Net unrealized investment gains (losses) included in OCI	(537		)	1,961			2,807			4,231			—		4,231			—
Purchases	—			1,566			—			1,566			—		1,566			—
Issuances	—			—			—			—			—		—			2,431
Sales	—			—			(607		)	(607		)	—		(607		)	—
Settlements	—			—			—			—			—		—			—
Paydowns, maturities and distributions	(235		)	(4,719		)	(9,552		)	(14,506		)	—		(14,506		)	(1,470		)
Ending balance, June 30, 2019	$	46,984		$	79,222		$	128,438		$	254,644		$	69	$	254,713		$	85,961

Beginning balance, January 1, 2019	$	47,531		$	80,742		$	120,211		$	248,484		$	5	$	248,489		$	78,700
Transfers into Level 3 ⁽³⁾	—			5,882			21,934			27,816			64		27,880			—
Transfers out of Level 3 ⁽³⁾	—			(4,876		)	—			(4,876		)	—		(4,876		)	—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—			—			—			—			—		—			—
Net realized (gains) losses included in net income related to financial liabilities	—			—			—			—			—		—			4,705
Net unrealized investment gains (losses) included in OCI	(193		)	4,510			2,655			6,972			—		6,972			—
Purchases	—			1,566			—			1,566			—		1,566			—
Issuances	—			—			—			—			—		—			5,449
Sales	—			—			(607		)	(607		)	—		(607		)	—
Settlements	—			—			—			—			—		—			—
Paydowns, maturities and distributions	(354		)	(8,602		)	(15,755		)	(24,711		)	—		(24,711		)	(2,893		)
Ending balance, June 30, 2019	$	46,984		$	79,222		$	128,438		$	254,644		$	69	$	254,713		$	85,961

________________


⁽¹⁾	Represents embedded derivatives, all related to the Company's fixed indexed annuity 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, 2019 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			Other Mortgage- Backed Securities ⁽²⁾			Total Fixed Maturity Securities			Equity Securities			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 realized (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 the Company’s fixed indexed annuity 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 . 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, 2019, the Company had no net losses on Level 3 securities. For the six month period ended June 30, 2018, the Company had a realized net loss on two Level 3 securities of $243 thousand. For the three and six month periods ended June 30, 2019, net investment losses of $371 thousand and $4,705 thousand 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 month periods ended June 30, 2018, the respective gain amounts were $1,291 thousand and $3,513 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 in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. 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, 2019
Financial Assets
Investments
Other investments	$	161,313	$	166,023	$	—	$	—	$	166,023
Financial Liabilities
Investment contract and life policy reserves, fixed annuity contracts	4,605,272		4,529,317		—		—		4,529,317
Investment contract and life policy reserves, account values on life contracts	90,239		93,366		—		—		93,366
Other policyholder funds	735,919		735,919		—		676,460		59,459
Long-term debt	297,881		315,938		—		315,938		—

December 31, 2018
Financial Assets
Investments
Other investments	$	156,725	$	161,449	$	—	$	—	$	161,449
Financial Liabilities
Investment contract and life policy reserves, fixed annuity contracts	4,555,849		4,478,338		—		—		4,478,338
Investment contract and life policy reserves, account values on life contracts	87,229		90,402		—		—		90,402
Other policyholder funds	689,287		689,287		—		626,325		62,962
Long-term debt	297,740		291,938		—		291,938		—

- 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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