Fair Value of Financial Instruments

9 Months Ended

Sep. 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 Item 8, Note 3 of the Consolidated Financial Statements in 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 September 30, 2019, Level 3 invested assets comprised 4.3% 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
September 30, 2019
Financial Assets
Investments
Fixed maturity securities
U.S. Government and federally sponsored agency obligations:
Mortgage-backed securities	$	754,355	$	754,355	$	—	$	749,551	$	4,804
Other, including U.S. Treasury securities	458,175		458,175		17,779		440,396		—
Municipal bonds	1,676,422		1,676,422		—		1,628,717		47,705
Foreign government bonds	47,915		47,915		—		47,915		—
Corporate bonds	1,585,108		1,585,108		14,506		1,473,929		96,673
Other mortgage-backed securities	1,317,585		1,317,585		—		1,175,684		141,901
Total fixed maturity securities	5,839,560		5,839,560		32,285		5,516,192		291,083
Equity securities	105,483		105,483		57,876		47,491		116
Short-term investments	237,819		237,819		237,819		—		—
Other investments	23,935		23,935		—		23,935		—
Totals	$	6,206,797	$	6,206,797	$	327,980	$	5,587,618	$	291,199
Separate Account (variable annuity) assets ⁽¹⁾	$	2,308,134	$	2,308,134	$	2,308,134	$	—	$	—
Financial Liabilities
Investment contract and policy reserves, embedded derivatives	$	1,145	$	1,145	$	—	$	1,145	$	—
Other policyholder funds, embedded derivatives	$	89,098	$	89,098	$	—	$	—	$	89,098

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 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 nine month periods ended September 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, July 1, 2019	$	46,984		$	79,222		$	128,438		$	254,644		$	69	$	254,713		$	85,961
Transfers into Level 3⁽³⁾	—			18,916			21,004			39,920			1		39,921			—
Transfers out of Level 3 ⁽³⁾	—			(2,822		)	(449		)	(3,271		)	—		(3,271		)	—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—			—			—			—			46		46			—
Net realized (gains) losses included in net income related to financial liabilities	—			—			—			—			—		—			3,661
Net unrealized investment gains (losses) included in OCI	842			1,744			397			2,983			—		2,983			—
Purchases	—			—			—			—			—		—			—
Issuances	—			—			—			—			—		—			2,033
Sales	—			—			—			—			—		—			—
Settlements	—			—			—			—			—		—			—
Paydowns, maturities and distributions	(121		)	(387		)	(2,685		)	(3,193		)	—		(3,193		)	(2,557		)
Ending balance, September 30, 2019	$	47,705		$	96,673		$	146,705		$	291,083		$	116	$	291,199		$	89,098

Beginning balance, January 1, 2019	$	47,531		$	80,742		$	120,211		$	248,484		$	5	$	248,489		$	78,700
Transfers into Level 3 ⁽³⁾	—			24,798			42,938			67,736			65		67,801			—
Transfers out of Level 3 ⁽³⁾	—			(7,698		)	(449		)	(8,147		)	—		(8,147		)	—
Total gains or losses
Net investment gains (losses) included in net income related to financial assets	—			—			—			—			46		46			—
Net realized (gains) losses included in net income related to financial liabilities	—			—			—			—			—		—			8,366
Net unrealized investment gains (losses) included in OCI	649			6,254			3,052			9,955			—		9,955			—
Purchases	—			1,566			—			1,566			—		1,566			—
Issuances	—			—			—			—			—		—			7,482
Sales	—			—			(607		)	(607		)	—		(607		)	—
Settlements	—			—			—			—			—		—			—
Paydowns, maturities and distributions	(475		)	(8,989		)	(18,440		)	(27,904		)	—		(27,904		)	(5,450		)
Ending balance, September 30, 2019	$	47,705		$	96,673		$	146,705		$	291,083		$	116	$	291,199		$	89,098

_____________


⁽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 nine month periods ended September 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, 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 realized (gains) losses included in net income related to financial liabilities	—			—			—			—			—			—			2,205
Net unrealized investment gains (losses) 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) 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 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 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.

For the nine month period ended September 30, 2019, the Company had no net losses on Level 3 securities. For the nine month period ended September 30, 2018, the Company had a realized net loss on three Level 3 securities of $243 thousand. For the three and nine month periods ended September 30, 2019, net investment losses of $3,661 thousand and $8,366 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 nine month periods ended September 30, 2018, net investment losses were $2,205 thousand and net investment gains were $1,308 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 Item 8, 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
September 30, 2019
Financial Assets
Investments
Other investments	$	171,579	$	175,478	$	—	$	—	$	175,478
Deposit asset on reinsurance	2,342,305		2,619,640		—		—		2,619,640
Financial Liabilities
Investment contract and policy reserves, fixed annuity contracts	4,658,148		4,581,321		—		—		4,581,321
Investment contract and policy reserves, account values on life contracts	91,788		94,899		—		—		94,899
Other policyholder funds	583,747		583,747		—		526,113		57,634
Short-term debt	135,000		135,000		—		—		135,000
Long-term debt	297,953		318,271		—		318,271		—

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